Examining the Impact of Firm Sustainability Practices on Firm Growth: Evidence from the United States

Abstract

The objective of this study is to analyze the relationship between firm sustainability practices and firm growth in the context of the United States. Specifically, the study aims to assess how the implementation of ecologically and socially responsible actions impacts the growth trajectory of firms operating in the USA. To explore the relationship between firm sustainability and firm growth, this study utilizes panel data from the Thomson Reuters Assets-4 Database spanning the period from 2002 to 2014. By analyzing this data, the study aims to examine how the adoption of firm sustainability practices influences the growth dynamics of firms over time. The study employs the Generalized Method of Moments (GMM) statistical method to measure the relationship among variables, providing a robust analytical framework. Drawing from various theoretical perspectives such as Agency theory, Stakeholder theory, Value-Enhancing theory, and institutional theory, the study recognizes the multidimensional nature of firm sustainability and its impacts on firm growth. It acknowledges that a single theory may not fully explain the complexities of this relationship. The hypothesis that high Return on Assets (ROA) will lead to high firm sustainability is supported by empirical findings, indicating a positive association between these variables. The study reveals that leverage has a negative impact on the Return on Assets (ROA) rating. This finding suggests that firms with high levels of debt may prioritize servicing their debt obligations over investing in assets that generate higher returns, thereby reducing their ROA. Similarly, the market-to-book ratio is found to have a negative impact on the ROA rating, indicating that firms with lower market valuations relative to their book value may experience lower profitability. On the other hand, total assets have a significant and positive effect on the ROA rating, suggesting that larger firms with higher asset bases tend to achieve higher returns on their assets. Moreover, tangible assets also positively influence the ROA rating, implying that firms with a higher proportion of tangible assets may generate higher returns relative to their total assets. The study highlights that the salaries to assets ratio has a negative impact on ROA. This suggests that firms with higher ratios of salaries to assets may experience lower returns on their assets. One possible explanation for this finding is that larger firms, which tend to have higher salaries due to their larger workforce and organizational complexity, may face greater scrutiny from government, the public, and special interest groups regarding their social responsibility practices. As a result, these firms may allocate a larger portion of their resources towards salaries and other expenses related to social responsibility initiatives, leading to a decrease in their profitability as measured by ROA. These findings have significant implications for policymakers and firm managers. Policymakers may need to consider implementing regulations or guidelines to ensure that firms strike a balance between their social responsibility efforts and their financial performance. Additionally, firm managers should carefully manage their allocation of resources to ensure that they achieve a satisfactory ROA while also fulfilling their social responsibility obligations. This balance is crucial for maintaining a safe and sustainable environment for all stakeholders and enhancing overall firm performance.