AABFJ Volume 18, Issue 2, 2024.

Rahman, Bintoro, Dewi & Kholilah: The Effect of ESG and Earnings Quality on the Value

The Effect of ESG and Earnings Quality on the Value Relevance of

Earnings and Book Value

Aulia Fuad Rahman 1, Nugroho Suryo Bintoro 2, Ayu Aryista Dewi 3 and Kholilah
Kholilah 4

Abstract

This paper aims to investigate the value relevance of ESG (environmental, social and
governance) and earnings quality of companies listed on the Indonesia Stock Exchange
during the period from 2012 to 2022. Furthermore, this study also investigates the value
relevance of earnings and book value in the presence of ESG and earnings quality. The value
relevance was operationalized using Ohlson's price model (1995), and data was extracted
from the Refinitiv database. Based on 353 firm-years, the panel data analysis indicates that
ESG and earnings quality have value relevance; this proves that information about ESG and
earnings quality are used by investors and stakeholders as a basis for decision-making.
Moreover, the presence of ESG has a negative impact on the value relevance of earnings but
has a positive impact on the value relevance of book value. By contrast, with ESG, the
presence of earnings quality has a positive impact on the value relevance of earnings but has
a negative impact on the value relevance of book value, implying that when the quality of
accounting information increases, users rely more on earnings information rather than book
value. A robustness test testing was also carried out by conducting sub-sample tests based on
the period during which the COVID-19 pandemic occurred during the research. Results show
that before the pandemic, users tended to be more interested in ESG information, while
during the pandemic, users tended to focus more on earnings quality information as a basis
for decision-making.

Keywords: environmental, social, governance, earnings quality, value relevance

JEL: M40, Q56 SDG: SDG8, Target 8.2

1
University of Brawijaya, Indonesia. Aulia Fuad Rahman <[email protected]>
2
University of Brawijaya Jalan M.T. Haryono 166, Malang, Jawa Timur, Indonesia
3
Economics and Business Faculty, Udayana University, Bali, Indonesia
4
UIN Maulana Malik Ibrahim Malang, Jl. Gajayana No.50, Malang, Jawa Timur,Indonesia

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Introduction
The advent of the 2030 agenda for sustainable development goals (SDGs), which
focuses on equality to promote social, economic and environmental development,
has radically changed stakeholders' perspectives on companies. Stakeholders are
increasingly urging companies to prioritize long-term operational continuity and
increase awareness of social and environmental implications (Berthelot et al., 2012;
Edgeman et al., 2015). Apart from that, stakeholders are also demanding that
companies disclose information about their sustainability activities more
transparently (Kuo et al., 2021).
In response to these demands from stakeholders, most companies are
transforming their business to become more sustainable (Hermundsdottir &
Aspelund, 2021) and are increasingly making disclosures in sustainability reports
(Jasni et al., 2020). As a consequence, investors are increasingly interested in
environmental, social and governance information, referred to as ESG (Burckart et
al., 2018), because it provides comprehensive sustainability analysis that is useful
for evaluating potential risks and opportunities, and facilitates better investment
decisions (Sahlian et al., 2023).
The emergence of ESG as a focus for investors nowadays implies that
financial information is no longer the dominant factor that determines decision-
making (Jadoon et al., 2021). However, studies on the value relevance of ESG
information are still limited (Aureli et al., 2020). This creates a knowledge gap
regarding whether disclosure of extensive ESG information and the ability to create
long-term value (Hummel & Schlick, 2016) will be considered by investors in
making investment decisions. Ideally, ESG scores, which reflect a company’s
responsibility with regard to sustainability and whether they are trusted by society
(Guiso et al., 2006), will be considered by investors in making decisions
(Mohammad & Wasiuzzaman, 2021), and therefore they have value relevance.
However, investors cannot ignore information about a company's future
earnings capability, which is reflected in earnings quality (Bellovary, 2005). In the
context of sustainability, extensive disclosure of ESG information reflects that the
company is able to create long-term value—both for stakeholders and
shareholders—meaning that the company tends to have good profit quality
(Hummel, 2016). Considering that ESG and earnings quality are crucial factors in
decision-making, it is important to carry out an analysis of value relevance
involving these two factors.
Specifically, this paper aims to investigate the value relevance of ESG and
earnings quality. Furthermore, this study also investigates the value relevance of
earnings and book value in the presence of ESG and earnings quality. In contrast
to previous studies, which have tended to use an event-study design, the authors
explore market performance over long windows, namely in the first, second, and
third months after the end date of the financial reporting period. This is done in
order to investigate investor decisions that are oriented towards ESG performance
and sustainable earnings quality in the long term.
This research contributes in three ways. First, it extends the traditional
value relevance approach that focuses on financial information to maximize

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shareholder value. Integrating financial (earnings quality) and non-financial (ESG)

dimensions into this value relevance model can provide new insights regarding
decision-making in capital markets that focus on creating long-term value for
stakeholders and shareholders.
Second, previous literature discussing the relationship between ESG and
company value has yielded inconclusive results, and this means there is still a
debate among researchers. Those with a social perspective believe that companies
with a high ESG performance can provide solutions that will improve the quality of
life for society and the environment while increasing opportunities for value
creation for the company (He et al., 2022; Porter et al., 2019; Ullah et al., 2022;
Wong et al., 2021). Meanwhile, other researchers are of the view that improving
ESG performance incurs high costs, has a long rate of return, and creates only
limited sustainability solutions (Aras et al., 2018; Liang et al., 2022; Qureshi et al.,
2020). Thus, this research can provide new evidence about ESG responses from an
investor perspective.
Finally, this research also carried out a robustness test by incorporating the
pillars of ESG and the conditions of the COVID-19 pandemic into the analysis. This
additional analysis can provide more complex evidence regarding the usefulness of
environmental, social, and governance information as well as the extent to which
ESG and earnings quality information were able to help investors in making
decisions when facing the crisis caused by the COVID-19 pandemic.

Literature Review
Decisions by investors to invest in a company are influenced by the value relevance
of the information disclosed by the company. In the traditional concept of value
relevance, financial information is the main factor used by investors and other
stakeholders in decision-making (Dicu et al., 2020). Investors expect companies to
disclose financial information clearly so it can be compared with other disclosures;
this enables them to assess future cash flow projections (Suprayogi & Barokah,
2019). However, over the past decades, investors and stakeholders around the
world have begun to require companies to disclose more non-financial information,
especially sustainability reports (Lu et al., 2021). This demand has arisen as a
result of increasing environmental and social problems, which are largely caused
by the activities of companies.
The large number of companies that disclose sustainability reports
highlights the issue of the value relevance of sustainability reports in decision-
making. This increase in numbers is likely due to increased support for sustainable
economies from international organizations and governments. Even the United
Nations Sustainable Stock Exchange Initiative (SSE) points out that 66 out of 120
member stock exchanges published ESG reporting guidelines (Aydoğmuş et al.,
2022). According to stakeholder theory, a company's goal is to create value for
shareholders while protecting all stakeholders (Freeman, 1984). Based on this view,
companies cannot achieve the goal of improving shareholder welfare if they ignore
the needs of stakeholder groups (such as employees, customers, shareholders,
government, and community groups) (Donaldson & Preston, 1995; Hörisch et al.,

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2014) which are different or even contradictory. Jensen (2001) claims that
evaluating various stakeholder interests is an effort to maximize the company's
long-term value. Therefore, companies must implement business practices that can
provide benefits to both themselves and all their stakeholders.
Perspectives regarding the value relevance of sustainability reports can be
explained by the concept of shared value, which is based on value enhancement
theory (Porter & Kramer, 2011). This concept emphasizes that a company that
engages in social and environmental activities that are beneficial to the company
and society can increase value. On the other hand, if a company does not choose
a combination of social and environmental activities that are beneficial to the
company and society, then these activities will reduce its value. Therefore, the
company's sustainable business practices are attractive to investors, making the
disclosure of sustainability information relevant in decision-making.

Value Relevance of ESG

One form of sustainability information that is the focus of strategic and operational
agendas for companies globally is ESG (OECD, 2020). In a view consistent with
stakeholder theory, high ESG involvement reflects that a company makes a big
contribution to economic, social and environmental development, as well as
implementing sustainable governance practices (Devalle et al., 2017). Stakeholder
theory is one of the strategic issues related to the company's ability to manage
relationships with stakeholders (Freeman, 1984). This theory underlies the demand
for management to prioritize stakeholder interests because of their ability to
influence management decision-making (Aydoğmuş, 2022). Extensive
contributions to ESG initiatives can maximize a company's positive externalities
and minimize negative externalities by balancing the costs of sustainability with its
benefits (Brockett, 2012).
Previous studies have found that high ESG disclosure can reduce
sustainability information asymmetry between companies and investors that
impact the value relevance of ESG (Sahlian, 2023). Furthermore, the study shows
that in different economic conditions, there are differences in the value relevance
of ESG (Sahlian, 2023). Disclosure of sustainability performance through ESG
provides more transparent information, thereby increasing investor confidence
regarding the company's future risks (Lourenço et al., 2012; Schadewitz & Niskala,
2010), and this has the impact of increasing the efficiency of stock market
information and reducing conflict costs among stakeholders thereby increasing
value (Ng & Rezaee, 2015; Porter, 2019).
In addition, integrating ESG into core business strategies and objectives is
not merely an act of "greenwashing" aimed at improving the company's reputation
and legitimacy in the eyes of the public (PWC, 2020). Greenwashing is the process
of conveying false and misleading information due to unsubstantiated claims to
deceive consumers or other parties into believing that the company's products are
environmentally friendly (Tohang et al., 2024). This practice may be done by
companies to emphasize aspects of sustainability that are just to cover up the
company's involvement in environmentally damaging practices (Tohang, 2024).

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Conversely, when adverse events occur, companies that regularly engage in social
and environmental protection will receive more moderate reactions from investors
than companies that engage in “greenwashing” practices (Mohammad &
Wasiuzzaman, 2021).
Companies with high ESG are also associated with good financial
performance (Lins et al., 2017; Tahmid et al., 2022). Companies that prioritize
customer loyalty and value creation for stakeholders can increase productivity,
employee retention, and company reputation (Gallego‐Álvarez et al., 2010; Rabaya
& Saleh, 2022), as well as reduce waste of resources and, as a result, high
profitability (Choi & Wong, 2007; García-Benau et al., 2013; Ng, 2015; Simnett et
al., 2009). On the other hand, a decline in ESG values has been shown to
significantly depress stock prices, and the effect may increase in the future
(Shanaev & Ghimire, 2022).
A negative view of a company can result in lawsuits, loss of revenue, high
financial risks, and increased debt costs. It also can have a negative impact on
reputation and ultimately reduce company value (Saini et al., 2022). In the context
of voluntary disclosure, investors will value companies that have ESG initiatives
more because they reflect the company's efforts to operate more ethically, as well
as efforts to reduce risks and maintain future business growth, meaning that ESG
information becomes relevant.

Value Relevance of Earning Quality

Literature discussing the value relevance of financial information has existed for a
long time, but there are still few studies that investigate the synergy between
financial information and non-financial information in the context of decision-
making. Sustainable profits are found to be profits that have high quality, and
conversely, unsustainable profits are found to be profits that have poor quality
(Penman & Zhang, 2002). Dechow, Ge and Schrand (2010) define earnings quality
as earnings that are high quality and provide more information about the
company's financial performance that is relevant to specific decisions made by
decision-makers. Thus, information regarding earnings quality is important for
investors in assessing a company's ability to survive in the future.
Several previous studies have linked earnings quality to earnings
management (for example, Jones, 1991; Subramanyam, 1996; DeFond &
Subramanyam, 1998; Kothari et al., 2005) or earnings informativeness (Francis et
al., 2008; Hummel, 2016). Earnings management is related to management
behaviour in an effort to prioritize shareholder interests and has an impact on
reducing company value (Choi et al., 2013). Profit informativeness assesses the
ability of information on a company's net profit to provide information regarding
the company's condition in the future. High earnings quality will increase the
reliability and trustworthiness of company reporting (Rezaee & Tuo, 2017), thereby
increasing company value. In the context of maximizing shareholder and
stakeholder value, Hummel (2016) stated that companies involved in improving
sustainability performance tend to have good profit quality, and this has the impact
of increasing company value.

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Methodology
This research analyzes a number of ESG performance data points of non-financial
sector companies on the Indonesia Stock Exchange during the period 2012-2022.
The activities of companies operating in the non-financial sector have a high degree
of sustainability risk (Pan, 2021). The increasing expansion of non-financial
industries has a direct impact on environmental and social problems and poses
greater challenges to implementing governance practices that support companies
to operate ethically (Wahdan et al., 2023).
Companies started taking the initiative to invest in ESG in 2012, namely
when the government began requiring companies to disclose the Social and
Environmental Responsibility of Limited Liability Companies in accordance with
Government Regulation (PP) No.47 of 2012. In line with the development of ESG
around the world, the government has been increasingly tightening the regulations
regarding reporting by requiring all issuers of shares on the stock exchange to
publish sustainability reports via SEOJK 16 /SEOJK.04/2021, and currently, the
government is planning to make ESG disclosure mandatory.
Value relevance adopts the equation developed by Ohlson (1995), which
postulates that the stock market value is a function of book value and accounting
profit only. This research model modifies the model (Ohlson, 1995) by adding two
variables as moderators: ESG and earnings quality. The value relevance analysis
uses a panel data research design to observe investors' reactions to the disclosure
of ESG information and the quality of earnings reflected in stock prices after the
information disclosure at the end of the fiscal period on December 31. This research
analyzes stock prices between January and March to observe the impact of the two
pieces of information that are the focus of various stakeholder groups on investor
reactions in the long term.
Specifically, this research examines the effect of earnings per share (EPS)
and book value equity (BVE) on stock price (SP), with ESG and earnings quality
(EQ) as moderators. The panel regression methodology uses two alternatives,
namely Random and Fixed Effect Models. The results of the Fixed Effect Model test
found that there were variables that were omitted and could influence the analysis
results, so the analysis method used in this research was the Random Effect Model.
This research also adds three control variables that are thought to correlate with
stock prices, namely return on assets (ROA), leverage (LEV), and industry type
(IND). The following equation presents the value relevance model proposed in this
study.

Model A
SPit = β0+β1EPSit+β2BVE it + β3ROAit+ β4LEVit + β5IND + εit ……………………………………… (1)

Model B
SPit = β0+β1EPSit+β2BVE it+β3ESG it+ β4EQ it + β5ROAit+ β6LEVit + β7IND εit………….(2)

Model C
SPit = β0+β1EPSit+β2BVE it+β3ESG it+ β4EQ it + β5EPSit*ESGit + β6BVEit*ESGit

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+ β7EPSit*EQit+β8BVEit*EQit+ β9ROAit+ β10LEVit + β11IND + εit…………………………………...(3)

Where:
i represents the company, t is the year;
SP is the stock price of company i in the first to third months after the end date of financial reporting;
EPS is earning per share company i in year t, BE is the book value equity of company i in year t; ESG
is company performance which includes environmental, social and governance aspects company i in
year t; EQ is ranking of company earnings quality company i in year t; ROA is the ratio of the earning
to total assets of company i in year t; LEV is the ratio of the total debt to the total assets in year t;
IND is dummy score 1 if the company is from a sector that is directly related to the environment,
score 2 if the company is from the consumer sector, score 3 if the company is from the industrial
sector; and a score of 4 if the company is from the services and communications sector.

This research model is used to test the influence of ESG and EQ on EPS and
BVE in three different periods, namely SP in January, February, and March. EPS
reflects the profit earned by a company per share, which is obtained from net profit
after tax divided by the number of ordinary shares outstanding. BVE reflects the
book value of a company, which refers to the accounting value of net assets on the
company's balance sheet at the end of the period in which the company reports its
results.
The ESG variable is a measure of a company's sustainability performance
that represents the evaluation of each ESG pillar, namely environmental, social,
and governance performance (Fatemi et al., 2018). The environmental performance
of ESG includes resource use, emissions, and innovation. The social performance
element of ESG includes employment, human rights, community, and product
responsibility. The governance performance element of ESG includes management,
shareholders, and CSR strategy. The ESG score obtained from the Refinitiv
database has a value range of 0-100, with 100 being the highest sustainability
performance.
The earnings quality variable is a measure of the reliability of a company's
earnings to assess its current performance and its likelihood of surviving in the
future. The measurement of earnings quality in this research uses the Earning
Quality Score, namely the stock ranking based on sustainable earnings. The
measurement of earnings quality based on the Refinitiv database has a value range
of 1-100, with 100 being the highest ranking.
This study’s method is based on previous research (Ng & Rezaee, 2015;
Setyahuni & Handayani, 2020; Mishra & Yadav, 2021; Mohammad &
Wasiuzzaman, 2021), but it adds three control variables that correlate with
company value, namely profitability ratio, leverage, and industry type. High
profitability is related to good company prospects as measured by return on total
assets (ROA), and leverage is related to company risk as measured by the ratio of
total debt to total assets (DAR). Industry type (IND) is related to industrial risks,
especially those that are sensitive to social and environmental issues (Leonidou et
al., 2017; Singh et al., 2015; Yadav et al., 2017). Company classification is based
on industry type and is measured with a dummy, namely a value of 1 (most
sensitive) to 4 (least sensitive). The companies’ industry profile data refer to the
IDX-IC classification used in Indonesia.

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To select the companies in the research sample, the authors used purposive
sampling based on several criteria, namely (1) they are non-financial sector
companies, (2) firms that publish ESG information, and (3) firms that have
earnings quality scores during the observation period. This research extracts SP,
EPS, BVE, ESG, EQ, ROA, and LEV data from the Refinitiv EIKON database, which
can be accessed from Brawijaya University. The ESG disclosure initiative in
Indonesia—which is still voluntary—has caused the amount of cross-section and
time-series data in this research to be unbalanced, meaning that the data in this
research comprise an unbalanced panel. Based on these criteria for this sample
selection, this research analyzes 353 firm-years from 55 non-financial companies
in Indonesia.

Table 1. Sample Distribution

Observation Period Frequency Percentage (100%) Cum.

2012 19 5.38 5.38
2013 21 5.96 11.33
2014 23 6.52 17.85
2015 28 7.93 25.78
2016 32 9.07 34.84
2017 32 9.07 43.91
2018 33 9.35 53.26
2019 34 9.63 62.89
2020 34 9.63 72.52
2021 45 12.75 85.27
2022 52 14.73 100
Total observations 353
Total groups 55

Table 2 presents the descriptive statistics (i.e., means and standard deviations)
and the correlation matrix of the predictor and control variables used in this study.

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Table 2. Descriptive statistics and correlation matrix

Mean SD SP Jan SP Feb SP Mar EPS BVE ESG EQ ROA LEV IND
SP Jan 68979.47 10847.25 1.000
SP Feb 6861.381 10475.28 0.995*** 1.000
SP Mar 6693.582 9975.108 0.986*** 0.993*** 1.000
EPS 559.484 1230.893 0.631*** 0.654*** 0.6622*** 1.000
BVE 3347.983 5226.747 0.800*** 0.812*** 0.8196*** 0.764*** 1.000
ESG 0.444 28.260 -0.092* -0.075 -0.0644* 0.0889* -0.0138 1.000
EQ 57.308 0.207 0.156*** 0.156*** 0.1513*** 0.164*** 0.0771 0.234*** 1.000
ROA 0.096 0.117 0.137*** 0.153*** 0.1674*** 0.331*** 0.151*** 0.491*** 0.396*** 1.000
LEV 0.345 0.179 -0.129** -0.142*** - -0.138*** -0.152*** -0.302*** -0.345*** -0.305*** 1.000
0.1496***
IND 2.192 1.108 - -0.246*** - -0.243*** -0.293*** -0.288*** -0.095* -0.343*** 0.383*** 1.000
0.231*** 0.2547***
Note: This table presents the mean, standard deviation, and correlation matrix, where *, **, and *** represent significance
levels at 10, 5, and 1%, respectively. The number of observations and companies is 353 and 55, respectively.

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A descriptive statistical analysis shows that stock prices in January,

February, and March averaged 68,979.47, 6,861.381, and 6,693.582, with standard
deviations of 10,847.25, 10,475.28, and 9,975.108, respectively. The variables
earnings per share and book value of equity have an average value of 559.484 and
3347.983, respectively, with standard deviations for these variables being 1230.893
and 5226.747, respectively. This implies that the sample in this study has low
earnings per share and a low book value of equity. This is because, during the 2020-
2021 period, the companies experienced a global economic crisis due to the COVID-
19 pandemic and are currently still in the post-crisis recovery stage.
When compared to the moderating variables, the ESG and earnings quality
variables have average scores of 0.444 and 57.208, respectively, with standard
deviations of 28.26 and 0.207. These results indicate that, on average, the sample
studied gets a C+ grade in the ESG performance ranking, which means that the
average company has relatively satisfactory sustainability performance and a
moderate level of transparency in reporting important ESG data publicly.
Furthermore, the average of the samples studied was ranked 57, with 100 being the
highest earnings quality ranking. This shows that, on average, the sample has quite
good earnings quality.
The correlation matrix shows that ESG variables are negatively correlated with
stock prices at a 10% significance level. This shows the possibility of a negative
relationship between ESG and stock prices if not controlling for confounding factors,
and this could influence the results of the analysis in this research. However, almost
all predictor variables are positively and significantly correlated with stock prices at
the 1% and 5% significance levels. Therefore, multicollinearity should not be a
problem.
This research modifies the value relevance model proposed by Ohlson (1995)
by integrating aspects of the quality of non-financial and financial information
disclosure, namely ESG and earnings quality. Regression model analysis was carried
out in three stages of testing using the Random Effect Model method. Model A only
includes predictor variables according to the equation (Ohlson, 1995), namely EPS
and BE; then, model B adds moderating variables (ESG and earnings quality) as
predictors, and model C tests the interaction relationship.

Empirical Results and Discussion

This research investigates whether investors value the disclosure of non-financial
and financial information in decision-making by analyzing the value relevance of ESG
information and earnings quality. Companies that have good sustainability
performance can improve relationships and reduce the costs of conflict with
stakeholders, improve their reputation, and increase customer loyalty and employee
productivity, meaning that the impact is to reduce uncertainty and economic risk for
investors while increasing the company's profitability in the future. Earnings quality
information also becomes relevant when companies choose to commit to
sustainability. Companies focusing on stakeholders reduce management
opportunism, and ESG disclosure is a way for companies to demonstrate their ability
to maintain profits in the future. Table 3 shows the results of panel data analysis for
all research models.

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Table 3. Value Relevance of ESG and Earning Quality

Variable Model A Model B Model C

Jan Feb Mar Jan Feb Mar Jan Feb Mar

EPS 1.367 1.489 1.293 1.206 1.351 1.173 9.060 7.782 7.204
(0.000)*** (0.000)*** (0.000)*** (0.001)*** (0.000)*** (0.001)*** (0.000)*** (0.000)*** (0.000)***
BE 0.367 0.454 0.553 0.493 0.642 0.656 0.912 1.031 1.122
(0.010)** (0.001)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.007)*** (0.002)*** (0.000)***
EQ 20.378 (0.104) 19.351 10.593 2.186 3.385 (0.782) 8.508
(0.147) (0.357) (0.862) (0.479)
ESG -8312.436 -6091.53 -7117.095 -1167.517 -1002.713 -1541.644
(0.000)*** (0.000)*** (0.001)*** (0.564) (0.612) (0.418)
EPS_ESG -16.658 -14.974 -13.969
(0.000)*** (0.000)*** (0.000)***
BVE_ESG 0.299 0.159 (0.762) 0.470
(0.670) (0.353)
EPS_EQ 0.0742 0.077 0.0708
(0.001)*** (0.001)*** (0.002)***
BVE_EQ -0.012 -0.013 -0.014
(0.004)*** (0.001)*** (0.000)***
ROA 12478.59 11707.52 11655.46 15863.55 15028.73 13526.99
(0.054)* (0.049)** (0.031)** (0.000)*** (0.001)*** (0.001)***
LEV 3780.447 3119.154 1603.145 -1110.231 -1183.118 -1842.474
(0.207) (0.268) (0.541) (0.618) (0.587) (0.375)
IND -1121.789 -1034.52 -881.059 -165.7974 -227.475 -152.7902
(0.066)* (0.065)* (0.083)* (0.681) (0.567) (0.680)
Number of 353 353 353 353 353 353 353 353 353
obs.
Number of 55 55 55 55 55 55 55 55 55
comp.
Overall R2 0.493 0.556 0.603 0.557 0.601 0.636 0.783 0.779 0.772

Note: This table presents the mean, standard deviation, and correlation matrix, where *, **, and *** represent significance levels at 10, 5, and 1%, respectively

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The regression analysis on models A, B, and C shows that the adjusted R2

value is above 49% (Table 3). This means that the predictor variables explain around
49% of the variation in the prediction variables. These results are consistent with
previous research (Farhana & Adelina, 2019; Jadoon, 2021; Jasman & Kasran, 2017;
Lev & Zarowin, 1999; Puspa, 2006) and show that the three models show that EPS
and BVE have a positive effect on stock prices in the first, second, and third months.
This means that information on the EPS and BVE of non-financial companies in
Indonesia in this research sample has value relevance for investors in decision-
making.
The results of the analysis of the three models in January, February, and
March show consistent results. Model B (Table 3) shows that ESG has an effect (p <
0.05) on stock prices in a negative direction. This result is in line with previous
research, which states that investors are still focused on financial information, for
example, the level of profits that companies can obtain so non-financial information
in the form of ESG is still considered a burden for companies (Sahlian, 2023). Thus,
high sustainability performance will result in lower company stock prices, and
investors will have a negative perception of ESG information. Meanwhile, earnings
quality (EQ) does not have a significant effect on stock prices, indicating that EQ
information has no relationship with investor decisions, so this information is
irrelevant.
The EPS_ESG interaction test shows that ESG is able to moderate (p < 0.05)
the relationship between EPS and SP and has a negative coefficient; however, the
ESG interaction is not able to moderate the relationship between BVE and SP. When
a company has high ESG involvement, investors tend to use EPS information rather
than BVE. However, investors responded negatively to the high ESG value of non-
financial companies in this research sample. These results are in line with the view
of the trade-off hypothesis (Cardamone et al., 2012), which states that high ESG
performance will increase stakeholder value but reduce company value. Investors
assume that high ESG means the company sacrifices additional costs for high
sustainability, which results in reduced benefits for the company and shareholders.
This result is in line with (Aydoğmuş et al., 2022), which stated that ESG investments
made by companies in environmental projects, for example, require quite high costs
with quite a long processing time, so the results cannot be obtained directly by
investors.
The EPS_EQ interaction test shows that EQ is able to moderate (p < 0.05) the
relationship between EPS and SP and has a positive coefficient; however, the
BVE_EQ interaction shows that EQ is able to moderate (p < 0.05) the relationship
between BVE and SP and has a negative coefficient. The results of this research are
in line with previous research (Collins et al., 1997) which revealed a trade-off between
EPS and BVE information. In other words, when the value relevance of EPS is
positive, the value relevance of BVE becomes negative. The company's ability to
maintain profits in the future is the hope of every stakeholder, so EQ gets a positive
response from investors, and they tend to use EPS information rather than EQ for
decision-making. Overall, the results of the control variable analysis reveal that share
prices are influenced by the company's ability to generate profits, while the debt ratio
and industry profile have no relationship with the share prices of non-financial
companies included in the sample in this study.

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Additional Tests
This research provides two additional analyses to investigate the contribution of ESG
pillars as well as investigate the impact of the crisis caused by the global pandemic,
both of which may yield different analytical results. Tests related to the contribution
of the ESG pillars were carried out by substituting the ESG variables with each pillar,
namely the environmental, social, and governance pillars. The model is analyzed
separately according to the ESG dimensions with the following equations.

Environmental Analysis
SPit = β0+β1EPSit+β2BVE it+β3Env it+ β4EQ it + β5EPS it*Env it + β6BVE it*Envit+
β7EPSit*EQit+β8BVEit*EQit+ β9ROAit+ β10LEVit + β11IND + εit………………………………………...(4)

Social Analysis
SPit = β0+β1EPSit+β2BVE it+β3Soc it+ β4EQ it + β5EPS it*Soc it + β6BVE it*Socit+
β7EPSit*EQit+β8BVEit*EQit+ β9ROAit+ β10LEVit + β11IND + εit………………………………………...(5)

Governance Analysis
SPit = β0+β1EPSit+β2BVE it+β3Gov it+ β4EQ it + β5EPS it*Gov it + β6BVE it*Govit+
β7EPSit*EQit+β8BVEit*EQit+ β9ROAit+ β10LEVit + β11IND + εit………………………………………...(6)

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Table 4. Value Relevance of Environmental, Social, and Governance Pillar

Variable Environmental Social Governance
Jan Feb Mar Jan Feb Mar Jan Feb Mar
EPS 3.532 2.579 2.619 10.636 9.502 8.611 8.067 7.076 6.424
(0.043)*** (0.135) (0.130) (0.000) *** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
BE 2.016 2.072 2.031 0.155 0.341 0.565 -0.080 .183 0.4976
(0.000)*** (0.000)*** (0.000)*** (0.648) (0.297) (0.076)* (0.809) (0.568) (0.110)
EQ -2.854 -1.214 4.148 (0.714) 6.803 (0.714) 7.745 12.148 (0.317) 4.148 (0.714) 10.544 (0.426) 15.139 (0.239)
(0.804) (0.912) (0.531)
EPS_Env -5.386 -4.366 -4.721
(0.004)** (0.016)** (0.009)***
EPS_Soc -19.316 -17.913 -16.316
(0.000)*** (0.000)*** (0.000)***
EPS_Gov - 16.372 -14.989 -13.679
(0.000)*** (0.000)*** (0.000)***

EPS_EQ 0.035 0.040 0.040 0.064 0.069 0.063 0.081 0.083 0.075
(0.088)* (0.044)** (0.050)** (0.005)* (0.002)*** (0.004)*** (0.001)*** (0.001)** (0.002)***
BVE_Env -2.790 -2.702 -2.033
(0.000)*** (0.000)*** (0.000)***
BVE_Soc 1.706 1.567 1.588
(0.000)*** (0.001)*** (0.000)***
BVE_Gov
2.302 2.029 1.971
(0.000) *** (0.000)*** (0.000)***
BVE_EQ -0.0050 .0.006 -0.0093 -0.010 -0.012 -0.014 -0.0012 -0.0013 -0015
(0.088)* (0.074)* (0.014)** (0.009)** (0.002)** (0.000)** (0.005)*** (0.002)*** (0.000)***
ROA 23217.05 21996.52 19807.18 11603.07 11007.07 10389.64 6649.646 6586.255 6022.548
(0.000)*** (0.000)*** (0.000)*** (0.024)*** (0.025)*** (0.022)*** (0.252)*** (0.223)*** (0.219)***
LEV -849.452 -899.836 -1504.465 -183.666 -428.2031 -1243.038 -1045.007 634.06 -442.877
(0.680) (0.660) (0.450) (0.941) (0.858) (0.585) (0.450) (0.805) (0.854)
IND -319.250 -369.151 -315.488 -246.197 -268.227 -188.480 -386.218 -369.617 -240.885
(0.417) (0.350) (0.403) (0.610) (0.559) (0.565) (0.470) (0.458) (0.592)
Number of 353 353 353 353 353 353 353 353 353
obs.
Number of 55 55 55 55 55 55 55 55 55
comp.
Overall R2 0.797 0.780 0.774 0.763 0.764 0.761 0.702 0.718 0.731

Note: This table presents the mean, standard deviation, and correlation matrix, where *, **, and *** represent significance levels at 10, 5, and 1%, respectively

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This research analyzes the impact of each ESG pillar, namely the
environmental (Env), social (Soc), and governance (Gov) aspects of performance. The
analysis was carried out by substituting ESG variables for each pillar in a separate
test (Table 5). The analysis results show that Env, Soc, and Gov are able to moderate
the relationship between EPS and share prices but have a negative direction.
Consistent with the main test results, high involvement in the Env, Soc, and Gov
aspects is considered an expensive investment, incurs additional costs, and has the
impact of reducing company performance and value, meaning that investors react
negatively to these three aspects of performance. In line with Collins et al. (1997),
the research results in this model also found that there was a trade-off of value
relevance between EPS and BVE, which was moderated by the performance in terms
of Env, Soc, and Gov. The results of the interaction test between BVE and Env, Soc,
and Gov show a positive direction, which means that investors tend to use BVE
information in decision-making when analyzing individual environmental, social,
and governance performance aspects. However, the results of the value relevance
analysis of the interaction of Env with EPS and BVE show an equally negative
direction.
These results validate the point of view that investing in environmental
performance is expensive because it involves a lot of resources, such as the creation
of environmentally friendly products and technologies or reducing energy use, and
initiatives have to undergo a lengthy research process (Benabou & Tirole, 2010;
Donaldson, 1995; Siddiqui et al., 2023). Therefore, investors react negatively when
the company has a high involvement in the environmental performance aspect.
Meanwhile, these findings show that investors respond positively to the social
activities and governance aspects. Increasing social activities that are mutually
beneficial to both the community and the company is seen as an effort to increase
trust in the company and improve its reputation; implementing sustainable
governance practices is seen as a company complying with government regulations,
and it facilitates access to the company's capital.
Additional testing related to the pandemic phenomenon was carried out by
adding the pandemic variable as a dummy where 1 = the period during and/or after
the pandemic and 0 = the period before the pandemic. The underlying reason for
conducting this test is the different characteristics of the research periods, which
can cause financial and non-financial indicators to be positively or negatively
correlated with stock prices (Sahlian, 2023). Therefore, the research conducted a
sub-sample test by dividing the sample into two groups—namely, the sample group
without the pandemic effect and the sample group with the pandemic effect—with
the following regression equation for the pandemic effect.

SPit = β0+ β1EPSit+ β2BVEit+ β3ESGit+ β4EQit + β4EQit + β6EPSit*ESG it + β7BVEit*ESGit

+ β8EPSit*EQit + β9BVEit*EQit+ β10ROAit + β11LEVit + β12IND + εit……………………………...(7)

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Table 5. Value Relevance of ESG and EQ Pre-Post-Pandemic

Pandemic Impact Post Pandemic Analysis Pre Pandemic Analysis

Jan Feb Mar Jan Feb Mar Jan Feb Mar

EPS 8.666) 7.414) 6.888) -4.326) -4.341) -4.604) 5.805)** 4.094 5.225
(0.000)*** (0.000)*** (0.000)*** (0.003)*** (0.004)*** (0.002)*** (0.032) (0.122) (0.051)*
BVE 0.961) 1.076 1.160 0.987 0.979 1.085 2.112 2.291 2.164
(0.004)*** (0.001)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)*** (0.000)***
EQ 5.742 6.762 -11.137 -8.364 -6.144 -3.270 9.704 8.772 17.212
(0.643) (0.575) (0.351) (0.399) (0.544) (0.743) (0.551) (0.586) (0.285)
ESG 958.950 1035.318 -20.738 -972.005 -1399.377 -1890.849 2209.02 2635.88 2060.619
(0.644) (0.610) (0.992) (0.577) (0.394) (0.268) (0.366) (0.281) (0.393)
EPS_ESG -16.177) -14.526 -13.574 -3.120 -2.942 -3.210 9.640 11.995 10.751
(0.000)*** (0.000)*** (0.000)*** (0.071)* (0.096)* (0.065)*** (0.040)** (0.009)*** (0.021)**
BVE_ESG 0.279 0.210 0.496 0.681 0.864 1.084 -4.357 -4.621 -4.196
(0.593) (0.685) (0.322) (0.051)* (0.012)** (0.003)*** (0.000)*** (0.000)*** (0.000)***
EPS_EQ 0.074 0.076 0.070) 0.080) 0.083) 0.086) -0.095) -0.088) -0.102
(0.001)*** (0.001)*** (0.001)*** (0.000)*** (0.000)*** (0.000)*** (0.005)*** (0.009)*** (0.002)***
BVE_EQ -0.012 -0.013 -0.014 -0.004 -0.005 -0.008 0.016 0.014 0.013
(0.003)*** (0.001)*** (0.000)*** (0.153) (0.074)* (0.009)*** (0.008)*** (0.019)** (0.035)**
ROA 11664.54 11013.51 10515.73 11096.08 8802.338 12840.44 6860.641 6762.873 6896.519
(0.010)*** (0.013)** (0.012)** (0.001)*** (0.008)*** (0.000)*** (0.181) (0.191) (0.173)
LEV -753.310 -850.725 -1553.554 1312.738 992.096 1327.093 -1882.165 -2082.515 -2189.959
(0.731) (0.692) (0.450) (0.431) (0.548) (0.439) (0.459) (0.414) (0.383)
INDS -131.188 -193.196 -132.993 -85.175 -115.271 -163.362 121.923 40.736 13.866
(0.740) (0.620) (0.717) (0.751) (0.660) (0.559) (0.797) (0.932) (0.976)
Pandemic -1969.777 -1862.149 -1472.894
(0.000)*** (0.000)*** (0.005)***
Number Of 353 353 353 131 131 131 222 222 222
Obs.
Number Of 55 55 55 53 53 53 35 35 35
Comp
Overall R2 0.797 0.792 0.782 0.881 0.887 0.895 0.868 0.859 0.841

Note: This table presents the mean, standard deviation, and correlation matrix, where *, **, and *** represent significance levels at 10, 5, and 1%, respectively

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Analysis of the research model by adding the pandemic effect using the REM
method shows that the adjusted R2 value is above 78% (Table 5). This means that
the predictor variables explain around 78% of the variation in the prediction
variables. The results of the analysis show that non-financial sector companies in
Indonesia had lower share prices during and/or after the pandemic (respectively
1969.777; -1862.149; and -1472.894) than before the pandemic event. The results
of this research are different from the results of research in several developed
countries (Broadstock et al., 2021; Hwang et al., 2021; Xu et al., 2023), which have
revealed that companies were able to gain a higher level of trust from both the public
and investors through ESG activities thus helping to mitigate the damage to their
share prices that was caused by the pandemic, as stated in the study by Xu (2023)
who described ESG as "vaccine equity". The causes, scope, and severity of the
pandemic—as well as the different nature of ESG disclosures in each country—may
be the reason for the differences between test results for the research samples.
Furthermore, the sub-sample tests of the periods with and without pandemic
effects yield interesting results. ESG and EQ are both able to moderate EPS and BVE
on share prices but have opposite coefficient directions. In relation to ESG, EPS had
a negative interaction, and BVE had a positive interaction with share prices in the
group affected by the pandemic. On the other hand, EPS had a positive interaction,
and BVE had a negative interaction with share prices in the group unaffected by the
pandemic. In relation to EQ, EPS had a positive interaction, and BVE had a negative
interaction with share prices in the group affected by the pandemic. On the other
hand, EPS had a negative interaction, and BVE had a positive interaction with share
prices in the group unaffected by the pandemic. The results of this research indicate
the existence of a trade-off concept between EPS and BVE (Collins et al., 1997),
namely that increasing the value relevance of one indicator will reduce the value
relevance of other indicators.
Weakening economic aspects and a decline in business performance that
occurred during the pandemic. Investors reacted negatively to high ESG performance
because investments to improve ESG performance incurred additional costs in the
midst of the crisis. Instead, investors were increasingly considering EQ information
to assess a company's ability to maintain its business during the pandemic.
Meanwhile, the test results from the pre-pandemic period indicate high
investor interest in ESG information, meaning that companies' high levels of effort to
engage in ESG gained a positive response from investors. On the other hand, a
negative EQ value indicates that investors had doubts about the reliability of the
companies' earnings quality. This may be because, during the pre-pandemic period,
the limited number of companies in Indonesia that were involved in ESG increased
the tendency for management to behave opportunistically because they focused on
increasing shareholder value. Thus, the results of this analysis demonstrate that
earnings quality (financial) information was more relevant for investors than ESG
(non-financial) information during the pandemic, and conversely, ESG (non-
financial) information was more relevant for investors than EQ (financial) information
before the pandemic.

Conclusion
This research aims to provide comprehensive evidence about the value relevance of
financial and non-financial information by adopting the value relevance model
developed by Ohlson (1995). The model was modified by adding ESG variables and
earnings quality as moderators of the relationship between earnings per share and
book value equity on share prices. The analysis was developed by using stock prices

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in different periods, namely stock prices in the first, second, and third months after
the end of the financial reporting period. This research involves three control
variables that are correlated with stock prices, namely profitability, debt ratios, and
industry type. Additional analysis was carried out to provide an explanation
regarding the contribution of the pillars of ESG and to observe differences in the
impact of the characteristics of the study period, especially the impact of events
caused by the pandemic.
The results of the value relevance analysis reveal that investors value ESG
and EQ in investment decisions. ESG information plays an important role in value
relevance as investors perceive ESG as both a risk and an opportunity to enter global
markets. Earnings quality also plays an important role in the value relevance of
investors, considering it to be a signal regarding the company's future condition and
an effort to reduce opportunistic management behavior. This research finds that
there is a trade-off regarding the value relevance of EPS and BVE, and this influences
investors' reactions in decision-making.
Among the three ESG pillars, investors did not assess environmental
performance because the high costs of improving environmental sustainability create
additional costs that reduce the value of the company, so the information gained a
negative response from investors. Meanwhile, social activities and governance played
an important role in value relevance because investors considered it an effort to
maintain good relations with society and be in compliance with governance
regulations in Indonesia.
Additional tests in this study found evidence that the characteristics of a
disclosure period will cause EPS and BVE to have a positive or negative impact on
stock prices. Investor behaviour reveals that financial information (quality of
earnings) was more relevant and important for investment decisions than non-
financial information during the pandemic. On the other hand, non-financial
information was more relevant and important for investment decisions than financial
information before the pandemic.
The findings of this research have implications for capital market players
regarding the importance of integrating ESG information into investment assessment
models, both individually and aggregately. Empirical evidence regarding the
relevance of the value of ESG information can support Indonesian Government
regulations to add ESG as a mandatory disclosure for public companies. The results
of this research are also useful for other stakeholders interested in corporate
sustainability performance.
The results of this study should be interpreted with caution. First, this
research does not consider other important sustainability performance factors
specific to companies and industries. Consideration of other sustainability
performance factors—such as non-compliance risk factors—may influence findings
regarding ESG value relevance and earnings quality. Second, this research is limited
to the Indonesian stock exchange market based on data taken from the 2012-2022
period, so it does not analyze other stages of economic instability. Therefore, future
studies could analyze other economic shocks in order to observe and draw
conclusions regarding investor behavior and the relevance of value in each different
condition.

Acknowledgements
This research has no conflicts of interest to declare. Any errors are our own.
Funding
This research was funded by Universitas Brawijaya.

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