Do Audit Committee Characteristics Moderate the Relationship between ESG and

Financial Performance? Cross-Country Analysis

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Shayuti Mohamed Adnan*

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shayuti.adnan@umt.edu.my
*Corresponding Author
Faculty of Business, Economics and Social Development
Universiti Malaysia Terengganu, 21030, Kuala Nerus, Terengganu, Malaysia

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https://orcid.org/0000-0003-0075-653X

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Waleed M. Al-ahdal
wm.alahdal2011@gmail.com
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Faculty of Business, Economics and Social Development
Universiti Malaysia Terengganu, 21030, Kuala Nerus, Terengganu, Malaysia
https://orcid.org/0000-0003-3194-3864
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Faozi A. Almaqtari
Faozi.almaqtari@asu.edu.om
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Assistant Professor in Accounting

College of Business Administration, A’Sharqiyah University (ASU), Ibra, Oman
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ORCID.ID/0000-0002-5625-3643

Muskan Sahu
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sahugouri09@gmail.com
PhD. Scholar
Faculty of Commerce, Banaras Hindu University, Uttar Pradesh, India
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ORCID.ID/ 0009-0006-0865-7973
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This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 Do Audit Committee Characteristics Moderate the Relationship between ESG and
Financial Performance? Cross-Country Analysis

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Abstract:

This study has a dual focus: first, to evaluate how audit committee characteristics
moderate the relationship between ESG and financial performance; second, to investigate this

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moderation within low and high-power distance cultures. Data were collected from twelve
culturally diverse countries: Austria, China, Greece, India, Indonesia, New Zealand, Japan,
Malaysia, Singapore, the United Kingdom, Sweden, and the United States of America. We
propose a positive association between ESG scores and financial performance, especially when

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considering audit independence and competence. Based on a dataset of 20,336 observations

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from 5084 distinct companies across countries during 2019-2022, panel analysis confirmed our
hypotheses. Our analysis included both direct and moderating effect models. We found that
audit expertise and independence moderate the relationship between ESG and financial
performance. Notably, this moderation effect was evident in both high and low power distance
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cultures, suggesting that the interaction between ESG and audit characteristics can enhance
corporate financial performance irrespective of cultural norms. These results hold significant
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practical and theoretical implications for policymakers, internal stakeholders, academics, and
investors striving to balance sustainability with financial outcomes. They demonstrate the
importance of audit members' expertise and independence in fostering sustainable
organisational practices, potentially guiding future policy decisions and investment strategies.
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Keywords: Audit committee characteristics; ESG; environmental performance; financial

performance; power distance cultures.
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1. Introduction
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Academic and corporate settings actively debate the connection between Environmental,
Social, and Governance (ESG) and company performance (see Alatawi et al., 2023;
Elmghaamez et al., 2023.; Giannopoulos et al., 2022; Hidayat & Zuhroh, 2023; Saygili et al.,
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2022; Zahid et al., 2022). Nevertheless, the majority of the prior research has yielded
inconsistent findings. While some empirical studies (Chininga et al., 2023; Zhao et al., 2018)
indicate that implementing ESG practices improves financial performance, other studies
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(Chininga et al., 2023; Zhao et al., 2018) demonstrate that these practices can have

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 unfavourable effects; and a group of research shows there are no linkages between financial
performance and ESG aspects (Chen et al., 2023).

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The proponents argue that ESG integration leads to improved financial performance (Ali
et al., 2022; Elmghaamez et al., 2023), long-term value creation (N. Wang et al., 2023), robust
risk management (De Giuli et al., 2023), and a stable reputation (Li et al., 2018). This viewpoint

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is based on the idea that ESG engagement embodies innovative tactics and good management
practices, both essential for long-term, steady growth. This viewpoint backs the beneficial
correlation between financial performance and ESG. However, the opponents, stemming from
agency and legitimacy theories, raise concern about the real impact that ESG factors have on

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financial performance (García-Amate et al., 2023; Giannopoulos et al., 2022; Saygili et al.,
2022; Wasiuzzaman et al., 2022). They contend that pursuing ESG objectives may occasionally

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distract resources from essential company activities and potentially undermine profitability.
This scepticism has led to contradictory empirical results and sparked debate on the importance
of businesses' participation in ESG practices. Technically, this group of researchers contend
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that companies’ involvement in ESG is a strategy that is used to deviate the stakeholder’s
attention to positive news, neglecting the facts that the companies could have left an
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environmental footprint when conducting their business activities (Burdon & Sorour, 2020;
Reid et al., 2023). These contradictory findings collectively imply that a research gap still
requires attention.
Apparently, investors are increasingly sceptical about how seriously corporations are
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taking the ESG agenda (M. T. Lee & Raschke, 2023; Torelli et al., 2020; Wedari et al., 2021).
This could be due to a lack of transparency and accountability in corporate actions and
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reporting on ESG issues. Adding to this issue is also an influence of national culture, that data
across countries provides evidence on how society reflects and reacts to an ESG disclosure
(DasGupta & Roy, 2023b; Wasiuzzaman et al., 2022). For instance, as more investors prioritise
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sustainability and responsible business practices, companies that fail to address these concerns
may face greater scrutiny and potential consequences (Bellucci et al., 2021; Silva, 2021).
However, would all societies across countries exhibit comparable behaviour? Likewise, an
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inverse linkage between ESG disclosure and financial performance may indicate that investors
perceive that a company is involved in "greenwashing"; a situation where a gap between the
stated and the actual ESG performance is intentionally created for other purposes than a sincere
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commitment to sustainability (M. T. Lee & Raschke, 2023; Y. Liu et al., 2023; Zhang et al.,
2023).

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 However, prior studies documented that auditing practices boost investor confidence while
reducing negative perceptions of an organisation (Arif et al., 2020; Pozzoli et al., 2022; Del

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Giudice & Rigamonti, 2020). More specifically, the existence of a committee that oversees
ESG function in a company might enhance the association between ESG performance and
economic performance, regardless of the detrimental effect of culture (see (Mohamed Adnan

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et al., 2018). Consequently, we contend that the characteristics of an audit committee moderate
the relationship between ESG criteria and financial performance. We also investigate how
national culture affects this relationship.
Two audit committee characteristics are analysed in this study: audit committee expertise

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and audit committee independence. Regarding ESG disclosure, the prior study documented
that the audit committee plays a critical role in verifying the reliability and accuracy of ESG-

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related information provided by management (Elmghaamez et al., 2023). These committees
should take into account the members' expertise, their independence from management, and
their activities (Abidin et al., 2009; Alhossini et al., 2021; Elmghaamez et al., 2023).
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Furthermore, the audit committee's supervision strengthens the linkage between ESG
disclosure and firm performance by ensuring the quality and credibility of such disclosures.
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Stakeholders are more likely to value firms that exhibit transparency and accountability in their
ESG practices, leading to improved firm performance. It is anticipated that the expertise and
independence of audit committees would lead to greater credibility, improved financial
reporting quality and reduced opportunistic behaviours (Dakhli, 2022; Watkins et al., 2004).
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This facilitates the adoption of innovative practices, including ESG practices (Dakhli, 2022).
Since the quality of the audit committee improves the quality of the ESG disclosure, a
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company's financial performance should benefit from the actual implementation of ESG
practices.
We analyse data across twelve culturally diverse countries based on Hofstede's six cultural
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dimensions. The cultural taxonomies, recently available on its online website, are the most
well-known and frequently used framework in academic research to examine the backdrop of
national culture (see (Agyei-Mensah, 2023; DasGupta & Roy, 2023b). By concentrating solely
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on power distance culture, our study aims to simplify the analysis of moderation variables
across several models. Considering low and high levels of power distance culture, we
investigate how audit committee characteristics moderate the connection between ESG
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performance and a company’s accounting-based and market-based performance. Focusing

solely on power distance culture enables a more thorough examination of its specific influence
on the association between ESG performance and firm performance, alongside the moderation
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 effect of audit characteristics, without the added complexity of multiple cultural variables. This
focused approach facilitates a deeper exploration of the subtleties and interactions between

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power distance culture and the variables under scrutiny. Additionally, numerous researchers
have previously demonstrated the notable impact of power distance culture on the relationship
between ESG and firm performance (DasGupta & Roy, 2023; Le et al., 2023; Shin et al.,

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2023b).
Power distance shapes society's behaviours (Hofstede, 1980). It can significantly impact
how societies react to governance and ethical standards, particularly auditing (Wasiuzzaman et
al., 2022). In civilisations with high power distance, hierarchical systems and unequal power

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distribution are commonly accepted as the norm (Ogundajo et al., 2022). This cultural
inclination might result in a hierarchical approach to corporate governance and potentially

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reduce the tendency to question authority, which could impact the transparency and
thoroughness of audit procedures. However, in low power distance societies, where equality is
valued more and authority is questioned, auditors may take a more proactive and inquisitive
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position, leading to more thorough and rigorous audit procedures (Chen et al., 2023). In such
settings, auditors’ roles are essential in guaranteeing accountability and compliance with ESG
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norms. Hence, the power distance culture can potentially influence auditors to uphold ethical
practices and sustainability objectives, highlighting the intricate interaction between cultural
norms and corporate governance processes. This emphasises the importance of having a
sophisticated comprehension of how cultural circumstances impact the efficacy of audit
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committees in advancing ESG compliance and, consequently, impacting corporate financial

performance.
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The study holds significant importance for various reasons. Firstly, it offers empirical
evidence on the complex interplay between audit characteristics, ESG performance, and
financial performance across diverse cultural backgrounds, specifically focusing on power
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distance. This research adds to the body of knowledge on corporate governance and
sustainability by examining the function of audit features in various cultural contexts,
especially about power distance. It also offers insights into how cultural differences affect
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corporate accountability and transparency. Additionally, it provides a unique framework for

assessing the authenticity and effectiveness of companies' ESG strategies.
Furthermore, by presenting empirical evidence on how robust auditing practices can
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moderate the influence of transparent and accountable ESG reporting on firm performance, this
study aims to address investor scepticism and enhance trust in ESG disclosures. This addresses

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 a significant concern within the investment community and ensures that corporate ESG
initiatives are aligned with genuine sustainability objectives, thereby fostering a more

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sustainable and equitable global economy. The study's findings are particularly relevant for
multinational corporations and global investors as they offer insights into how tailored audit
techniques, aligned with specific cultural contexts, can enhance the success of ESG initiatives.

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This has broader implications for policy formulation, corporate strategy, and investor decision-
making, providing a nuanced understanding of how cultural factors can be integrated into audit
methodologies to improve ESG performance. Moreover, the cross-country examination
undertaken in this study goes beyond academic exploration; it represents a crucial step towards

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bridging the gap between cultural diversity and corporate governance. This advances our
understanding of the international business environment in the sustainable era.

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Secondly, regarding the methodology, the study utilises panel data analysis, employing a
comprehensive dataset comprising 20,336 observations from 5084 distinct companies across
multiple countries, spanning the period from 2019 to 2022. This extensive dataset is notable
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for its inclusion of a critical timeframe that encompasses both the beginning and aftermath of
the COVID-19 pandemic—a period marked by significant global economic upheaval and
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increased emphasis on corporate responsibility and sustainability. Incorporating data from this
period allows for a thorough examination of how the pandemic may have impacted corporate
ESG practices and the effectiveness of auditing processes across various cultural contexts. The
temporal coverage of the dataset presents a unique chance to explore the evolving dynamics of
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ESG compliance and financial performance in a rapidly changing global environment,

providing valuable insights into companies' responses to the challenges posed by the COVID-
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19 pandemic. The dataset's depth and breadth also allow for a more nuanced understanding of
the relationships between audit features, ESG performance, and financial consequences in
various cultural contexts. This ensures that the study's conclusions are firmly grounded in solid
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empirical facts.
Thirdly, this study's research setting is distinguished by its culturally diverse dataset,
obtained from a selection of countries, each exhibiting distinct cultural dimensions as defined
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by cultural dimensions theory by Geert Hofstede (Hofstede & McCrae, 2004; Minkov &
Hofstede, 2012, 2014). Austria, Sweden, the United States, New Zealand, and Japan exhibit
relatively low levels of power distance. At the same time, China, Greece, India, Malaysia,
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Indonesia, the United Kingdom, and Singapore demonstrate higher levels of power distance.
(Hofstede, 1980). This diverse selection allows for a thorough exploration of a broad spectrum
of cultural aspects. The countries were intentionally selected to reflect different degrees of
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 power distance, offering a rich and comparative context for examining how these cultural
characteristics intersect with and affect audit features and their influence on ESG performance

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and financial results. By encompassing such a varied cultural landscape, the study not only
enhances comprehension of cultural intricacies in corporate governance but also provides a
more comprehensive and worldwide viewpoint, which is essential for comprehending the

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complex interaction between corporate auditing, culture, and ESG adherence in a globalised
economic context.
This study contributes significantly to the theoretical framework of corporate governance
and ESG literature by conducting empirical analysis centred on the cultural dimension of power

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distance. While power distance is the main focus, the selection of sample countries was driven
by acknowledging the importance of cultural factors. This approach allows for a deeper

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understanding of how two different levels of power distance, a crucial cultural aspect, interact
with audit features to impact the relationship between ESG and financial outcomes, thereby
expanding the existing body of research. Additionally, the study offers valuable practical
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insights for auditors and corporate governance professionals, particularly those operating in
diverse cultural contexts. These insights offer a nuanced understanding of how auditing
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processes and ESG policies can be effectively tailored to different cultural settings,
emphasizing the importance of considering unique cultural elements in practice. Thus, this
study bridges theoretical understanding and practical implementation in the global business
sphere, particularly in integrating cultural variables into ESG initiatives and audit practices.
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This paper is organised as follows: the second section elaborates on the background of the
study, followed by a literature review that sets the theoretical groundwork for the development
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of hypotheses. Section four presents the research methodology with details on the sample
selection data collection and analysis techniques. Section five presents the results and
discussion section. The paper summarises the findings, analyses their practical consequences,
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acknowledges limitations, and suggests future research areas.

2. Background of the study

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2.1. Hosfede’s Cultural Taxonomies and ESG

Although some may criticise Hofstede cultural taxonomies as outdated, few studies have
shown that they remain solid. For instance, House et al. (2002) introduced GLOBE's nine
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cultural dimensions as an alternative to Hofstede's model, including future orientation and

egalitarianism. Research by Tang & Koveos (2008) found that GLOBE's dimensions vary with

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 economic development, while Hofstede's remain stable. Additionally, Kim & Gray (2009)
showed that cultural models by Hofstede, Schwartz, and GLOBE correlate with corporate

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ownership structures, highlighting Hofstede's enduring relevance and usage in research despite
critiques of its datedness. The pertinent literature on sustainability, integrated reporting and
CSR or ESG performance substantially uses Hofstede's framework (Le et al., 2023; Lu &

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Wang, 2021; X. Xu & Liu, 2023)
Literature supported the influence of Hofstede's cultural taxonomies on ESG (DasGupta &
Roy, 2023b; Shin et al., 2023; Wasiuzzaman et al., 2022). For example, civilisations
characterized by a low degree of power distance and a strong emphasis on individualism tend

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to foster scepticism towards authority, prioritize equality, and exhibit a greater inclination
towards adopting transparent and responsible ESG practices (Mohamed Adnan et al., 2018). In

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contrast, cultures characterized by a significant power distance may have difficulties when
trying to execute ESG efforts that are participatory and inclusive. The contrast between
masculinity and femininity influences the extent to which a culture prioritizes the aggressive
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pursuit of business success over public welfare, hence affecting the equilibrium between
economic performance and social responsibility in ESG strategies. The level of risk
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management in ESG policies can be influenced by uncertainty avoidance. Organizational
cultures that emphasize avoiding uncertainty could favour more stringent and cautious ESG
guidelines. The existence of a long-term orientation might promote the adoption of sustainable
and future-oriented ESG goals. On the other hand, the degree of indulgence versus restraint in
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society shows its inclination towards immediate satisfaction or self-control, which in turn
affects the techniques adopted by corporations for their social responsibility initiatives (
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Hofstede et al., 2010; Hofstede, n.d., 1991, 1998; Hofstede & Minkov, 2010; Minkov &
Hofstede, 2014).
2.2. Cultural Setting and ESG in the Countries
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The cultural settings of Austria, Greece, Indonesia, Japan, Malaysia, Singapore, Sweden,
and the United States each present a unique influence on their respective ESG practices. In
Austria, companies increasingly integrate ESG practices into their corporate strategies,
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showing a solid commitment to social responsibility and environmental sustainability. Austrian

companies are also known for their active government support for ESG initiatives through
various regulations, implementation of green technologies and reducing the carbon footprint
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(Plastun et al., 2022). Greek companies, on the other hand, have made significant progress in

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 integrating ESG factors into their business strategies, particularly since the economic crisis
(Soras & Christopoulos, 2023).

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Moving to Asia, Indonesia has a distinctive ESG landscape. Being one of the biggest
emerging markets, Indonesian companies are gradually adopting ESG principles. This is partly
due to external investor pressure and a rising awareness of environmental and social challenges

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within the country (Sugiarto et al., 2023). The challenge for Indonesia lies in balancing
economic growth with environmental sustainability, especially in industries like palm oil and
mining. Japan, as a global economic leader, has taken significant strides in ESG, with Japanese
companies leading in areas like technology innovation for sustainability (Liu et al., 2023). The

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Japanese government's policies and the proactive stance of institutional investors have been
pivotal in driving ESG integration in corporate Japan.

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Similarly, Malaysia’s ESG scene is evolving, with an increasing no. of firms recognizing
the importance of sustainable practices. The Malaysian government has introduced various
initiatives to promote ESG, particularly in Islamic finance and green investment (S.-P. Lee &
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Isa, 2023; Wan Mohammad et al., 2023). Singapore stands out in Southeast Asia for its
advanced ESG practices. The city-state’s strategic focus on sustainable development and strict
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governance standards has made it a hub for sustainable finance and green initiatives (Kang &
Lam, 2023). Singaporean companies are often seen as benchmarks for the region's corporate
governance and sustainability practices.
In Europe, Sweden is a global leader in ESG, with Swedish companies renowned for their
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high environmental standards and strong social welfare systems (Rahi et al., 2022). The
Swedish approach to ESG is holistic, integrating sustainability deeply into business models and
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national policies. Lastly, in the United States, ESG is becoming a mainstream component in
corporate governance, with an increasing number of companies incorporating ESG criteria into
their strategies (de Vincentiis, 2023; De Vincentiis, 2024; Mneimneh et al., 2023; Peng &
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Smith III, 2023). This trend is driven by growing investor demand for sustainable investments,
regulatory changes, and a heightened public awareness of social and environmental issues.
3. Literature Review and Hypotheses Development
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3.1. The Theory

It is conventional to apply agency theory to comprehend the moderating impact of audit
committee features on the relationship between ESG and financial performance (Dakhli, 2022;
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Elmghaamez et al., 2023). According to Jensen and Mekcling (1976), the agency theory
contends that organizations operate within a principal-agent framework, where owners

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 delegate decision-making authority to managers. Conflicts of interest, however, can occur
between owners (principals) and managers (agents), leading to agency conflicts. An essential

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component of corporate governance processes, the audit committee monitors financial
reporting, regulatory compliance, and internal controls to help resolve conflicts of this nature
(Habbash & Alghamdi, 2017; Agyei-Mensah, 2019; Zahid et al., 2022). Agency theory

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essentially supports the notion that the audit committee reduces agency conflicts, validates ESG
disclosures, and enhances the credibility of the company's sustainability programs to regulate
the linkages between ESG disclosure and firm performance. Thus, agency theory can be used
to understand how audit committees function in modulating the linkages between ESG and

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corporate financial performance (Elmghaamez et al., 2023).
Stakeholder theory, however, can be applied to evaluate how national culture affects a

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model with a moderating variable (see Freeman's, 1994). The theory explains that companies
function within a larger ecosystem that includes all entities that either influence or are affected
by the company (Freeman & McVea, 2005; Lee & Isa, 2023). According to this view, a
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company's true success comes from attending to the requirements of all of its stakeholders—
including the public, employees, governments, and customers—rather than just concentrating
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on its shareholders' profits (Pajunen, 2006). Companies aim to maintain their sustainability in
society and increase their competitiveness by satisfying these stakeholders' expectations. This
paradigm encourages a thorough and socially responsible approach to business management
by enabling managers to incorporate their values into strategic planning and implementation
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(Freeman, 2010; Freeman & McVea, 2005).

Furthermore, because a company's sustainability initiatives have the potential to
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improve its long-term viability and profitability, stakeholders are placing a higher priority on
them (Chininga et al., 2023). As a result, businesses can use ESG ratings as a valuable tool to
satisfy stakeholders, which will improve their sustainability practices and reputation and,
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eventually, their business performance (Chininga et al., 2023; Velte, 2017). Moreover, scholars
frequently utilize stakeholder theory to elucidate the positive impact of ESG disclosure on
financial performance. (Chen et al., 2023; Chininga et al., 2023; Danila, 2023; Lee & Isa, 2023;
Naeem et al., 2022; Saygili et al., 2022; Shin et al., 2023; Thanh Nguyen et al., n.d.; Xu et al.,
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2022). In our study, stakeholder theory further supports the idea that ESG disclosure has a
favourable impact on financial performance.
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To investigate the impact of audit committee characteristics on the connection between

ESG and financial performance, we begin by reviewing the most recent studies on the influence
of ESG performance on firm performance and cultural context.
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 3.2. The role of ESG performance in a firm’s financial performance with different
cultural contexts:

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Prior research has looked at how ESG disclosure affects company performance with and
without taking cultural issues into account (Chininga et al., 2023; DasGupta & Roy, 2023;
Duque-Grisales & Aguilera-Caracuel, 2021; Hsiao et al., 2024; Le et al., 2023; Quan, 2022;

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Shi & Veenstra, 2021a; Shin et al., 2023b; X. Xu & Liu, 2023; Zhao et al., 2018). For example,
Duque-Grisales & Aguilera-Caracuel (2021) showed that ESG disclosure negatively influences
financial performance. Furthermore, they also analyzed the individual impacts of each ESG
pillar and found that they all have a detrimental effect on financial performance. In contrast,

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Quan (2022) investigated the influence of ESG disclosure and all three components of ESG on
financial performance. They found notably favourable linkages between ESG disclosure and

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financial performance. Similarly, the environmental and social components demonstrated a
significantly positive impact on financial performance, whereas the governance pillar did not
exhibit a notable influence on financial performance. These conflicting results suggest the
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presence of additional factors affecting this relationship.
Moreover, cultural factors, particularly power distance, have significantly affected the
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relationship between ESGD and financial performance. Shin et al., (2023) showed that in
countries characterized by high power distance or uncertainty avoidance cultures, firms' ESG
efforts are less likely to be linked to financial performance. Similarly, DasGupta & Roy, (2023)
illustrated that in environments with high power distance, it is anticipated that a firm's financial
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performance would be compromised as firms are less inclined to pursue superior ESG
performance. Conversely, in settings characterized by low power distance, a firm's financial
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performance is expected to improve. Lu & Wang, (2021) proposed that companies operating
in nations characterized by low power distance would exhibit more robust environmental
performance. Additionally, in such contexts, firms tend to disclose more Corporate Social
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Responsibility (CSR) information. Furthermore, Hsiao et al. (2024) employed a comprehensive

ESG score to gauge the extent of CSR fulfilment. The findings indicate that CSR negatively
impacts firm performance. Regarding national culture, there is an inverse association between
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the power distance index and firm performance. The power distance index can also exacerbate
the adverse linkage between CSR and firm performance.
In contrast, utilizing data from 116 multinational enterprises from 2013 to 2018, Le et al.,
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(2023) found that in environments characterized by low power distance, the environmental and
social components are inversely associated with business performance. However, in high

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 power distance contexts, the linkage between the environmental and social elements and
business performance is statistically positive. Similarly, Xu & Liu (2023) examined the

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moderating role of cultural distance in the relationship between business profitability and ESG
disclosure. The findings demonstrated that cultural distance considerably increases the positive
and noteworthy impact that ESG disclosure has on corporate profitability.

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Quan (2022) utilized all six Hofstede cultural dimensions to explore how these dimensions
affect the relationship between sustainability activities and organizational values. Among these
dimensions, power distance was found to weaken the relationship, suggesting that high power
distance may weaken the relationship more than low power distance. Potapova et al. (2021)

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showed that a community characterized by a high level of power distance negatively impacts
the association between CSR information disclosure and financial performance. The presence

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of high-power distance, marked by features such as a complex hierarchical government system,
reduced individual accountability, corruption, and acceptance of centralized authority, all
undermine the connection between sustainability disclosure and financial performance.
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Similarly, DasGupta & Roy (2023b) explore the impact of national culture on the
relationship between ESG performance and the financial performance of international firms.
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Based on a dataset of 2,773 firms across 27 countries, they reported that national culture
significantly influences ESG financial performance. Specific cultural traits like low power
distance, high individualism, and long-term orientation strengthen the positive relationship
between ESG performance and financial performance, whereas traits like high power distance
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and collectivism weaken it. Overall, these studies emphasize the complexity of the relationship
between ESG disclosure and financial performance. They highlight the critical significance of
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cultural factors, particularly power distance, in shaping this relationship. Therefore, focusing
on power distance and categorizing countries based on their power distance cultures is a
meaningful approach to further understanding the dynamics between ESG disclosure and
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financial performance.
H1: There is a significant positive impact of ESG disclosure on firm performance.
H2: There is a significantly positive impact of ESG disclosure on financial performance with
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a low power distance culture.

H3: There is a significant negative impact of ESG disclosure on the financial performance with
a high-power distance culture.
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3.3. Audit characteristics, ESG disclosure, financial performance and cultural

dimension linkages:

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 Prior studies documented the linkages among audit, ESG, national culture and financial
performance (DasGupta & Roy, 2023a; Elmghaamez et al., n.d.; Fuadah et al., 2022; M. T. Lee

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& Raschke, 2023; Lu & Wang, 2021; Pozzoli et al., 2022; Wang et al., 2022). Audit committee
attributes significantly impact financial performance across various sectors. Studies conducted
in Nigeria, Malaysia, and Bahrain suggest that factors such as the independence, composition,

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expertise, and meeting frequency of audit committees visibly influence financial outcomes (Al-
Matari, 2022; Kurawa & Shuaibu, 2022; SALEM OUDAT et al., 2021). Additionally, audit
committee characteristics can also have an impact on Environmental, Social, and Governance
(ESG) performance. For instance, Arif et al., (2020) investigate the influence of audit

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committee characteristics on ESG disclosures in the Australian energy sector. Their analysis
of 24 Australian energy sector firms from 2009 to 2018 revealed that independent and proactive

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audit committees can bridge the gap between managerial actions and stakeholder expectations
in ESG disclosures. Their study indicates the effectiveness of audits in mitigating agency
problems and enhancing business legitimacy.
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More importantly, audits play a crucial role in mitigating investors' scepticism towards
greenwashing plans. In a more recent study, Pozzoli et al., (2022) examine how audit
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committee features, particularly independence, tenure, and expertise influence ESG scores,
both before and during the COVID-19 pandemic. The research employs panel data analysis,
encompassing 13 European Union member states from 2018 to 2020, with data from the
Refinitiv Eikon database. The study demonstrates that audit committee independence and
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experience have a significant positive impact on ESG rankings. On the other hand, the study
discovers an inverse linkage between the audit committee's duration and ESG performance,
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indicating that a longer tenure may not be beneficial for the best possible ESG results. The
research implies the importance of robust audit committee characteristics in times of crisis.
In another instance, Del Giudice & Rigamonti, (2020) also assess whether sustainability
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reporting audits lead to more reliable ESG scores, particularly following corporate misconduct.
Based on the data from corporate scandals from 2007 to 2017, the research reveals a stark
contrast between firms with audited and unaudited ESG reports post-scandal. While firms with
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audited ESG reports show no significant change in their scores, those without audited reports
experience a statistically significant decline in ESG performance. This highlights the crucial
role of auditing in enhancing the reliability and credibility of ESG scores. Chen et al., (2023)
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presented data from the audit industry. They investigate whether audit companies that
participate in CSR initiatives offer audit services of a higher calibre than those that do not.
They obtained hand-collected data on the CSR activities of every Chinese audit companies
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 from 2007 to 2020. The findings indicate that audit firms involved in CSR activities generally
provide higher-quality audit services. The findings offer insights into the ethical and risk

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management dimensions of ESG from audit perspectives. ESG elements can be influenced by
audit features, which can therefore moderate the relationship between ESG and other variables.
In the context of audit characteristics as moderating variables, Zahid et al. (2022) The study

iew
investigated how audit quality moderates the linkages between ESG disclosure and firm
performance. It uncovered a negative impact of ESG disclosure on firm performance and
highlighted that when ESG disclosure is combined with audit quality, it further exacerbates the
adverse effect on firm performance. Similarly, with different financial measures Zahid, Taran,

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et al. (2023) explored the interplay between audit quality and ESG disclosure regarding
dividend policies. The results revealed a favourable linkage between ESG disclosure and

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dividend policies, albeit significantly and negatively moderated by audit quality. Moreover, in
another financial metric, Zahid, Saleem, & Maqsood (2023) found that companies exhibiting
excellent ESG performance tend to have reduced reliance on debt financing. This indicates that
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businesses with robust ESG performance find it easier to obtain equity funding through the
stock market. However, they did not observe any notable impact of audit quality on this
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association. They suggest that market mechanisms may reward ESG performance regardless
of the perceived audit quality.
In contrast, Dakhli (2022) showed that Corporate Social Responsibility (CSR) has a
positive influence on a firm's financial performance. Moreover, Dakhli proposed that the
ot

advantageous effect of CSR on corporate financial performance is more pronounced for

companies with higher audit quality. Similarly, Samy El-Deeb et al. (2023) examined the ways
tn

in which audit quality influences the link between company valuation and ESG disclosure for
companies listed on the Egyptian stock exchange. The findings showed that audit quality
significantly modifies the positive relationship between ESG disclosure and business value.
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Furthermore, Elmghaamez et al. (2023) investigated the moderating impact of the audit
committee index on the link between financial performance and ESG parameters. Metrics
including the audit committee's size, independence, and frequency of meetings made up the
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audit committee index. The findings showed that the link between the performance indicators
and the elements of ESG disclosure is adversely affected by the audit committee index.
On the contrary, Fuadah et al., (2022) highlight the audit committee's significance as a
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crucial component in optimizing the positive effects of ESG disclosure on company value.
Using data from 140 companies listed on the Indonesia Stock Exchange (2018-2020), they used

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This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 partial least squares structural equation modelling. Interestingly, they found that while business
performance is not always positively impacted by ESG disclosure, firm value is. Significantly,

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it is discovered that the audit committee modifies the association between business value and
ESG disclosure, strengthening the beneficial effects of ESG practices on firm value. It is clear
from the discussion that came before it that cultural factors could potentially have an impact

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on how the audit committee modifies the relationship between financial performance and
environmental, social, and governance aspects.
Furthermore, in the context of power distance culture, audit characteristics are crucial in
shaping auditors' conduct and adherence to firm performance standards. The extent of power

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distance within a society impacts how individuals engage with authority figures and follow
established rules and protocols. Audit characteristics hold considerable significance within the

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framework of power distance culture. Studies show that power distance influences auditors'
ethical conduct, their inclination to report unethical behaviour, and the timeliness of audit
reporting (Limajatini et al., 2019; Taylor & Curtis, 2013; Toumi et al., 2022). This clearly
er
indicates that power distance cultural dimensions can affect the influence of audit committee
characteristics, namely independence and expertise. In conclusion, the significance of audit
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characteristics in the context of the power distance culture emphasizes the necessity of
considering cultural aspects when evaluating the impact of auditor attributes on firm
performance, ESG performance, and the moderating effect on the relationship between ESG
and firm performance. The significance of recognizing and utilizing cultural effects in the audit
ot

context is emphasized by the fact that including cultural diversity in audit committees can
improve audit procedures' efficacy and the quality of reporting. As far as we are aware, no
tn

research has looked into how audit committees, in various cultural contexts, might moderate
the linkages between ESG and firm performance. These hypotheses are formulated in light of
the discussion mentioned above:
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H4: There is a significant moderation impact of audit committee expertise on the relationship
between ESG performance and the financial performance of companies.
H5: There is a significant moderation impact of audit committee independence on the linkage
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between ESG performance and the financial performance of companies.

H6: In low power distance, there is a significantly positive moderation impact of audit
committee expertise on the linkage between ESG performance and the financial
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performance of companies.

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 H7: In high power distance, there is a significantly positive moderation impact of audit
committee expertise on the linkage between ESG performance and the financial

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performance of companies.
H8: In low power distance, there is a significantly positive moderation impact of audit
committee independence on the linkage between ESG performance and the financial

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performance of companies.
H9: In high power distance, there is a significantly positive moderation impact of audit
committee independence on the linkage between ESG performance and the financial
performance of companies.

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4. Research Methodology

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4.1. Data collection and sampling

This study's distinct research framework relies on a culturally diverse dataset from multiple
countries, each reflecting unique cultural attributes as per Geert Hofstede's cultural dimensions
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theory (Hofstede & McCrae, 2004; Minkov & Hofstede, 2012, 2014). Data were gathered from
the Refinitiv database, encompassing 20,336 (companies*years) observations of 5084
companies spanning twelve countries: Austria, China, Greece, India, Indonesia, Japan,
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Malaysia, New Zealand, United Kingdom, Singapore, Sweden, and the United States of
America, during the period from 2019 to 2022. Table 1 outlines the characteristics of the
countries represented by our sample companies. We categorize sample companies into low and
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high-power distance groups based on their average power distance scores. Companies with
power distance scores lower than the overall average are classified as having low power
distance, while those with scores higher than the overall average are classified as having high
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power distance. Specifically, 3,887 companies are categorized as having low power distance,
while 1,197 companies are categorized as having high power distance. Cultural dimension data
was retrieved from Hofstede’s cultural taxonomies website at https://geerthofstede.com. The
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study presents empirical insights into the complex interaction among audit features, ESG
performance, and financial results across diverse cultural contexts, with a specific emphasis on
power distance.
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4.2. Operational definition of the variables

4.2.1. Predicted variables:
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We have taken two measures of financial performance (FP): Tobin-Q and ROA.

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 Tobin-Q: We assess firm value through Tobin’s Q, which is calculated as (the book
value of assets + (market value of equity − book value of equity))/book value of assets. Tobin’s

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q is a commonly utilized metric in finance and accounting to represent firm valuation. (Shi et
al. 2021; Dakhli 2022). When discussing Tobin's q within the framework of high power
distance culture and low power distance culture, we are exploring how cultural norms and

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practices regarding power dynamics within a society could impact the association between
Tobin's q and ESG factors.

ROA (return on assets): This figure is determined by dividing the Income After Taxes
for the fiscal period by the Average Total Assets, which is expressed as a percentage. The

v
Average Total Assets represent the mean of Total Assets at the start and end of the year. (Zahid

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et al., 2022; Shi et al. 2021; Dakhli 2022). When examining Return on Assets (ROA) in the
context of high and low power distance cultures, we are evaluating how cultural norms and
behaviours regarding power dynamics could impact the understanding and consequences of
ROA.
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4.2.2. Main Predictor variables

We utilize both the ESG scores (Zahid et al., 2023; Zahid et al., 2022) and its
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constituent pillars (Environmental pillar scores (Zahid et al., 2023; Zahid et al., 2022),
Governance pillar score (Zahid et al., 2023; Zahid et al., 2022), Social pillar scores (Zahid et
al., 2023; Zahid et al., 2022)) as independent variables. The ESG score represents a
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multidimensional index derived from numerous financial and nonfinancial indicators. It

conducts a comprehensive evaluation by incorporating self-disclosed information across
environmental, social, and corporate governance domains. This score aims to offer a
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comprehensive assessment of a company's operational performance.

4.2.3. Moderators
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Audit committee expertise: We considered audit committee expertise as a moderator in

our study. This variable is defined as whether the company's Audit Committee (AC) comprises
a minimum of three members, including at least one individual recognized as a "financial
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expert" according to the criteria outlined in the Sarbanes-Oxley Act. If these conditions are
met, the variable is assigned a value of 1; otherwise, it receives a value of 0 (Zahid et al., 2023;
Zahid et al., 2022; Dakhli 2022).
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Audit committee independence: We examined audit committee independence as a

moderator in our study. This involved considering the proportion of independent board

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 members serving on the audit committee, as specified by the company (Zahid et al., 2023;
Zahid et al., 2022; Dakhli 2022).

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4.2.4. Control variables

We use two control variables: firm size (Zahid et al. 2022; Dakhli 2022) and leverage
(Zahid et al. 2022; Shi et al. 2021; Dakhli 2022).

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Table 1: Country Description

Power distance
Country No. of firms Economic status
(Low/High)
Austria 33 Developed Low

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China 369 Developing High
Greece 23 Developed High
India 145 Developing High

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Indonesia 48 Developing High
Japan 459 Developed Low
Malaysia 70 Developing High
New Zealand 58 Developed Low
Singapore 82 er Developed High
Sweden 217 Developed Low
United Kingdom 526 Developed High
United States of America 3054 Developed Low
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4.3. Econometrics tools and Model specification:

We adopt comprehensive methodological steps to estimate the findings. For direct effect
estimation, there are 12 models in total. This includes six dependent variables, each with two
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models: one incorporating ESG pillars score and the other incorporating ESG scores. To
explore the moderating effects of audit committee expertise and audit committee independence,
tn

two models are developed for each dependent variable with one moderator. For example, Tobin
Q is subjected to four models to assess the moderating effect, with two models focusing on
audit committee expertise and the remaining two on audit committee independence. Thus, the
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research is structured around the following model designs:

4.3.1. Direct effect models

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The following models are estimated to analyze the direct effect of the predictors on the
outcome variables:
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𝐅𝐏 𝐇𝐏𝐃/𝐋𝐏𝐃 𝒊𝒕 = 𝛂 + 𝜷𝟏 𝑬𝑵𝑽𝒊𝒕 + 𝜷𝟐 𝑮𝑶𝑽𝒊𝒕 + 𝜷𝟑 𝑺𝑶𝑪𝒊𝒕 + 𝜷𝟒 𝐀𝐔𝐃𝐄𝐗𝐏 + 𝜷𝟓 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕

+ 𝜷𝟔 𝑭𝑺𝑰𝒁𝑬𝒊𝒕 + 𝜷𝟕 𝑳𝑬𝑽𝒊𝒕 + 𝛆𝐢𝐭 Model (1)

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This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 𝐅𝐏𝐇𝐏𝐃/𝐋𝐏𝐃 𝒊𝒕 = 𝛂 + 𝜷𝟏 𝐄𝐒𝐆 + 𝜷𝟐 𝐀𝐔𝐃𝐄𝐗𝐏 + 𝜷𝟑 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕 +
𝜷𝟒 𝑭𝑺𝑰𝒁𝑬𝒊𝒕 + 𝜷𝟓 𝑳𝑬𝑽𝒊𝒕 + 𝛆𝐢𝐭

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Model (2)

4.3.2. The moderating effect of ACEXP and AUDIND

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This study employs a series of models to explore the moderating effects of audit
committee characteristics and cultural dimensions on the relationship between ESG variables
and financial performance. Specifically, the models assess 1) the impact of audit committee
expertise (ACEXP) and audit committee independence (AUDIND), 2) the moderating role of

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audit committee expertise (AUDEXP) in high power distance (PD) versus low PD contexts,

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and 3) the moderating role of audit committee independence (AUCIND) across different PD
settings. The following are the models:
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𝐅𝐏 𝐇𝐏𝐃/𝐋𝐏𝐃 𝒊𝒕 = 𝛂 + 𝜷𝟏 𝑬𝑵𝑽𝒊𝒕 + 𝜷𝟐 𝑮𝑶𝑽𝒊𝒕 + 𝜷𝟑 𝑺𝑶𝑪𝒊𝒕 + 𝜷𝟒 𝐀𝐔𝐃𝐄𝐗𝐏 + 𝜷𝟓 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕
+
𝜷𝟔 𝑭𝑺𝑰𝒁𝑬𝒊𝒕 + 𝜷𝟕 𝑳𝑬𝑽𝒊𝒕 + 𝜷𝟖 𝑬𝑵𝑽 ∗ 𝑨𝑼𝑪𝑬𝑿𝑷𝒊𝒕 + 𝜷𝟗 𝑮𝑶𝑽 ∗ 𝑨𝑼𝑪𝑬𝑿𝑷𝒊𝒕 + 𝜷𝟏𝟎 𝑺𝑶𝑪 ∗ 𝑨𝑼𝑫𝑬𝑿𝑷𝒊𝒕 + 𝜷𝟏𝟏 𝐅
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Model (3)

𝐅𝐏 𝐇𝐏𝐃/𝐋𝐏𝐃 𝒊𝒕 = 𝛂 + 𝜷𝟏 𝐄𝐒𝐆 + 𝜷𝟐 𝐀𝐔𝐃𝐄𝐗𝐏 + 𝜷𝟑 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕 +

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𝜷𝟒 𝑭𝑺𝑰𝒁𝑬𝒊𝒕 + 𝜷𝟓 𝑳𝑬𝑽𝒊𝒕 + 𝜷𝟔 𝑬𝑺𝑮 ∗ 𝑨𝑼𝑫𝑬𝑿𝑷𝒊𝒕 + 𝜷𝟕 𝑭𝑺𝑰𝒁𝑬 ∗ 𝑨𝑼𝑫𝑬𝑿𝑷𝒊𝒕 + 𝜷𝟖 𝑳𝑬𝑽 ∗ 𝑨𝑼𝑫𝑬𝑿𝑷𝒊𝒕 + 𝛆𝐢𝐭

Model (4)
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𝐓𝐨𝐛𝐢𝐧𝐐 𝒊𝒕 = 𝛂 + 𝜷𝟏 𝑬𝑵𝑽𝒊𝒕 + 𝜷𝟐 𝑮𝑶𝑽𝒊𝒕 + 𝜷𝟑 𝑺𝑶𝑪𝒊𝒕 + 𝜷𝟒 𝐀𝐔𝐃𝐄𝐗𝐏 + 𝜷𝟓 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕 +

𝜷𝟔 𝑭𝑺𝑰𝒁𝑬𝒊𝒕 + 𝜷𝟕 𝑳𝑬𝑽𝒊𝒕 + 𝜷𝟖 𝑬𝑵𝑽 ∗ 𝑨𝑼𝑪𝑰𝑵𝑫𝒊𝒕 + 𝜷𝟗 𝑮𝑶𝑽 ∗ 𝑨𝑼𝑪𝑰𝑵𝑫𝒊𝒕 + 𝜷𝟏𝟎 𝑺𝑶𝑪 ∗ 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕 + 𝜷𝟏𝟏 𝐅𝐒
Model (5)
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𝐓𝐨𝐛𝐢𝐧𝐐 𝒊𝒕 = 𝛂 + 𝜷𝟏 𝐄𝐒𝐆 + 𝜷𝟐 𝐀𝐔𝐃𝐄𝐗𝐏 + 𝜷𝟑 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕 +

𝜷𝟒 𝑭𝑺𝑰𝒁𝑬𝒊𝒕 + 𝜷𝟓 𝑳𝑬𝑽𝒊𝒕 + 𝜷𝟔 𝑬𝑺𝑮 ∗ 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕 + 𝜷𝟕 𝑭𝑺𝑰𝒁𝑬 ∗ 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕 + 𝜷𝟖 𝑳𝑬𝑽 ∗ 𝑨𝑼𝑫𝑰𝑵𝑫𝒊𝒕 + 𝛆𝐢𝐭
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Model (6)

5. Results and Discussion

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5.1. Descriptive statistics and correlations

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 Table 2 provides descriptive statistics for several key variables in the study. The descriptive
statistics are presented in three sections: the first part covers the overall sample, the second part

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details the statistics for companies operating in high power distance cultures, and the third part
outlines the statistics for companies operating in low power distance cultures. The average ESG
scores are 43.93, 49.41, and 42.24 for the overall, high power distance culture (PD), and low

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PD samples, respectively. In terms of the Environmental pillar, the mean scores are 31.51,
46.52, and 26.89, with standard deviations of 28.37, 26.07, and 27.43 for the overall, high PD,
and low PD categories, respectively. The average scores for the Governance pillar are relatively
similar across the three segments, standing at 51.10, 52.11, and 50.80, with corresponding

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standard deviations of 21.74, 22.12, and 21.61 for the overall, low PD, and high PD categories.
Similarly, the mean scores for the social pillar are 45.47, 47.05, and 44.98, with standard

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deviations of 21.56, 23.17, and 21.01 for the overall, low PD, and high PD segments,
respectively.

These statistics suggest room for improvement in environmental pillar scores to enhance
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overall ESG scores for companies. The minimum values for both ESG scores and individual
ESG pillar scores are consistently 0 across the entire sample. However, there are slight
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variations in the maximum values. For ESG scores, the maximum values are 95.75, 93.40, and
95.75 for the overall, high-power distance (PD), and low PD samples, respectively. Regarding
environmental scores, the maximum values are 98.25, 98.25, and 97.97, while for governance
scores, the maximum values are 99.62, 98.31, and 99.62. Similarly, for social scores, the
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maximum values are 99.56, 97.40, and 99.56 for the overall, high PD, and low PD categories,
respectively.
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The mean Return on Assets (ROA) is -0.02, 0.05, and -0.04, with standard deviations of
0.25, 0.28, and 0.080 for the overall, low-power distance culture, and high-power distance
culture samples, respectively. The maximum Tobin-Q values are 7.95, 3.84, and 7.95, and the
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average is -0.11, consistent across the overall, low-power distance, and high-power distance
segments. Regarding moderators, the averages for audit committee expertise are 62.19, 41.30,
and 6.63, with corresponding standard deviations of 24.81, 33.88, and 16.62 for the overall,
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high-power distance (PD), and low PD samples, respectively. Additionally, the mean for audit
committee independence is 49.10, 48.98, and 50.06, with a minimum value of 0 and maximum
values of 94.62, 94.62, and 93.97 for the overall, high PD, and low PD categories, respectively.
Pr

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Table 2. Descriptive Statistics

e d
Mean
AUDEXP
62.19
AUDIND
49.10
ENV
31.51
ESG
Overall Sample

43.93
FSIZE
9.34
GOV
51.10
LEV
-0.35
TobinQ

i ew -0.11
ROA
-0.02
SOC
45.47
Median
Maximum
73.33
94.59
55.19
94.62
26.84
98.25
41.43
95.75
9.38
12.74
51.56
99.62
-0.25

e
6.46
v -0.09
7.95
0.02
4.90
43.97
99.56
Minimum
Std. Dev.
Observations
0.00
24.81
20336
0.00
19.89
20336
0.00
28.37
20336
0.00
19.67
20336
r
0.00
1.00
20336
0.00
21.74
20336 r -6.76
0.92
20336
-7.35
0.88
20336
-2.95

20336
0.25
0.00
21.56
20336

Mean 41.30 45.98 46.52 49.41

ee High PD
9.71 52.11 -0.24 -0.11 0.05 47.05
Median
Maximum
Minimum
71.35
74.15
0.00
49.10
94.62
0.00
47.97
98.25
0.00
t
50.66
93.40
1.11 p 9.66
12.74
6.02
53.44
98.31
0.00
-0.27
3.78
-3.72
-0.14
3.84
-2.94
0.04
0.96
-0.79
46.40
97.40
0.58
Std. Dev.
Observations
33.88
4788
25.00
4788

n
26.07
4788
o 19.30
4788
0.87
4788
22.12
4788
0.62
4788
0.79
4788 4788
0.08 23.17
4788

Mean
Median
Maximum
68.63
73.33
94.59
ir n
50.06
55.19
93.97
t 26.89
19.08
97.97
42.24
39.21
95.75
Low PD
9.23
9.26
12.63
50.80
51.56
99.62
-0.39
-0.24
6.46
-0.11
-0.08
7.95
-0.04
0.02
4.90
44.98
43.18
99.56
Minimum
Std. Dev.

e p 0.00
16.62
0.00
17.92
0.00
27.43
0.00
19.48
0.00
1.01
0.87
21.61
-6.76
0.99
-7.35
0.91
-2.95
0.28
0.00
21.01

P r
Observations 15548.00 15548.00 15548.00 15548.00 15548.00

20
15548.00 15548.00 15548.00 15548.00 15548.00

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 5.2. Correlation

Table 3 displays the correlation matrix of the study's variables. The ESG score exhibits a

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statistically significant (ρ<0.01) and positive correlation with both financial performance
measures, namely ROA (0.242) and Tobin-Q (0.125). This aligns with expectations, as
companies demonstrating higher financial performance may depend on a higher ESG score.

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Similarly, the environmental pillar score shows a significantly positive association with both
ROA (0.248) and Tobin-Q (0.107). Likewise, the governance pillar score also exhibits a
significantly positive correlation with both ROA (0.17) and Tobin-Q (0.07). Similarly, the
social pillar score is significantly and positively correlated with ROA (0.137) and Tobin-Q

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(0.142), indicating that higher ESG scores and elevated scores across all ESG pillars generally

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correspond to superior financial performance. A noteworthy and positive correlation exists
between Tobin-Q and audit committee attributes, specifically, audit committee expertise (0.07)
and audit committee independence (0.61). This suggests that the efficacy of the audit
committee may be associated with higher Tobin-Q. Furthermore, ROA is positively correlated
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with audit committee independence (0.011) but negatively correlated with audit committee
expertise (-0.069). This implies that higher audit committee independence may be linked to
pe
increased ROA, while greater audit committee expertise could be associated with decreased
ROA.
ot
tn
rin
ep
Pr

21

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 Table 3: Correlations

Probability AUDEXP AUDIND ENV ESG FSIZE GOV LEV TobinQ ROA SOC

ed
AUDEXP
1
AUDIND 0.148 1
0.000 -----
ENV -0.149 0.029 1

iew
0.000 0.000 -----
ESG 0.008 0.127 0.809 1
0.263 0.000 0.000 -----
FSIZE -0.112 -0.009 0.371 0.348 1
0.000 0.210 0.000 0.000 -----
GOV 0.118 0.238 0.436 0.679 0.202 1

v
0.000 0.000 0.000 0.000 0.000 -----
LEV 0.058 0.039 0.091 0.126 -0.285 0.099 1

re
0.000 0.000 0.000 0.000 0.000 0.000 -----
TobinQ 0.077 0.061 0.107 0.125 -0.568 0.077 0.478 1
0.000 0.000 0.000 0.000 0.000 0.000 0.000 -----
ROA -0.069 0.011 0.248 0.242 0.315 0.171 0.004 0.028 1
0.000 0.112 0.000 0.000 0.000 0.000 0.562 0.000 -----
SOC 0.038
0.000
0.066
0.000
er
0.692
0.000
0.839
0.000
0.280
0.000
0.444
0.000
0.097
0.000
0.142
0.000
0.137
0.000
1
-----
pe
ot
tn
rin
ep
Pr

22

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 5.3. Direct effect estimation

ed
Table 4 displays the findings from the direct effect estimation, investigating the influence
of the ESG score and its three components—environmental pillar score, social pillar score, and
governance pillar score—on financial performance. The analysis employs six measures to

iew
assess financial performance, including Tobin-Q, ROA, ROA in high power distance cultures
(ROA high PD), ROA in low power distance cultures (ROA low PD), Tobin-Q in low power
distance cultures (Tobin-Q low PD), and Tobin-Q in high power distance cultures (Tobin-Q
high PD). The analysis consists of twelve models, with six dedicated to investigating the impact
of ESG scores on financial performance and another six for evaluating the influence of ESG

v
pillars on financial performance. Model 1 indicates a positive and statistically significant

re
influence of the environmental (β=3.66), social (β=0.99), and governance (β=0.325) pillars on
Tobin-Q. This suggests that enhancements in environmental, governance, and social scores are
associated with an increase in Tobin-Q. Furthermore, model 2 investigates the impact of ESG
er
on Tobin-Q and identifies a statistically significant (ρ<0.05) positive impact. This implies that
a rise in ESG scores corresponds to an increase in Tobin-Q. Both the outcomes of Model 1 and
Model 2 underscore the importance of ESG as a critical factor in enhancing market valuation.
pe
The growing importance of ESG among investors and stakeholders highlights the
acknowledgement of ESG factors as fundamental indicators of sustainability. Companies with
strong and demonstrated ESG practices stand the chance of receiving more positive market
ot

valuations. Furthermore, model 3 suggests that the environmental (β=-0.05) and social (β=-
0.005) pillars exert a statistically significant (ρ<0.01) and adverse effect on Return on Assets
(ROA), implying that a greater emphasis on environmental and social practices may result in a
tn

decrease in ROA. Conversely, the governance pillar exhibits a statistically significant

(β=0.002, ρ<0.01) positive impact on ROA, suggesting that companies can enhance their ROA
by focusing on internal management and practices. Additionally, the positive impact of audit
rin

committee characteristics (ρ<0.01) on ROA indicates that audit committee members'

experience, knowledge, and independence may contribute to an increase in ROA. Likewise,
the findings from the fourth model indicate the significance of audit committee characteristics
ep

in enhancing Return on Assets (ROA). The results also indicate a positive and statistically
significant (ρ<0.01) impact of firm size (β=0.466) and leverage on ROA, suggesting that larger
firm size is associated with a larger ROA. Moreover, companies with higher leverage are more
Pr

likely to achieve a larger ROA.

23

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 Additionally, in Model 5, an examination was conducted on the influence of environmental,
social, and governance pillars on Tobin-Q in high power distance cultures. The findings reveal

ed
a significant (ρ<0.01) negative impact of environmental (β =-0.015) and governance (β =-
0.048) pillars, indicating that companies operating within such cultures face adverse
consequences on Tobin-Q as a result of their efforts to enhance environmental and governance

iew
aspects. Moreover, the results suggest that attempts to improve these aspects could negatively
impact the market valuation of companies within high power distance cultures characterised
by prominent power inequalities and hierarchical structures.
Likewise, Model 6 demonstrates a statistically significant (ρ<0.01) and adverse influence

v
of ESG (β=-0.041) on Tobin-Q in high power distance cultures. The outcomes also highlight a

re
significantly positive effect of audit committee expertise on Tobin-Q in high power distance
cultures, suggesting that the presence of highly experienced and knowledgeable audit
committee members can exert a notable positive impact on Tobin-Q, even within cultures
characterised by high power distance.
er
Model 7 delved into the effects of ESG pillars on Tobin-Q in low power distance cultures.
The findings suggest a significantly positive impact of ESG pillars on Tobin-Q, implying that
pe
companies operating within low power distance cultures can enhance Tobin-Q by emphasising
environmental, social, and governance practices. Similarly, Model 8 also reveals a significantly
positive impact of ESG (β=1.66, ρ<0.01) on Tobin-Q in low power distance cultures.
Moreover, Model 9 illustrates that the ESG pillars positively (ρ<0.01) influence Return on
ot

Assets (ROA) in high power distance cultures.

However, in the comprehensive examination of the overall impact of ESG in Model 10, a
tn

negative (β =-0.041, ρ<0.01) impact on ROA in high power distance cultures was identified.
This suggests that if companies operating in high power distance cultures heavily emphasize
ESG practices, it may result in a detrimental effect on their ROA. Likewise, in Model 11, an
rin

adverse impact of environmental (β=-0.011) and social (β=-0.015) pillars on Return on Assets
(ROA) was identified for companies operating in low power distance cultures. However, in the
comprehensive analysis of the overall impact of Environmental, Social, and Governance (ESG)
ep

on ROA, a significantly positive (β=1.667, ρ<0.01) impact on ROA was observed. This implies
that an increased emphasis on ESG practices by companies in low power distance cultures may
result in an enhancement of their ROA. The R-squared (r2), adjusted R-squared (r2_a), F-
Pr

statistic, and p-values, demonstrate the statistical significance of the regression model,
indicating that it explains a substantial portion of the variance in financial performance.

24

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 Table 4:Direct effect model

e d
Variable
Model 1
***
Tobin-Q

7013.673
Model 2
6273.808
***
Model 3
-4.478
***
ROA
Model 4
-4.747
***
Model 5
4.827
***
Direct Effect Models
Tobin-Q High PD
Model 6
29.889
***
Tobin-Q low PD
Model 7
172.126
***
Model 8
176.452
***

i
Model 9
0.032
***
w
ROA High PD

e Model 10
29.889
***
ROA low PD
Model 11 Model 12
-0.242
***
176.452
***
C

ENVIRONMENTAL
6.476
3.668
**
7.438 -13.114
-0.005
***
-16.950 28.950
-0.015
***
22.530 12.409
1.069
***
11.312

e v
71.544
0.000
***
22.530 -12.682
-0.011
***
11.312

r
_PILLAR_SCORE 2.317 -8.491 -14.153 4.646 -17.693 -23.407
0.325 0.002 -0.048 0.101 0.000 0.006

r
GOVERNANCE_PIL ** *** *** *** *** ***
LAR_SCORE 2.390 5.913 -11.679 3.713 16.365 12.643
0.993 -0.005 0.006 0.760 0.000 -0.015
SOCIAL_PILLAR_S
CORE
***
2.889
0.000
**
***
-7.041
0.000
***
8.388

ee
-0.041
***
***
4.754
1.667
***
***
345.763
-0.041
***
***
-24.352
1.667
***

p
ESG_SCORE -2.438 0.433 -7.046 3.100 -7.046 3.100
-0.491 -0.243 0.001 0.001 0.026 0.015 -0.204 -0.213 0.000 0.015 0.003 -0.213

t
AUDIT_COMMITTE *** ** *** *** *** *** *** ** *** *** *** **
E_EXPERTISE -3.400 -2.326 8.211 6.450 9.826 4.838 -6.854 -2.441 5.976 4.838 13.554 -2.441

o
-0.279 -0.071 0.000 0.000 -0.001 -0.005 0.025 -0.113 0.000 -0.005 0.002 -0.113
AUDIT_COMMITTE ** *** *** ** *** *** *** *** ***
E_INDEPENDENCE -2.229 -1.367 3.308 0.817 -1.562 -3.512 2.503 -3.188 23.593 -3.512 26.986 -3.188

FIRM_SIZE
-277.461
**
-2.260
0.031
-181.643
***
-2.028
0.025
0.471
***
11.591
0.000

t n0.466
***
15.331
0.000
-5.496
***
-18.188
0.482
-2.894
***
-24.068
0.711
-66.768
***
-4.590
0.040
-50.632
***
-3.083
0.040
-0.020
***
-862.828
0.000
-2.894
***
-24.068
0.711
0.773
***
33.241
0.000
-50.632
***
-3.083
0.040

ir n
** *** *** *** *** *** *** *** *** *** *** ***
LEVERAGE 2.676 4.763 6.552 8.864 97.615 95.052 556.062 223.059 -24.961 95.052 12.844 223.059
R-squared 0.573 0.581 0.647 0.653 0.904 0.953 0.942 0.912 0.956 0.953 0.697 0.912
Adjusted R-squared 0.430 0.441 0.529 0.537 0.856 0.937 0.913 0.869 0.935 0.937 0.545 0.869

p
F-statistic 4.018 4.149 5.480 5.641 18.759 59.954 32.336 20.809 43.578 59.954 4.580 1542.120
Prob(F-statistic) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

r e
P 25

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 5.4. The moderating effect of AC attributes on the relationship between ESG and
financial performance (ROA, Tobin-Q):

ed
Table 5 displays the moderating impact of audit committee characteristics on the
association between ESG and financial performance. The table comprises eight models, with

iew
two moderators involved: four models pertain to the audit committee's expertise as moderator,
and the remaining four models relate to the audit committee's independence as moderator. The
results indicate that while the direct influence of ESG on Tobin-Q is not significant, a positive
impact on Tobin-Q is observed when ESG interacts with AC (Audit Committee)
characteristics. This suggests that the interactions between ESG and AC characteristics

v
contribute to a higher Tobin-Q, often associated with an augmented market valuation,

re
especially when accounting for AC expertise and AC independence in these interactions.

Likewise, the direct influence of ESG factors on Return on Assets (ROA) is deemed
insignificant. However, when ESG interacts with Audit Committee (AC) characteristics, a
er
positive effect on ROA is observed, indicating that AC characteristics moderate the connection
between ESG and ROA. These findings highlight that the knowledge and experience of AC
pe
members are crucial in effectively managing the complexities associated with ESG issues,
ultimately contributing to the enhanced financial performance of companies. Additionally, the
objectivity of an independent audit committee positions it well to impartially assess the
integration of ESG practices within the company, preventing conflicts of interest and ensuring
ot

a transparent and unbiased evaluation of ESG's impact on financial performance.

The interaction between company size and audit committee attributes is associated with a
tn

noteworthy negative impact on financial performance. This suggests that as the size of the firm
increases, financial performance tends to decrease through the involvement of the audit
committee. Larger firms may prioritize factors other than Environmental, Social, and
rin

Governance (ESG), with the assistance of audit committee members, potentially reducing the
market image and Return on Assets (ROA) of companies.
ep
Pr

26

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
Table 5: The moderating effect of Audit committee characteristics

AC Expertise Moderator AC Independence Moderator

e d
w
Variable Tobin-Q ROA Tobin-Q ROA
7609.736 895.396 -0.414 -5.298 148.321 5606.427 -1.117 -8.285
C *** *** *** *** *** *** *** ***

e
7.820 38.229 -16.024 -36.444 10.239 166.327 -19.473 -36.496

i
3.960 -0.002 1.220 -0.011
*** *** ** ***

v
ENVIRONMENTAL_PILLAR_SCORE 3.370 -6.502 2.467 -18.298
-0.024 0.000 0.008 0.000
*** *** ** **

e
MODERATE__ENVIRONMNETAL -3.407 12.063 2.473 2.130
0.927 -0.004 0.213 0.003

r
*** *** ** ***
GOVERNANCE_PILLAR_SCORE 3.119 -13.079 2.674 5.383
0.000 0.000 0.000

r
** *** * 0.000
MODERATE__GOVERNANCE 2.801 29.107 -1.898 0.930
2.364 -0.001 0.531 -0.011

e
** *** ** ***
SOCIAL_PILLAR_SCORE 2.199 -3.393 2.626 -14.105
0.000 0.000

e
0.005 *** * 0.000
MODERATE__SOCIAL 1.025 22.994 1.807 0.105
0.009 0.000 0.000 0.000

p
ESG SCORE 0.390 -1.029 0.974 -1.289
0.030 0.001 0.002 0.003
*** *** *** ***

t
MODERATE__ESG 30.174 33.937 37.035 38.014
-1.435 -0.088 0.002 0.000 -0.218 -2.237 0.003 0.003
*** *** *** *** *** *** *** ***

o
AUDIT_COMMITTEE_EXPERTISE -3.368 -4.663 6.772 4.754 -2.649 -48.878 35.396 54.802
0.300 0.001 0.169 2.580 0.001 0.005
-0.495 *** *** 0.000 *** *** *** ***

n
AUDIT_COMMITTEE_INDEPENDENCE -1.517 15.622 2.582 -1.311 3.187 47.390 2.664 122.368
-345.325 -82.743 0.458 0.498 -65.165 -520.020 0.578 0.686
*** *** *** *** ** *** *** ***

t
FIRM_SIZE -3.057 -33.720 14.536 34.687 -2.539 -167.565 25.159 32.094
-1.625 -0.010 -0.009 -1.590 -16.844 0.030 0.028
-1.229 *** *** *** ** *** *** ***

ir n
MODERATE__FIRM_SIZE -0.378 -28.467 -15.088 -25.561 -2.373 -167.053 19.343 43.426
-14.048 0.002 0.002 -0.243 -0.343 0.000 0.000
-7.446 *** *** *** ** *** *** ***
LEVERAGE -1.232 -64.091 16.839 8.052 -1.968 -24.373 -13.329 -48.529
0.252 0.000 0.000 -0.009 -0.014 0.000 0.000
0.133 *** *** *** ** *** *** ***

p
MODERATE__LEVERAGE 1.236 65.434 -16.927 -8.017 -2.128 -39.740 -12.759 -54.566
R-squared 0.517 0.807 0.637 0.586 0.590 0.933 0.768 0.988
Adjusted R-squared 0.356 0.710 0.455 0.379 0.384 0.899 0.652 0.982

e
F-statistic 3.202 8.328 3.494 2.829 2.866 27.664 6.611 160.878
Prob(F-statistic) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

P r 27

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 5.5. Moderating effect AC expertise in low PD and high PD:

ed
Table 6 examined how audit committee expertise moderates the association between ESG
and financial performance in both low and high-power distance cultures. The results indicate
that the audit committee moderates the relationship between ESG and financial performance.

iew
The interaction between ESG and audit committee expertise shows a significant and positive
influence on financial performance, suggesting that ESG contributes to improved financial
performance in both low and high-power distance cultures, facilitated by the knowledge and
expertise of audit committee members.

v
The collaborative impact of the environmental pillar and AC expertise significantly
enhances both ROA and Tobin-Q in both high and low-power-distant cultures. This suggests

re
that the knowledge and skills of audit committee experts may mitigate the influence of cultural
power distance, resulting in a consistently positive and significant impact of ESG on financial
performance. Similarly, the interaction between the social pillar and AC expertise significantly
er
and positively influences financial performance in both low and high-power-distant cultures.
This indicates that regardless of cultural power distance, the audit committee members'
pe
expertise contributes positively to companies' financial performance when considering the
social pillar.

However, examining the interaction between the governance pillar and AC expertise
reveals a negative impact on Tobin-Q for companies operating in high power-distant cultures.
ot

This implies that internal activities may not be effectively managed in such cultures, leading to
a diminished market image and reduced Tobin-Q. Conversely, for companies in low power-
tn

distant cultures, the interaction between governance and AC expertise positively impacts
financial performance. This suggests that with the expertise of AC members, companies in low
power-distant cultures can effectively manage internal activities, enhancing their market image
rin

and resulting in increased market valuation.

The influence of firm size on financial performance is consistently negative across different
cultural power distances. However, when there is an interaction between firm size and audit
ep

committee expertise, it results in a positive and significant impact on the financial performance
of companies, both in low and high-power distance cultures. This suggests that larger firm size
is associated with improved financial performance, facilitated by the knowledge and expertise
Pr

of the audit committee. All the statistical indicators indicate that the models are highly suitable,
and we can place confidence in the conclusions drawn from these models.

28

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
Table 6: Moderating effect AC expertise in low PD and high PD
Variable
C
Tobin-Q High PD
42.979
***
-37.747
***
Tobin-Q Low PD
221.498
***
169.727
***
ROA-Q High PD
0.244
***
-37.747
***
-3.482
***
e d
ROA-Q Low PD
169.727
***

ENVIRONMENTAL_PILLAR_SCORE

MODERATE_1_ENVIRONMNETAL
53.545
0.019
***
14.880
0.000
***
8.223
0.673
***
4.087
0.006
***
73.350
0.000
***
-5.824
0.000
***

i ew -40.577
-0.001
***
-4.002
0.000
**

GOVERNANCE_PILLAR_SCORE
2.580
0.088
***
28.815
4.282
-0.012
-0.355
3.998
0.000

e
0.161
v 2.144
0.003
***
10.247
MODERATE_1_GOVERNANCE

SOCIAL_PILLAR_SCORE
-0.001
***
1.986
-0.051
***
0.019
***
4.032

r
0.596
*** r
0.021
***
5.348
0.000
***
0.000
0.105
-0.006
***

e
-20.402 3.990 14.088 -9.549
0.002 0.005 0.000 0.000
MODERATE_1_SOCIAL *** *** *** ***

e
27.641 14.875 4.615 6.712
0.013 2.312 0.013 2.312
ESG_SCORE *** *** *** ***

MODERATE_1_ESG
-0.016

t
43.562
0.001
***
14.780
0.011 p 0.107
4.605
0.008
***
4.073
-0.124 0.000
43.562
0.001
***
14.780
0.011 0.001
4.605
0.008
***
4.073
-0.124

o
AUDIT_COMMITTEE_EXPERTISE *** *** *** *** *** *** *** ***
-16.901 11.412 7.273 -3.133 3.579 11.412 3.257 -3.133

n
0.012 0.018 0.015 -0.126 0.000 0.018 -0.001 -0.126
AUDIT_COMMITTEE_INDEPENDENCE *** *** *** *** *** ** ***
21.723 13.378 0.885 -3.201 18.900 13.378 -2.362 -3.201

t
-7.338 -9.698 -66.905 -74.278 -0.019 -9.698 0.352 -74.278
FIRM_SIZE *** *** *** *** *** *** *** ***
-63.956 -141.218 -3.915 -4.347 -61.199 -141.218 33.795 -4.347

ir n
-0.283 -0.381 -2.960 -2.556 0.000 -0.381 -0.006 -2.556
MODERATE_1_FIRM_SIZE *** *** *** *** ***
-62.797 -72.490 -1.332 -1.330 13.278 -72.490 -27.751 -1.330
-31.437 -31.625 -12.696 -11.809 -0.001 -31.625 0.001 -11.809
LEVERAGE *** *** *** *** *** *** *** ***

p
-51.446 -238.946 -3.328 -2.880 -11.576 -238.946 4.996 -2.880
0.583 0.586 0.227 0.211 0.000 0.586 0.000 0.211
MODERATE_1_LEVERAGE *** *** *** *** *** *** *** ***

r
R-squared

e
Adjusted R-squared
F-statistic
51.686
0.944
0.925
49.721
235.519
0.970
0.956
65.115
3.341
0.652
0.477
3.733
2.895
0.651
0.476
3.720
11.239
0.869
0.825
19.698
235.519
0.970
0.956
65.115
-4.972
0.576
0.434
4.061
2.895
0.651
0.476
3.720

P
Prob(F-statistic) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

29

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 5.6. Moderating effect of AC independence in low and high PD:

ed
Table 7 explored how audit committee independence moderates the relationship between
ESG and the financial performance of companies in low—and high-power distance cultures.
The results show that the interaction between ESG and audit committee independence

iew
consistently has a positive impact on financial performance in all models, irrespective of the
power distance level. This suggests that the combination of audit committee independence and
ESG may enhance financial performance.

The interaction between the environmental pillar and audit committee independence

v
exhibits positive and statistically significant coefficients in all models. This indicates that
companies' initiatives in environmental sustainability, combined with the presence of

re
independent members in the audit committee, may lead to improved financial performance in
both low and high-power distance cultures. This association suggests a potential simultaneous
enhancement in financial performance and environmental practices. Governance and social
er
pillars positively interact with audit committee independence, indicating that the relationship
between governance, social factors, and Tobin-Q is enhanced in companies operating within a
pe
high-power distance culture. Audit committee independence may promote improved Tobin-Q,
particularly in businesses with high power distance.

The observed interaction effects highlight the significance of audit committee

independence in influencing the relationships between various factors and financial
ot

performance. Companies possessing effective attributes in their audit committees tend to

experience more favourable outcomes in their endeavours to enhance financial performance
tn

and navigate the impact of environmental, social, and governance considerations.

rin
ep
Pr

30

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
Table 7: The moderating effect of AC independence in low and high PD
Variable Tobin-Q High PD
26.988 38.948
Tobin-Q Low PD
1251.389 919.608
ROA-Q High PD
0.132 38.948 -3.545
e d
ROA-Q Low PD
919.608

w
*** *** *** ***
C 31.775 1.403 63.333 -11.780
-0.056 3.397 0.000 -0.006

e
*** ** *** ***

i
ENVIRONMENTAL_PILLAR_SCORE -22.802 1.967 -10.093 -8.902
0.001 0.039 0.000 0.000

v
*** ** *** ***
MODERATE_2_ENVIRONMNETAL 17.632 1.997 27.931 3.926
-0.041 0.510 0.000 0.004

e
*** ** ** ***
GOVERNANCE_PILLAR_SCORE -26.548 2.133 2.067 11.464

MODERATE_2_GOVERNANCE
0.000
*
1.706
0.014
***
0.000
-1.203
*

r
1.890
r
0.000
0.075
0.000
***
0.000
1.345
-0.009
***

e
SOCIAL_PILLAR_SCORE 7.842 1.940 30.111 -10.859
0.000 0.000 0.000 0.000
*** **

e
MODERATE_2_SOCIAL 9.787 -1.268 2.350 -0.078
-0.078 5.045 -0.078 5.045

p
*** * *** *
ESGSCORE -11.785 1.952 -11.785 1.952
0.000 0.000 0.000 0.000

t
*** * *** *
MODERATE_2_ESG 8.214 -1.680 8.214 -1.680
0.023 0.037 -1.418 -1.275 0.000 0.037 0.000 -1.275
AUDIT_COMMITTEE_EXPERTISE
AUDIT_COMMITTEE_INDEPENDENC
E
***
18.487

n
0.036
***
13.531 o***
14.201
0.006
***
5.831
**
-2.269
1.060
**
1.969
*
-1.959
0.389
1.078
***
36.590
0.000
***
41.030
***
14.201
0.006
***
5.831
***
3.765
0.001
***
4.774
*
-1.959
0.389
1.078

t
-0.966 -1.585 -70.195 -52.799 -0.007 -1.585 0.168 -52.799
*** *** ** *** *** *** **
FIRM_SIZE -12.662 -21.309 -1.544 -1.968 -13.156 -21.309 4.469 -1.968

ir n
0.118 0.165 -11.557 -8.421 0.001 0.165 0.030 -8.421
*** *** *** *** ***
MODERATE_2_FIRM_SIZE 32.073 126.288 -1.298 -1.413 67.727 126.288 10.793 -1.413
-0.272 -0.341 -0.881 -0.852 0.000 -0.341 0.000 -0.852
*** *** *** *** *** ***

p
LEVERAGE -3.426 -7.751 -50.433 -21.733 31.453 -7.751 -10.614 -21.733
0.003 0.002 -0.028 -0.027 0.000 0.002 0.000 -0.027

e
*** *** *** *** *** *** *** ***
MODERATE_2_LEVERAGE 9.307 15.848 -45.091 -25.834 -49.185 15.848 -11.370 -25.834

r
R-squared 0.887 0.922 0.657 0.709 0.941 0.922 0.673 0.709
Adjusted R-squared 0.829 0.883 0.485 0.563 0.911 0.883 0.509 0.563
F-statistic 15.420 23.416 3.813 4.856 31.327 23.416 4.103 4.856

P
Prob(F-statistic) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

31

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 6. DISCUSSION

ed
It is crucial to explore the complex connections between audit characteristics, financial
performance, and ESG concerns while addressing the study's findings. Several important
insights are revealed by estimating the direct impact of the ESG score and its three components

iew
on financial performance. Firstly, Model 1 indicates that enhancements in the environmental,
social, and governance scores positively influence Tobin-Q, suggesting that these ESG
components are associated with increased market valuation. This finding aligns with the
growing recognition among investors and stakeholders of ESG factors as essential
sustainability indicators.

v
Similarly, Model 2 supports the favourable impact of ESG on Tobin-Q, reinforcing the

re
notion that higher ESG scores correspond to improved market valuations. The findings align
with existing literature that emphasizes the growing importance of ESG factors in financial
performance. Studies have shown that strong ESG practices can lead to better market
er
valuations and profitability by reducing risks and enhancing reputation (Dakhli, 2022; Dkhili,
2024; Elmghaamez et al., 2023; Samy El-Deeb et al., 2023). Moreover, these findings
pe
contradict the findings of Al-ahdal et al. (2023) who reported a negative impact of ESG
disclosure on firm value. Additionally, our findings also contradict Boulhaga et al. (2023),
which demonstrated that ESG has no direct effect on corporate performance.

However, the analysis also reveals that the linkage between ESG components and Return
ot

on Assets (ROA) is more complex. Model 3 shows that while the governance pillar positively
influences ROA, the environmental and social pillars have a negative impact. This suggests
tn

that while strong internal management practices (governance) can enhance ROA,
overemphasising environmental and social practices might detract from short-term
profitability.
rin

Model 4 emphasizes this complexity even more by showing how firm size and leverage
positively affect ROA and how larger firms with higher leverage typically outperform smaller
firms in terms of ROA. Our finding contradicts the findings of Sun et al. (2019), who
ep

demonstrated that corporate social performance positively affects corporate financial

performance. Similarly, it contradicts Al Kurdi et al. (2023), who demonstrated that
environmental and social pillars positively affect ROA while supporting our finding by
Pr

demonstrating the positive effect of governance on ROA. Al Kurdi et al. (2023) also
demonstrated a negative effect of ESG on ROA. Furthermore, they showed that the

32

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 environmental and social pillars have a negative impact on corporate performance. The first
hypothesis, which claimed that ESG disclosure significantly improved firm performance, is

ed
only partially accepted.

The findings reveal a complex interplay where audit independence and expertise

iew
significantly mitigate the negative impacts of perceived greenwashing on a company's
performance. This indicates that the market's trust in a company's ESG scores is considerably
enhanced when these scores are backed by independent and knowledgeable auditors. The
moderating role of audit committee (AC) characteristics is critical in understanding the ESG-

v
financial performance relationship. The results from Table 4 indicate that while the direct
influence of ESG on ROA is not significant, the interaction between ESG and AC

re
characteristics both expertise and independence, positively impacted both the metrics of
financial performance; ROA and Tobin-Q. Since both of the audit committee's qualities
moderate the relationship between ESG and corporate performance, hypotheses 4 and 5 are
er
accepted. These results further support the agency theory. This emphasises the importance of
AC characteristics in effectively managing ESG complexities and enhancing market valuation
and profitability. This moderating effect underscores the critical role of auditor credibility in
pe
enhancing the positive linkages between ESG scores and financial performance.

Furthermore, this relationship highlights the market's growing sophistication in discerning

and valuing genuine ESG commitments over superficial greenwashing tactics. The
ot

comprehensive panel analysis, spanning thousands of companies worldwide, lends robustness

to these conclusions, suggesting that these trends are observable across various industries and
tn

geographical contexts. The results of our study align with Fuadah et al. (2022), who provided
evidence that the audit committee's moderating role strengthens the relationship between
corporate values and ESG aspects. However, our findings diverge from theirs in terms of the
rin

relationship between ESG and firm performance. Fuadah et al. (2023) concluded that the audit
committee does not moderate this relationship, whereas our study contradicts this assertion.
Similarly, our findings contradict (Saputra et al., 2024) demonstrated that audit committees do
ep

not affect the relationship between ESG and firm value. We contend that our comprehensive
dataset and robust analysis support our findings.

The fascinating impact of cultural factors, notably the significance of power distance, on
Pr

these connections is further highlighted by this study. The cultural setting significantly
influences ESG and financial performance, especially power distance. Models 5 and 6 reveal

33

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 that in high power distance cultures, the environmental and governance pillars negatively affect
Tobin-Q, and a higher overall ESG score also adversely impacts Tobin-Q. The third hypothesis

ed
is partially accepted. Conversely, in low power distance cultures, ESG components positively
influence Tobin-Q and ROA (Models 7, 8, and 11). These findings suggest that the cultural
context significantly influences how ESG practices impact financial performance, with high

iew
power distance cultures potentially posing challenges to the positive implementation of ESG
initiatives. These findings align with Susec & Sardy, n.d., who discovered that, compared to
businesses operating in cultures with high power distance, those employing ESG practices in
cultures with low power distance typically have greater financial success. This suggests that

v
companies where the relationship between subordinates and superiors is not excessively distant

re
may foster teamwork and promote innovation, leading to improved financial performance.
Moreover, our findings also support Potapova et al. (2021), who argued that the positive effects
of ESG were reversed by a higher degree of power distance, which involves a complicated
er
hierarchical governance structure, corruption, a reduction in personal accountability, and
acceptance of centralized authority. Shin et al. (2023) claimed that companies' ESG efforts are
less likely to be connected to financial performance when they operate in nations with high
pe
power distance cultures. It would be assumed that a high power distance would deter companies
from achieving exceptional ESG performance, hence weakening their financial success.

AC expertise is an important moderating factor in both low- and high-power distance

ot

cultures. Table 5 shows that financial performance is positively impacted by the combination
of ESG elements and AC expertise across cultural boundaries, indicating that competent and
experienced audit committees can lessen the detrimental effects of cultural power distance.
tn

However, the governance pillar's interaction with AC expertise negatively impacts Tobin-Q in
high power distance cultures, indicating that effective management of internal activities is
challenging in such contexts. The H6 and H7 are accepted.
rin

Similarly, Table 6 shows that AC independence consistently enhances the linkages between
ESG and financial performance, regardless of power distance. This finding suggests that
independent audit committees can provide unbiased evaluations of ESG practices, leading to
ep

improved financial outcomes. The positive interaction between the environmental pillar and
AC independence highlights the potential for simultaneous enhancements in financial
performance and environmental sustainability. The H8 and H9 are accepted. The cultural
Pr

aspect adds a layer of complexity to the global understanding of ESG factors. It necessitates a
more localized approach to evaluating the interplay between ESG initiatives, auditing qualities,

34

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 and financial performance. Consequently, for multinational corporations and global investors,
these insights emphasize the need to consider cultural nuances in their ESG strategies and

ed
auditing practices to align with different markets' varying expectations and norms.

The findings have several real-world implications for policymakers and corporate

iew
executives. Firstly, companies should recognize the significance of ESG practices in enhancing
market valuation, especially in contexts where stakeholders increasingly prioritize
sustainability. Nevertheless, companies must also manage ESG projects while considering their
immediate financial success, especially in cultures with a significant power distance, where the
adverse effects on profitability may be more noticeable. The significant moderating role of AC

v
characteristics suggests that companies should invest in enhancing the expertise and

re
independence of their audit committees. Knowledgeable and independent AC members can
effectively manage ESG complexities, ensuring that sustainability initiatives translate into
improved financial outcomes. For policymakers, these findings underscore the importance of
er
promoting corporate governance practices that enhance AC effectiveness.

In conclusion, the study highlights the nuanced relationship between ESG practices and
pe
firm performance, influenced by cultural context and moderated by audit committee
characteristics. Companies can achieve sustainable financial success in diverse cultural settings
by strategically managing ESG initiatives and strengthening audit committee attributes.
ot

7. CONCLUSION

The current research thoroughly examines how ESG issues impact financial performance,
tn

with a particular focus on the functions played by audit committee features and cultural
contexts. The findings reveal that Tobin-Q, which denotes a rise in market valuation, is
positively impacted by increases in ESG ratings, namely in the environmental, social, and
rin

governance domains. This highlights the increasing significance of ESG aspects for investors
and stakeholders as crucial sustainability indicators. Nevertheless, the linkages with Return on
Assets (ROA) are more complex. The governance pillar has a favourable effect on return on
ep

assets (ROA), indicating that excellent internal management practices improve profitability.
However, the environmental and social components negatively influence ROA, suggesting that
excessive emphasis on these areas may decrease short-term profitability. The complexity of
Pr

this issue suggests that comprehensive ESG policies that consider both short and long-term
financial outcomes are essential.

35

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 The study also emphasizes the significant influence of cultural factors, particularly power
distance, on the linkages between ESG practices and firm performance. Within cultures

ed
characterized by high power distance, where hierarchical structures are prominent, the presence
of ESG components has a detrimental effect on Tobin-Q. On the other hand, in cultures with
low power distance, these elements positively impact both ROA and Tobin-Q. This suggests

iew
that the effectiveness of ESG initiatives could vary greatly depending on cultural factors,
requiring businesses to modify their approach. Regardless of cultural differences, the audit
committee's qualities—such as independence and expertise—are essential moderators in this
connection. The results highlight the significance of sound company governance by showing

v
that informed and impartial audit committees strengthen the beneficial effects of ESG policies

re
on financial performance. This moderating role underscores the market's trust in ESG scores
when supported by credible and effective audit committees.

These results have several practical implications. Companies should strategically manage
er
ESG initiatives to enhance market valuation, especially in cultures that prioritize sustainability.
Investing in the expertise and independence of audit committees is also essential for translating
ESG practices into improved financial outcomes. For policymakers, the findings highlight the
pe
need to promote corporate governance practices that enhance audit committee effectiveness.
Regarding contributions, this research offers a sophisticated comprehension of the varying
effects of ESG elements on financial performance, stressing the significance of cultural
ot

background and audit committee attributes. It validates the importance of ESG practices for
market valuation and profitability while highlighting the complexity of their impacts on ROA.
The study also underscores the critical role of audit committees in moderating these
tn

relationships, supporting agency theory and the importance of strong governance.

The intriguing findings of this study pave the way for several promising directions in future
research. One key area is the deeper exploration of cultural influences on the ESG-audit-
rin

financial performance nexus. Future studies could investigate how several cultural aspects
beyond power distance, including individualism or uncertainty avoidance impact these
relationships. Additionally, research could be extended to explore how different corporate
ep

governance structures influence the efficacy of ESG initiatives and the perception of audit
quality. Another fertile area for investigation is the role of technological advancements, like
artificial intelligence and blockchain, in enhancing the transparency and reliability of ESG
Pr

reporting and auditing processes. This could include examining how these technologies might
alter the dynamics between ESG factors, audit qualities, and financial performance. Further,

36

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=4910355
 longitudinal studies extending beyond the 2020-2022 timeframe would be beneficial to
understand the long-term trends and impacts, especially in the context of evolving global

ed
economic and environmental challenges. Lastly, comparative studies between industries could
offer insights into sector-specific challenges and opportunities in aligning ESG goals with
financial performance, providing more tailored strategies for businesses in various sectors.

iew
These directions promise to enrich the academic discourse on ESG factors and corporate
performance and offer practical implications for businesses striving to balance profitability
with sustainability.

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