LEADERS VERSUS LAGGARDS: ESG PERFORMANCE, VALUATION PREMIUMS, AND THE COST OF CAPITAL

Abstract

The integration of environmental, social, and governance criteria into financial decision-making has transformed capital markets, reshaping how corporate value is assessed and priced. This study investigates the impact of sustainability ratings on firm valuation by comparing companies classified as leaders and laggards. Using a 33-year panel dataset of 1,200 firms across fifteen emerging economies, the analysis employs autoregressive distributed lag models, Granger causality tests, and cost of capital comparisons. The results reveal that environmental, social, and governance leaders consistently enjoy significant valuation premiums, lower borrowing costs, and reduced equity risk, while laggards face systematic valuation discounts, higher financing costs, and constrained access to capital. Contextual moderators further shape these outcomes: external assurance by Big Four auditors amplifies the premium for leaders, while rating divergence exacerbates the penalties for laggards. Granger causality tests confirm that sustainability performance predicts valuation rather than the reverse, underscoring its forward-looking role in shaping market outcomes. These findings demonstrate that sustainability leadership has become structurally embedded in the determinants of firm value, signaling resilience, credibility, and long-term competitiveness. The study contributes to the literature by providing robust empirical evidence on the valuation asymmetries between leaders and laggards and by highlighting the importance of credible assurance and standardized rating methodologies for effective capital allocation.