The Impact of Non-Financial Indicators on Corporate Financial Performance with Reference to the Manufacturing Sector in India

Abstract

A new disclosure approach that emphasizes creating value for the firm's long-term goals is sustainability or non-financial reporting. Over the last decades, policymakers and stakeholders have started giving corporate sustainability reporting more attention. In addition, the question of whether corporate sustainability disclosure (CSD) enhances corporate financial performance (CFP) and whether it can be utilized as a risk- mitigation strategy is a subject that is receiving a growing amount of attention. A better understanding of non-financial disclosure and its impact on CFP and the firm's financial health is essential for the investor's stakeholders and management to build a better strategy and policies. The study investigates a sample of 223 manufacturing firms covering different industries with in the manufacturing sectors throughout ten years from 2010 to 2019. To account for the endogeneity in each of the four objectives, the authors used the generalized method of moments (GMM). The study has four primary objectives. This includes examining the impact of CSD on CFP and financial distress of the firm and whether CSD can be used to mitigate the firm's default risk; further, the study also explored the moderating role of GRI compliance and Firm life cycle in this association. The results illustrated a positive and significant association between CSD (ESG) and CFP in all the models, indicating that CSD doings will enhance the firm value and profitability of Indian manufacturing firms. Furthermore, the study discovered that the relationship between CSD and firm value is positively moderated by GRI compliance, demonstrating that ESG-disclosing firms being GRI compliant have an improved firm value than those not. Further examining the role of the company life cycle indicates that adopting CSD along with various stages aids in the business's comprehensive, concrete, and intangible development even in the declining introduction and shake-out stage. Further, the results of the current study imply that ESG disclosure is associated with a lower risk of default, indicating CSD can be used as a risk mitigation strategy. Hence, understanding the CSD and CFP linkage can aid the industry and managers in framing and establishing acceptable disclosure methodologies.