The moderating effect of monetary policy and ESG practices on the relationship between leverage and firm value in ASEAN-5 emerging countries

Abstract

This study investigates the moderating effect of monetary policy and environmental, social, and governance (ESG) practices on the relationship between leverage and firm value using a sample of 535 listed firms in the ASEAN-5 countries, including Vietnam, Indonesia, Malaysia, the Philippines, and Thailand from 2017 to 2021. We performed a fixed effect (FE) method and a system generalized method of moments (SGMM) method. Our results confirm that debt leverage has a positive effect on firm value and that this effect is significantly moderated by the interaction mechanism between the level of ESG performance and the monetary policy. More precisely, we observed a significant detrimental effect of contractual monetary policy on the effectiveness of debt utilization. This effect could be mitigated by companies adopting high levels of ESG practices. Our findings contribute to the existing body of financial economics research on ESG, focusing specifically on its impact on corporate finance and the magnitude of influence of governance exerted by monetary policy.