Agency costs of free cash flows and investments in business sustainability

摘要: This paper extends the literature on the determinants of environment, social and governance (ESG) dimensions of sustainability investment by examining whether low growth firms with the agency problems of high free cash flows (FCF)(Jensen, 1986) have more incentives to invest in ESG sustainability. We use sustainability performance as a proxy for sustainability investment, since sustainability performance does not emerge naturally and firms must have invested in sustainability to attain performance. The results indicate that firms with high FCF are associated with higher levels of ESG sustainability investment, after controlling for dividend distributions, debt interest payments and investment expenditure for maintaining asset-in-place and acquiring new investment. We also find that high FCF firms with high investments in ESG sustainability are associated with higher market returns than similar firms with low investments in ESG.