Does the market price ESG disclosure too slowly? Evidence from future performance and valuation in Indonesia

Abstract

This study examines whether environmental, social, and governance (ESG) performance is reflected immediately in market value or incorporated gradually after it begins to affect firms' future operating performance and delayed valuation. We examine this timing issue using Refinitiv Eikon data on Indonesian-listed firms from 2008 to 2025. A firm's value is measured using Tobin's Q, and future operating performance is measured using the following year's return on assets. In estimating these relationships, this research controls for profitability, firm size, leverage, liquidity, growth in sales and assets, firm age, loss-making companies, board size, and analyst following. Industry and year fixed effects were included, with standard errors clustered by firm and year to account for within-firm serial correlation and common year-level shocks. We find no association between the composite ESG score and contemporaneous Tobin's Q. The results change when the analysis examines future outcomes. Firms with higher ESG scores report better operating performance in the following year, and the relationship with firm value also appears in the later period. The timing of these results matters. Rather than responding to the ESG score itself, investors may respond when ESG practices begin to appear in observable performance. Improvements in stakeholder relationships, resilience, and management quality are unlikely to be realized immediately. Taken together, the results are more consistent with delayed, gradual pricing of ESG practices as they emerge and become observable to investors than with the view that ESG has no economic relevance in Indonesia.