Environmental, Social and Governance (ESG) Evaluation and Organizational

Attractiveness to Prospective Employees: Evidence From Japan

Lian Liu
Asian Development Bank Institute

Naoko Nemoto
Waseda Business School

This study hypothesized that firms’ Environmental, Social and Governance (ESG) evaluation is related
positively to their attractiveness to prospective employees. Although growing number of researches have
been focusing on relations between ESG evaluation and corporate financial performance, few researches
have investigated the link between ESG evaluation and corporate attractiveness as employers. Results
indicate ESG evaluation is related to firms’ attractiveness as employers, suggesting that a firm’s high ESG
scores may provide a competitive advantage in attracting human talents and enhancing corporate value.
At a time when corporate success depends on a high-level staff, the need for corporate to improve ESG
evaluation is intensifying. Regarding the impact of ESG component, the study shows Environmental factor
has significant positive impact on attractiveness of larger firms, while Governance is most relevant for
smaller firms.

Keywords: ESG, corporate value, corporate brand

INTRODUCTION

This study tests the hypothesis that corporate with high Environmental, Social and Governance (ESG)
evaluation have competitive advantages in attracting a larger pool of candidates and improving corporate
value.
Recently, an increasing number of investors have incorporated non-financial factors measured by
environmental, social, and governance (ESG) issues into their investment decision making (World Bank,
2018). ESG investment has expanded and reached $30.68 trillion in the five major markets in 2018,
increasing from $ 18.23 trillion in 2014 (Global Sustainable Investment Alliance, 2018). Since COVID-19
shock in early 2020, the inflow of funds into ESG investment has further accelerated (IIF, 2020)1. Reasons
for the increase in investment balance are as follows (Yuyama, 2020): 1) implementation of Principal of
Responsible Investment2 under the leadership of the United Nations, which has been supported by more
than 3,000 investors, 2) the adoption of the Sustainable Development Goals by 193 member countries of
United Nations in 2015 and subsequent policy responses, 3) increased awareness of climate change risks in
the wake of the Paris Agreement (2015) and other factors, and 4) increased interest in unemployment,
economic inequality, and sustainable growth of companies due to pandemic risks. When factoring into ESG
investments, investors often refer to the scoring of ESG evaluation companies and regard their assessment

14 Journal of Accounting and Finance Vol. 21(4) 2021

as benchmark. Morgan Stanley Capital International (MSCI)3, FTSE Russell4, and Sustainalytics5 are
known as market leaders (World Bank, 2018).
A similar concept to ESG evaluation is Corporate Social Performance (CSP), which represents a
company's efforts in line with the Corporate Social Responsibility (CSR). CSR comprises a company’s
discretionary multi-dimensional activities related to social, environmental, ethical, and economic
performance of the business (McWilliams et al., 2006). The concept of CSR has a quite long and vast
literature (Mosca & Civera, 2017). ESG factors are chosen to evaluate a company's CSR-based behavior
from the perspective of investment decisions.
As majority of ESG investment expects monetary returns as well as social returns, increasing number
of empirical researches have explored the link between ESG evaluation and corporate financial
performance. The results are inconclusive, while 60% of existing literature shows there is positive link
between ESG evaluation and corporate financial performance (Friede et al., 2015). One reason for the
continued debate relates to the variety of methodologies in which ESG factors are evaluated (Suto and
Takehara 2016). In addition, limited research has been conducted to further explicate the transmission
channels between ESG evaluation and corporate financial performance (Yuyama, 2020).
To date, some researches have shed the light on how ESG factors are linked to corporate’ competitive
advantage and long-term corporate values (Brammer and Pavelin, 2006; Hur, Kim and Woo, 2013; Melo
and Garrido-Morgado, 2012). Ibuki (2003) points out that corporate CSR initiatives not only reduce
corporate risk, but also improve their competitive position. As examples of concrete effect, "superiority in
transaction, improvement of employee loyalty, improvement of enterprise brand value" are named.
Perception of corporate managers and investors are divided on whether ESG initiatives will create
economic value. According to a McKinsey’s survey targeting top corporate managers and investors, those
who agreed that ESG factors contribute to increased corporate value was 57% in 2019, showing small
increase from 54% in 2009 (McKinsey, 2020).
Given inconclusiveness of existing literature, market perception and limited analysis to explore the
linkage of ESG and corporate value, the relations between ESG and corporate attractiveness as employer
represents an interesting research theme. Attracting and retaining superior human resources can provide
organization with a competitive advantage and sustainable growth (Hiller and Kroll, 1995).
The study shows ESG evaluation is related to firms’ attractiveness to potential employee, suggesting
that a firm’s high ESG scores may provide a competitive advantage in attracting human talents and
enhancing corporate value. This result is supported by the existing theories, namely signaling theory and
social identity theory. Prior literature suggested that because applicants have incomplete information about
organization, they interpret ESG information they receive as signals about the organizations’ working
conditions and sustainable management (Fisman et. al 2006). Additionally, social identity theory suggests
that people classify themselves into social categories based on various factors such as the organization they
work for, and that membership in these social categories influences an individual’s self-concept (Dutton et.
Al., 1994).
The empirical analysis is based on panel regression models with a data set of the top 300 companies in
Japan in terms of market capitalization during 2016-2019. As a proxy of attractiveness as employers, we
use Employment Brand Ranking based on the survey targeting university and graduate school students who
are hunting for jobs. Regarding ESG evaluation, we use CSR scoring of Toyo Keizai, which is widely used
in Japan. The study divides the target companies in two groups in terms of market capitalization and applies
the model to each group. The coefficient significance of each component is different depending on the
group of firms. E(environment) factor has significant positive impact on attractiveness for employer in the
group of firms with larger size, while G(governance) has significant impact in the group of firms with
smaller size.
In Japan, the penetration of ESG investment is lagging that of Europe and the United States, but the
recent increase is remarkable. The amount outstanding of ESG investment has increased 2.5-times in two
years from Y 137 trillion in 2017 to Y 336 trillion in 20196. On the other hand, there is still little empirical
research on the effectiveness of ESG investment, especially link between ESG evaluation and corporate
value. Some corporate managers and investors hold cautious views toward ESG investment7 as they believe

Journal of Accounting and Finance Vol. 21(4) 2021 15

the effectiveness of ESG investments has not been fully verified. The results of this study have implications
for the strategies of corporate management and policy makers. Improving ESG evaluation will support the
organizations to appeal to potential employee and secure sustainable growth. The findings could also be
useful for investors who adopt ESG factors in decision making.
This study aims to contribute to the previous literature in four aspects. First, it presents an analysis of
linkage between ESG evaluation and attractiveness for potential applicants in Japan, which has not been
verified by previous research. Second, compared to previous research (Turban and Greening, 1997), the
data sample has been expanded, and more variables that may affect the attractiveness of companies are
factored in the model. Third, this study shows mechanism that higher ESG evaluation can attract high
quality human resources and potentially improve corporate value. Fourth, it analyzes which ESG
component has a significant impact on corporate attractiveness.
The remainder of this study is structured as follows. Section 2 reviews the relevant literature and
discusses research hypothesis. Section 3 explains the data and the methodology. Section 4 presents the
empirical results and the robustness check. Finally, Section 5 discusses implications for the development
of ESG investment and provide avenues for future research.

RELATED LITERATURE AND RESEARCH HYPOTHESIS

The Relationship Between ESG Performance and Financial Performance

ESG investment has attracted a growing interest from research scholars over the past decades. Most of
those studies have focused on analyzing the relation between ESG and corporate financial performance
(Suto and Takehara, 2016; Zhao et al., 2018; Su et al., 2010; Beck et al., 2018). Majority of the results
identify positive correlation, though some are insignificant or negative (Margolis and Walsh, 2003; Van
Beurden and Gossling, 2008). Based on the research of Margolis and Walsh (2003), which reviews 127
studies between 1972 and 2002, the relationship between ESG and financial performance could be positive
(109 studies), negative (seven studies), or insignificant (28 studies). Friede et al. (2015) reviewed more than
2,200 existing researches and found 60% of literature related with corporate equity shows there is positive
link between ESG evaluation and corporate financial performance.
In Japan, less empirical researches have been conducted on this issue and results are mixed. Yuyama
et al. (2019) investigated the link between stock price returns and ESG disclosure scores of Japanese firms,
which shows no significant relations between two factors excepting the results in 2017. Suto and Takehara
(2016) identified that higher Corporate Social Performance is related with lower market-based risk
measures of Japanese firms such as historical volatility of stock returns, while the effects of CFP on firm’s
profitability is mixed.
One reason for the continued debate relates to the variety of methodologies in which ESG factors are
evaluated (Suto and Takehara, 2016). In addition, the results depend on specific situation and time horizons
(Yuyama, 2020). ESG activities may have a positive association with financial performance in certain
environments, but a negative association or no association in other environments (Carroll and Shabana,
2010). Besides, ESG activities often involve a long-term process and take years to fully develop and pay
off financially. Yet most related researches are based on a short time horizon, which may contribute the
mixed results. Brammer and Millington (2008) investigate the link of corporate social performance (CSP)
and corporate financial performance (CFP) and claimed that the firms with both unusually high and low
CSP have higher financial performance than other firms, with unusually poor social performers doing best
in the short run and unusually good social performers doing best over longer time. In support of their
arguments, they present the empirical model and collection the data of from 537 firms' annual reports that
registered in the London Stock Exchange in 1999.

Mechanism and Channels to Link Between ESG Evaluation and Financial Performance
The transmission channels that link ESG evaluation with corporate financial performance remain to be
debated. Prior literature explained the linkage based on the stake holder’s theory. Jensen (2001) indicates
companies with high ESG evaluation have advantage in strategic management of various stakeholders,

16 Journal of Accounting and Finance Vol. 21(4) 2021

which is a vital component for the efficient creation of long-term firm value. A strand of literature (Gregory
et al., 2014) argues that companies with a strong ESG profile establish competitive edge due to the more
efficient use of resources, or better innovation management, which help generate abnormal returns and
ultimately leads to higher corporate value. Another strand of literature (El Ghoul et al., 2011; Jo and Na,
2012; Oikonomou et al., 2012) suggests that companies with strong ESG characteristics typically have
better risk management, so they suffer less from severe incidents such as fraud, embezzlement, corruption,
that can adversely impact the value of the company.

The Relationship Between ESG Evaluation, Corporates’ Attractiveness as Employers and

Corporate Brand
Turban et.al. (1997) noted that firms engaging in CSR would have more positive reputations and would
be perceived as more attractive employers by potential applicants, thereby providing those companies with
a competitive advantage over their rivals. This study is based on data of 160 firms in the US. They use polls
by students in the strategic management course (n= 75) as a proxy of attractiveness. To estimate a model
of firms’ attractiveness, firms’ profitability and size are controlled.
Other researches have focused on analyzing the relation between ESG evaluation and non-financial
values such as corporate brand. Some of them use brand fidelity and Fortune ranking as the proxy measures
of corporate brand (Hoeffler and Keller, 2002; Garberg and Fombrun, 2006; Melo and Garrido-Morgado,
2012). Majority of studies reveal a positive relationship between ESG evaluation and corporate brand.
Garberg and Fombrun (2006) conclude that ESG activities are stimulants for increasing brand reputation in
the minds of customers, thus making it an important strategy to build corporate brand.
This paper explores mechanism where ESG evaluation could affect corporate values by influencing on
corporate ability to attract and retain human talents. Another contribution of this study is that it utilizes
larger and unbiased samples and incorporates recent data about when ESG investment gained momentum.
The study also investigates the impact of each ESG component over corporates attractiveness.

Research Hypothesis
Based on the prior reference, this paper derives following hypotheses to detect the link between ESG
evaluation, corporates attractiveness as employers and corporate value:

H1: A positive relationship exists between ESG evaluation and corporates attractiveness as employers.

This hypothesis is supported by the existing theories, namely signaling theory (Fisman et. Al 2006) and
social identity theory (Dutton et.al 1994). This result is consistent with the results of existing survey.
According to Deloitte’s millennial survey, the millennium generation place priority to ESG factors as the
purpose of business. For instance, 32% of respondents believe the business should achieve improvement of
society, while 27% say the business should achieve generating profits. The survey also shows those who
perceive their workplace is engaged in environmental protection and other ESG issues tend to have high
motivation and loyalty to the company (Deloitte, P., 2019).

H2: A positive relationship exists between corporate attractiveness as employers and corporate value.

Attracting and retaining superior human resources can provide organization with a sustained
competitive advantage and sustainable growth (Hiller and Kroll, 1995). With the current labor shortage in
some sectors and the projected shortage amid aging society, attracting top-quality young applicants is
becoming increasingly important for organizational success in Japan and other countries. This study verifies
this hypothesis by estimating the effects of corporate attractiveness on Tobin’s Q which is a proxy of
corporate value.

Journal of Accounting and Finance Vol. 21(4) 2021 17

DATA AND METHODOLOGY

Data
Dependent Variable: Attractiveness for Employers (Employment Brand Ranking)
The data in this analysis span from 2016-2019 on a yearly basis. To test the hypothesis 1 and measure
corporate attractiveness as employers, this study uses the employment brand ranking, created by the Bunka
Broadcasting Career Partners Employment Information Research Institute, one of the most famous
employment information companies in Japan. This institute has conducted "employment brand survey"
during October and March and published the results in April and August since 2001. More than 20,000
university and graduate students who are registered on the employment information site responded. The
employment ranking is made based on the result of the poll. The top 300 companies are regularly announced
by its official site8 and Toyo Keizai magazines which are widely read among businesspersons. We used the
survey results published in latter half of the year, as students vote after attending the firm briefings or
interviews and it could be a more accurate assessment. In this research, the employment brand ranking is
split into a 7-point scale, with 1 meaning that the companies are ranked 1 to 50, while 7 meaning that the
companies are ranked beyond 300.

Dependent Variable: Tobin’s Q

To verify the hypothesis 2, this study uses Tobin’s Q ration as a proxy for corporate value based on
prior literatures (Cho, 1998; Davies et al. 2005). First, Tobin’s Q ratio is always considered as a long-term
and forward-looking performance measure. It is in line with the attributes of ESG evaluation, that are more
likely to pay off in the long run. Second, as a market-based measures, Tobin’s Q ratio minimize the effects
of any possible distortion in financial performance, resulting from firms’ reporting incentives and
accounting choices (Servaes and Tamayo, 2013; Cho and Tsang, 2020). As such, we estimate Tobin’s Q
ratio using the formula below:
𝐶𝐶𝐶𝐶𝐶𝐶
𝑄𝑄 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑖𝑖 = (1)
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

where, 𝐶𝐶𝐶𝐶𝐶𝐶 represents market capitalization of the company, while 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 represents total assets.

Independent Variable: ESG Evaluation

To measure ESG evaluation for Japanese firms, the study uses the Toyo Keizai CSR Corporate Ranking
created by Toyo Keizai. The CSR Ranking evaluates the four dimensions of corporate CSR-based behavior,
namely environment, human resource utilization, social contribution, and corporate governance9. They
research CSR through questionnaire surveys of companies and gives them a rating and a score out of 100
with a higher score indicating better ranking. The survey was launched in 2001 and announced once a year.
The 2019 survey covered1,501 companies including 1,456 listed and 145 unlisted companies. This study
chooses the CSR ranking as they have the greatest coverage of Japanese companies except for Bloomberg,
have a long history of research, are infiltrating the Japanese market, and are supervised by researchers which
ensures independence. The total number of firm-years for the sample is reduced to around 780 due to the
lack of employment brand ranking or financial data.
It should be noted that the CSR ranking is evaluated by Toyo Keizai and is not the same as the
performance of CSR or ESG. In some items, the point is added if there is disclosure of the company, and
not because of the superiority or inferiority of the number.

Control Variable
Drawing on the literature that examines the drivers of corporate attractiveness and corporate brand, the
control variables are corporate size (market capitalization), return on assets (ROA), revenue growth, price-
to-earnings ratio (P/E) and industry classification. We use the natural logarithm of market capitalization (in
millions of Japanese yen) as a proxy for firm size. Larger firms tend to be more visible to the publics and

18 Journal of Accounting and Finance Vol. 21(4) 2021

ordinary people could hold more information regarding the activities of larger firms, so larger firms should
be expected to obtain a better reputation than smaller rivals (Brammer and Pavelin, 2006).
Strong financial performance has been widely proved to help a firm establish a good reputation, since
it generally signals an effective corporate strategy, good management, and good resource allocations, and
so on (Roberts and Dowling, 2002; Sabate and Puente, 2003). Revenue growth is used to capture how fast
a business is expanding. ROA and P/E ratio are used to capture corporate profitability and market‐based
performance, respectively. We expect positive relations between corporate size, ROA, revenue growth and
corporate attractiveness.
Existing literature suggests that industry sector is a mediating player between corporate brand and ESG
factors as each sector would have different industry‐specific stakeholder pressures and responses on ESG
strategy (Brammer and Pavelin, 2006; Melo and Garrido-Morgado, 2012). For instance, environmental
performance tends to have a negative impact on reputation in certain sectors, but not in the chemicals,
consumer products, resources, and transportation sectors. As such, we control industry factors using dummy
based on Global Industry Classification Standards. The year dummy is included as the control variables
because financial market conditions and business cycle may have impact on attractiveness of specific
corporate sectors. The primary source of financial statement data is Capital IQ provide by S&P Global.

Methodology
Using the data sets explained in Section 3.1, a twofold approach is implemented. First, we developed
the following panel data regression model to estimate corporate attractiveness (corporate employment brand
ranking):

𝑅𝑅 𝑅𝑅𝑅𝑅 𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 = 𝛼𝛼0 + 𝛼𝛼1 𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖 + 𝛼𝛼2 𝑋𝑋𝑖𝑖𝑖𝑖 + 𝛼𝛼3 𝛾𝛾 + 𝜇𝜇𝑖𝑖𝑖𝑖 (2)
𝑅𝑅
𝑅𝑅
𝑡𝑡
𝑡𝑡
where, i and t denote the firms and time indices, respectively. The residuals are 𝜖𝜖𝑖𝑖𝑖𝑖 = 𝛾𝛾 + 𝜇𝜇𝑖𝑖𝑖𝑖 , where 𝛾𝛾
represents the unobserved time specific effect, while 𝜇𝜇𝑖𝑖𝑖𝑖 represents the random error term. 𝛼𝛼0 represents

𝑡𝑡
𝑡𝑡
constant terms. 𝑅𝑅 𝑅𝑅𝑅𝑅 𝑅𝑅𝑅𝑅 𝑖𝑖𝑖𝑖 denotes employment brand ranking, as a reflection of corporate attractiveness
𝑅𝑅
𝑅𝑅
for employer. 𝐶𝐶 𝑖𝑖𝑖𝑖 denotes corporate CSR ranking. The variable is lagged by 4 months to mitigate against
𝐶𝐶𝐶𝐶
endogeneity concerns. To examine the impact of different aspects of ESG (Environment, human resource
utilization, social contribution, and corporate governance) on corporate attractiveness, we estimate separate
models by replacing 𝐶𝐶 𝑖𝑖𝑖𝑖 with 𝐸𝐸𝑖𝑖𝑖𝑖 , 1𝑖𝑖𝑖𝑖 , 2𝑖𝑖𝑖𝑖 , 𝑖𝑖𝑖𝑖 , respectively. Here, 𝐸𝐸𝑖𝑖𝑖𝑖 denotes environment. 1𝑖𝑖𝑖𝑖
𝐶𝐶𝐶𝐶
𝑆𝑆
𝑆𝑆
𝐺𝐺
𝑆𝑆
denotes human resource utilization. 2𝑖𝑖𝑖𝑖 denotes social contribution. 𝑖𝑖𝑖𝑖 stands for corporate governance.
𝑆𝑆
𝐺𝐺
𝑋𝑋𝑖𝑖𝑖𝑖 is a vector of control variables for equation (2). Our primary control variables in our model are
market capitalization, return on assets (ROA), revenue growth, price-to-earnings ratio (P/E), and industry
dummy.
Second, we developed the following regression model to explore the link between corporate value and
corporates’ attractiveness as employers.

𝑄𝑄 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑖𝑖 = 𝛼𝛼0 + 𝛼𝛼1 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 + 𝛼𝛼2 𝑌𝑌𝑖𝑖𝑖𝑖 + 𝛼𝛼3 𝛾𝛾𝑡𝑡 + 𝜇𝜇𝑖𝑖𝑖𝑖 (3)

𝑄𝑄 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑖𝑖𝑖𝑖 denotes Tobin’s Q ratio. 𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖𝑖𝑖 denotes corporate CSR ranking. 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 represents
employment brand ranking, as a reflection of corporates’ attractiveness for employer. 𝑌𝑌𝑖𝑖𝑖𝑖 is an array of
control variables for equation (3), which comprise total asset, financial leverage measured by corporate
debt as a percentage of equity, ROA, revenue growth rate and industry dummy?
First, company size is widely recognized as an essential factor affecting corporate financial
performance because larger firms have greater bargaining power over suppliers and buyers, and thus could
positively affect corporate value (Waddock and Graves, 1997; Cho and Tsang, 2020). Second, financial
leverage is one of tools a company can use to make the best financing and investment decisions. Stable and
optimal capital structure contributes to better financial performance. Therefore, we include it as the control
variable. Third, sales growth rate represents growth potential of firm. Finally, ROA is included in the
regression model to control the effect of firms’ current profitability.

Journal of Accounting and Finance Vol. 21(4) 2021 19

Descriptive Statistics and Correlation of Variables
Table 1 reports the descriptive statistics of main variables employed in this study. The corporate ESG
scores range from 20 to 100 points.

TABLE 1
DESCRIPTIVE STATISTICS

Obs. Mean Median Std. Dev. Min Max

a
Ranking 1056 4.381 5 2.201 1 7
Q Ratiob 1032 0.888 0.545 0.969 0 9.359
ESGc 703 75.513 87.65 12.672 20 100
Ec 749 83.555 87.7 13.099 20 100
S1 c 781 82.992 84.5 10.441 20 100
S2c 791 81.635 85.2 13.067 20 100
Gc 755 90.119 92.7 8.279 20 100
Ln(cap) d 1042 13.244 13.367 1.587 3.802 16.883
Ln(asset) e 1041 13.863 13.688 1.890 3.753 20.138
ROAf 913 5.203 4.5 4.075 -28.479 21.580
Debtg 1042 0.875 0.372 2.062 -0.270 28.285
P/Eh 973 22.534 16.844 20.940 3.500 218.594
Growthi 1024 3.299 2.522 10.287 -35.034 115.844
Note: a
Employment ranking
b
Tobin’s Q ratio
c
ESG aggregate score; E, S1, S2 and G represent environmental, human resource utilization, social and
governance scores, respectively.
d
Market capitalization
e
Total asset
f
Return on asset
g
Corporate debt as a ratio of corporate equity
h
Price-to-Earnings Ratio
j
Yearly revenue growth

Table 2 displays Pearson correlations between the main variables. As expected, ESG evaluation scores
provide initial evidence on the negative implication of ESG on corporate attractiveness as employers. Based
on the Pearson correlation coefficients matrix, most of the correlation are less than 0.5 which offers
evidence that our estimate will not suffer from multicollinearity. However, each component of ESG and
ESG aggregate score show higher correlation.

20 Journal of Accounting and Finance Vol. 21(4) 2021

 TABLE 2
PEARSON CORRELATION MATRIX

1 2 3 4 5 6 7 8 9 10 11 12 13
1 Q ratio 1
2 Ranking 0.086 1
3 ROA 0.769 0.203 1
4 P/E 0.302 -0.004 0.019 1
5 Growth 0.009 -0.077 0.112 -0.123 1
6 Ln(asset) -0.445 -0.366 -0.464 -0.177 0.112 1
7 ln(cap) 0.186 -0.311 0.113 -0.018 0.156 0.696 1
8 Debt -0.363 -0.132 -0.443 -0.073 0.040 0.451 0.014 1
9 ESG -0.014 -0.250 -0.042 0.027 0.053 0.190 0.209 0.051 1
10 E -0.168 -0.187 -0.096 -0.107 0.041 0.313 0.323 -0.007 0.423 1
11 S1 -0.057 -0.190 -0.056 -0.006 0.048 0.165 0.175 0.028 0.815 0.605 1
12 S2 -0.115 -0.217 -0.069 -0.061 0.044 0.329 0.386 -0.039 0.527 0.757 0.675 1
13 G -0.114 -0.063 -0.027 -0.049 -0.025 -0.012 0.000 -0.066 0.473 0.551 0.640 0.666 1
Note: All the variables use the same abbreviations throughout the paper.

Journal of Accounting and Finance Vol. 21(4) 2021 21

EMPIRICAL RESULTS

Empirical Results
The results from the estimation of equation (2) are provided in Table 3. The overall evaluation of ESG
has significant negative signs, which suggests that higher ESG evaluation is associated with higher student
brand ranking, namely higher attractiveness as employers.
To assess the effect of each ESG component, we replace the overall ESG scores with E(environment),
S1(human resource utilization), S2(social contribution), and G (corporate governance). All components
have significant negative signs, suggesting each component is associated with attractiveness as employers.
It shows corporate with high Environmental, Social and Governance (ESG) evaluation have competitive
advantages in attracting a larger pool of candidates. The result is striking in two ways. First, ESG evaluation
seem to have more significant impact on organizational attractiveness than other financial indicators
including revenue growth and P/E ratio. Second, coefficient of E (environment) is significant with higher
confidence level, compared to that of S1(human resource utilization). This is contrary to expectations that
work-life balance, wages and leave systems are more essential factors in choosing the workplace. Our
findings suggest potential applicants place emphasis on evaluation of corporate commitment to
environmental protection, conserving and managing resources, good relations with society and fair and
transparent management when choosing the firm.
The coefficients of the control variables accord largely with prior studies and are also in alignment with
the findings in the related literature. To conserve space, the table does not include the coefficients associated
with the time dummies and industry dummies.

Responding to Endogeneity Issue

In general, analysis of the relationship between a company's attractiveness and ESG evaluation may
cause endogeneity issues. Companies with popularity among students have good name recognition and
good profit margins. These factors are associated with higher capital expenditures to improve ESG factors.
In order to alleviate the problem of endogeneity, we applied one- year lagged value of ESG evaluation as
an instrument. In addition, we applied a fixed effect model for removing enterprise-specific factors which
potentially affect a dependent variable. The Table 4 is the results of this analysis. The overall evaluation of
ESG has significant negative signs, which suggests that higher ESG evaluation is associated with higher
student brand ranking using the fixed effect model. As for the effect of each component, E(environment),
S1(human resource utilization) have significant negative signs, suggesting E and S1 are associated with
student’s popularity.

Results of Subgroups
We applied the model to subgroups which are divided based on the market capitalization. The
coefficient significance of each component is different depending on the group. For the group of larger
firms, environment has significant impact on corporate attractiveness as employer, while for the group of
smaller firms, governance is significant. The prior literature indicates the corporate governance is the most
critical factor affecting corporate value in Japan (Kato, 2000). Companies with weak corporate governance
tend to cause serious scandals and misconducts which lead to a significant decline in corporate value (GPIF,
2018). Smaller companies have relatively insufficient resources and internal architecture to develop
corporate governance, and prospective employee is expected to value governance assessments that mostly
affect corporate value. On the other hand, for larger companies, it is interpreted environmental factor is
more important under the assumption that the governance system is in place to some extent.

22 Journal of Accounting and Finance Vol. 21(4) 2021

 TABLE 3
OLS REGRESSION RESULTS ON ATTRACTIVENESS FOR EMPLOYEES

(1) (2) (3) (4) (5)

ROA 0.0774*** 0.0821*** 0.0734*** 0.0652*** 0.0895***
(0.0248) (0.0229) (0.0231) (0.0241) (0.0231)
Ln(cap) -0.716*** -0.748*** -0.748*** -0.753*** -0.798***
(0.0769) (0.0690) (0.0721) (0.0726) (0.0696)
Growth -0.00465 -0.00423 -0.00458 -0.00561 -0.00681
(0.00721) (0.00650) (0.00649) (0.00652) (0.00715)
P/E -0.00185 -0.000207 -0.00159 -0.000879 -0.00196
(0.00421) (0.00397) (0.00405) (0.00413) (0.00412)
ESG -0.0284***
(0.00986)
S1 -0.0143*
(0.00736)
S2 -0.0131**
(0.00640)
E -0.0181***
(0.00617)
G -0.0175**
(0.00845)
Constant 14.63*** 16.32*** 18.56*** 16.84*** 17.59***
(1.908) (1.439) (1.554) (1.420) (1.574)
Time effect Yes Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes Yes
Observations 629 689 695 663 665
R-squared 0.529 0.458 0.459 0.476 0.462
Note: 1. Standard errors in parentheses.
2. *, ** and *** mean significance at 10%, 5%, and 1% levels, respectively, and standard errors.
3. S1: human source utilization, S2: social contribution, E: Environment, G: Corporate Governance

TABLE 4
FIXED-EFFECT REGRESSION RESULTS ON ATTRACTIVENESS FOR EMPLOYEES

(1) (2) (3) (4) (5)

ROA 0.127*** 0.112*** 0.103*** 0.102*** 0.124***
(0.0285) (0.0255) (0.0256) (0.0268) (0.0258)
Ln(cap) -0.788*** -0.772*** -0.777*** -0.842*** -0.841***
(0.0917) (0.0780) (0.0812) (0.0821) (0.0786)
Growth -0.00442 -0.00399 -0.00543 -0.00488 -0.00508
(0.00685) (0.00676) (0.00678) (0.00674) (0.00680)
P/E 0.000466 0.000610 -0.00118 0.000221 -5.01e-05
(0.00495) (0.00463) (0.00465) (0.00480) (0.00475)
L.ESG -0.0306**
(0.0127)
L.S1 -0.0196**
(0.00869)
L.S2 -0.00992
(0.00731)

Journal of Accounting and Finance Vol. 21(4) 2021 23

 L.E -0.0186***
(0.00719)
L.G -0.0102
(0.00982)
Constant 18.16*** 16.52*** 18.23*** 17.44*** 19.17***
(1.785) (1.638) (1.600) (1.580) (1.828)
Time effect Yes Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes Yes
Observations 470 520 525 499 503
R-squared 0.513 0.497 0.492 0.520 0.494
Note: 1. Standard errors in parentheses.
2. *, ** and *** mean significance at 10%, 5%, and 1% levels, respectively, and standard errors.

TABLE 5
FIXED-EFFECT REGRESSION RESULTS ON ATTRACTIVENESS FOR EMPLOYEES
(LARGER GROUP)

(1) (2) (3) (4) (5)

ROA 0.135*** 0.117*** 0.105*** 0.119*** 0.144***
(0.0327) (0.0311) (0.0307) (0.0303) (0.0305)
Ln(cap) -0.970*** -0.911*** -0.936*** -1.025*** -1.001***
(0.189) (0.180) (0.173) (0.171) (0.179)
Growth 0.00231 0.000611 8.58e-05 0.00177 -0.00252
(0.00789) (0.00717) (0.00701) (0.00699) (0.00719)
P/E -0.00125 -0.000336 -0.00187 -0.00350 -0.000403
(0.00725) (0.00709) (0.00680) (0.00694) (0.00682)
L.ESG -0.0394
(0.0247)
L.S1 -0.0119
(0.0160)
L.S2 -0.0146
(0.0109)
L.E -0.0199*
(0.0104)
L.G 0.0118
(0.0122)
Constant 16.91*** 20.51*** 21.26*** 23.02*** 19.89***
(3.348) (2.996) (2.924) (2.889) (3.155)
Time effect Yes Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes Yes
Observations 250 263 268 264 258
R-squared 0.636 0.617 0.623 0.640 0.631
Note: 1. Standard errors in parentheses.
2. *, ** and *** mean significance at 10%, 5%, and 1% levels, respectively, and standard errors.

24 Journal of Accounting and Finance Vol. 21(4) 2021

 TABLE 6
FIXED-EFFECT REGRESSION RESULTS ON ATTRACTIVENESS FOR EMPLOYEES
(SMALLER GROUP)

(1) (2) (3) (4) (5)

ROA 0.115** 0.105** 0.0929** 0.0826 0.116***
(0.0524) (0.0434) (0.0444) (0.0503) (0.0442)
Ln(cap) -0.774*** -0.600*** -0.638*** -0.766*** -0.692***
(0.234) (0.197) (0.209) (0.218) (0.202)
Growth -0.0283 -0.0266 -0.0245 -0.0284 -0.0225
(0.0191) (0.0176) (0.0175) (0.0185) (0.0177)
P/E 0.00126 0.000425 -0.00125 0.00111 -0.000910
(0.00701) (0.00636) (0.00647) (0.00683) (0.00654)
L.ESG -0.0193
(0.0174)
L.S1 -0.0179
(0.0115)
L.S2 -0.00588
(0.0115)
L.E -0.0188
(0.0117)
L.G -0.0350**
(0.0174)
Constant 15.28*** 15.27*** 14.93*** 18.15*** 17.95***
(3.304) (2.859) (2.787) (2.967) (2.989)
Time effect Yes Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes Yes
Observations 220 257 257 235 245
R-squared 0.415 0.385 0.382 0.405 0.398
Note: 1. Standard errors in parentheses.
2. *, ** and *** mean significance at 10%, 5%, and 1% levels, respectively, and standard errors.

The result from equation (3) is provided in Table 7. It shows a significant negative relationship between
Tobin’s Q ratio and employment ranking, implying that attracting and retaining superior human resources
can provide organization with a sustained competitive advantage and improve corporate value.

TABLE 7
OLS REGRESSION RESULTS ON CORPORATE VALUE

Tobin's Q ratio
ROA 0.153***
(0.00646)
Lnasset -0.125***
(0.0200)
Debt -0.0167
(0.0297)
Growth 0.00116
(0.00213)
Ranking -0.0257**
(0.0121)

Journal of Accounting and Finance Vol. 21(4) 2021 25

 Constant 2.027***
(0.442)
Time effect Yes
Industry dummy Yes
Observations 901
R-squared 0.638
Note: 1. Standard errors in parentheses.
2. *, ** and *** mean significance at 10%, 5%, and 1% levels, respectively, and standard errors.

Robustness Check
This study chooses the linear probability model following prior studies. This method is convenient and
easier to interpret (Angrist and Pischeke, 2008). On the other hand, there is argument that the ordered probit
model would be more appropriate if the number of dependent variables is limited. To confirm validity of
the estimated results, we applied the ordered probit model. From the results reported in Table 8, we confirm
the relationships between ESG evaluations and corporate attractiveness are similar with the results using
OLS.

TABLE 8
ORDERED PROBIT MODEL REGRESSION RESULTS

(1) (2) (3) (4) (5)

ROA 0.0711*** 0.0519*** 0.0451*** 0.0405** 0.0572***
(0.0194) (0.0150) (0.0151) (0.0159) (0.0152)
Ln(cap) -0.581*** -0.458*** -0.452*** -0.460*** -0.487***
(0.0605) (0.0454) (0.0475) (0.0484) (0.0464)
Growth -0.00684 -0.00612 -0.00587 -0.00699 -0.00744
(0.00628) (0.00504) (0.00495) (0.00513) (0.00546)
P/E -0.000481 -0.000424 -0.00139 -0.000977 -0.00178
(0.00384) (0.00269) (0.00274) (0.00287) (0.00282)
ESG -0.00759
(0.00550)
S1 -0.0104**
(0.00482)
S2 -0.0100**
(0.00415)
E -0.0118***
(0.00403)
G -0.0117**
(0.00557)
Time effect Yes Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes Yes
Observations 376 689 695 663 665
LogLik -574.7 -1082 -1091 -1030 -1044
Note: 1. Standard errors in parentheses.
2. *, ** and *** mean significance at 10%, 5%, and 1% levels, respectively, and standard errors.

CONCLUSION

This study addresses the scarcity of research that examines linkage between ESG evaluation and
corporate value with the focus on corporates’ attractiveness for employers. The empirical results show ESG
evaluation is related to firms’ attractiveness as employers, suggesting that a firm’s high ESG scores may

26 Journal of Accounting and Finance Vol. 21(4) 2021

provide a competitive advantage in attracting human talents which could provide corporate sustainable
competitive advantage.
The coefficient significance of each component is different depending on the group of firms.
E(environment) factor has significant positive impact on attractiveness for employer in larger firm group,
while G(governance) is most relevant for smaller firm group.
The results of this study have implications for the strategies of corporate management. Improving ESG
evaluation will support the organizations to appeal to potential employee and secure sustainable growth.
The findings could also be useful for investors who adopt ESG factors in decision making. In the Japanese
firm context, the needs to improve ESG evaluation and attract qualified talent is more critical, given
diminishing supply of younger labor force and labor shortage in some industries such as information
technology, construction, service and medical and welfare. Corporates can do this by signaling potential
employee in advertisements that they offer a work environment conductive to ESG activities such as
environmental protection, diversity, transparent corporate governance and by providing culture that
reinforce individual workers’ identities of social contribution.
The results of this study have policy implications. Though ESG investment has gained more support
from the government and regulatory authority, the level of implementation, ESG disclosure and
transparency are diverse among countries. This finding could give more incentives to the government to
improve the framework of ESG investment as better disclosure will support market function and enhance
ESG activities of the corporate.
Finally, we address the limitations of the study. The study covers top-tier Japanese firms for the years
2016 to 2019. An extension of the sample could explore the research perspective. Investing the link between
ESG evaluation and other factors related with competitive advantage such as loyalty of employee is another
agenda for research.

ENDNOTES
1.
The net increase of funds which have incorporated ESG factors reached $1.3 trillion during January to
November 2020, increased by 1.5 times from the level in 2019.
2.
The PRI was launched in 2006 to encourage investors to incorporate ESG issues into investment practices
through six principles.
3.
MSCI Inc., is an American finance company headquartered in New York City and serving as a global
provider of equity, fixed income, hedge fund stock market indexes, multi-asset portfolio analysis tools and
ESG related products.
4.
FTSE Russell is the trading name of London Stock Exchange Group subsidiaries FTSE International Ltd.
The division provides equity index, as well as other indices and ESG products.
5.
Sustainalytics is a subsidiary of Morning Star that rates the sustainability of listed companies based on their
environmental, social and corporate governance performance.
6.
The Government Pension Investment Fund (GPIF), the largest asset owner in the world, signed PRI in 2015
and adapted Japan’s Stewardship Code which encourage investors to integrate ESG factors acted as a catalyst
for penetration of ESG investment in Japan.
7.
As of May 2019, only 0.13% of private corporate pension funds have adapted Japan’s Stewardship Code.
8.
Employment brand ranking is accessible from this site https://www.careerpartners.co.jp/laboratory/employ/
9.
The first dimension, environmental performance, covers the performance on environmental organization and
information disclosure, environmental performance. The second dimension, human source utilization, covers
the performance on utilization of diverse human resources, human rights, labor issues, employment of
persons with disabilities, personnel and evaluation system, work-life balance, and wages and leave system.
The third dimension, social contribution, covers the performance on social contribution business department,
social contribution activity spending, community participation activities, educational/academic support
activities, culture/arts/sports support activities, international exchange participation activities, great east
Japan earthquake and other reconstruction support. Finally, the fourth dimension, corporate governance,
covers the performance on corporate governance, legal compliance, internal control. Evaluations are carried
out on a company-wide, all-industry uniform basis.

Journal of Accounting and Finance Vol. 21(4) 2021 27

REFERENCES

Beck, C., Frost, G., & Jones, S. (2018). CSR disclosure and financial performance revisited: A cross-
country analysis. Australian Journal of Management, 43(4), 517–537.
Brammer, S.J., & Pavelin, S. (2006). Corporate reputation and social performance: The importance of
fit. Journal of Management Studies, 43(3), 435–455.
Cho, E., & Tsang, A. (2020). Corporate Social Responsibility, Product Strategy, and Firm Value. Asia‐
Pacific Journal of Financial Studies, 49(2), 272–298.
Cho, M.H. (1998). Ownership structure, investment, and the corporate value: An empirical analysis.
Journal of Financial Economics, 47(1), 103–121.
Davies, J.R., Hillier, D., & McColgan, P. (2005). Ownership structure, managerial behavior and corporate
value. Journal of Corporate Finance, 11(4), 645–660.
De la Fuente Sabaté, J.M., & de Quevedo Puente, E. (2003). Empirical analysis of the relationship
between corporate reputation and financial performance: A survey of the literature. Corporate
Reputation Review, 6(2), 161–177.
Deloitte, P. (2019). Mind the gaps: The 2019 Deloitte millennial survey. Retrieved September 11, 2020.
Du, S., Bhattacharya, C.B., & Sen, S. (2010). Maximizing business returns to corporate social
responsibility (CSR): The role of CSR communication. International Journal of Management
Reviews, 12(1), 8–19.
El Ghoul, S., Guedhami, O., Kwok, C.C., & Mishra, D.R. (2011). Does corporate social responsibility
affect the cost of capital? Journal of Banking & Finance, 35(9), 2388–2406.
Friede, G., Busch, T., & Bassen, A. (2015). ESG and Financial Performance: Aggregate Evidence from
more than 2000 Empirical Studies. Journal of Sustainable Finance & Investment, 5(4), 210–233.
Gardberg, N.A., & Fombrun, C.J. (2006). Corporate citizenship: Creating intangible assets across
institutional environments. Academy of Management Review, 31(2), 329–346.
Global Sustainable Investment Alliance (GSIA). (2018). Global Sustainable Investment Review.
Government Pension Investment Fund. (2019). ESG Annual Report.
Gregory, A., Tharyan, R., & Whittaker, J. (2014). Corporate social responsibility and firm value:
Disaggregating the effects on cash flow, risk and growth. Journal of Business Ethics, 124(4),
633–657.
Hoeffler, S., & Keller, K.L. (2002). Building brand equity through corporate societal marketing. Journal
of Public Policy & Marketing, 21(1), 78–89.
Hur, W.M., Kim, H., & Woo, J. (2014). How CSR leads to corporate brand equity: Mediating mechanisms
of corporate brand credibility and reputation. Journal of Business Ethics, 125(1), 75–86.
Ibuki, E. (2003, September). Corporate social responsibility and corporate strategy (Japanese).
Chitekishisansouzou, pp. 54–71.
Institute of International Finance. (2020). Sustainable Debt Monitor.
Jo, H., & Na, H. (2012). Does CSR reduce firm risk? Evidence from controversial industry sectors.
Journal of Business Ethics, 110(4), 441–456.
Kato, Y. (2020). Environmental, Social, and Governance Factors and Their Implications for Equity
Investments. ESG Investment: Opportunities and Risks for Asia, chapter 3, 49–70. Tokyo: ADBI.
Keller, K.L., & Lehmann, D.R. (2006). Brands and branding: Research findings and future priorities.
Marketing Science, 25(6), 740–759.
Margolis, J.D., & Walsh, J.P. (2003). Misery loves companies: Rethinking social initiatives by business.
Administrative Science Quarterly, 48(2), 268–305.
McKinsey & Company. (2020). The ESG premium: New perspectives on value and performance.
Melo, T., & Garrido‐Morgado, A. (2012). Corporate reputation: A combination of social responsibility
and industry. Corporate Social Responsibility and Environmental Management, 19(1), 11–31.
Mosca, F., & Civera, C. (2017). The Evolution of CSR: An Integrated Approach, Symphonya. Emerging
Issues in Management (symphonya.unimib.it), 1, 16–35.

28 Journal of Accounting and Finance Vol. 21(4) 2021

Oikonomou, I., Brooks, C., & Pavelin, S. (2012). The impact of corporate social performance on financial
risk and utility: A longitudinal analysis. Financial Management, 41(2), 483–515.
Roberts, P.W., & Dowling, G.R. (2002). Corporate reputation and sustained superior financial
performance. Strategic Management Journal, 23(12), 1077–1093.
Servaes, H., & Tamayo, A. (2013). The impact of corporate social responsibility on firm value: The role
of customer awareness. Management Science, 59(5), 1045–1061.
Su, R., Liu, C., & Teng, W. (2020). The heterogeneous effects of CSR dimensions on financial
performance–A new approach for CSR measurement. Journal of Business Economics and
Management, 21(4), 987–1009.
Suto, M., & Takehara, H. (2016). The link between corporate social performance and financial
performance: Empirical evidence from Japanese firms. International Journal of Corporate
Strategy and Social Responsibility, 1(1), 4–25.
Suto, M., & Takehara, H. (2018). Corporate Social Responsibility and Corporate Finance in Japan.
Japan: Springer.
Turban, D.B., & Greening, D.W. (1996). Corporate Social Performance and Organizational
Attractiveness to Prospective Employees. Academy of Management Journal, 40(3), 658–672.
Van Beurden, P., & Gössling, T. (2008). The worth of values–a literature review on the relation between
corporate social and financial performance. Journal of Business Ethics, 82(2), 407.
Waddock, S.A., & Graves, S.B. (1997). The corporate social performance–financial performance
link. Strategic Management Journal, 18(4), 303–319.
Yuyama, T. (2020). ESG Investment and Performance (Japanese). Japan: Kinzai Press.
Yuyama, T., Shirasu, Y., & Soichiro, M. (2019). ESG Disclosure Score and Investment Performance
(Japanese). Securities Analysts Journal, 57(10), 72–83.
Zhao, C., Guo, Y., Yuan, J., Wu, M., Li, D., Zhou, Y., & Kang, J. (2018). ESG and corporate financial
performance: Empirical evidence from China’s listed power generation companies.
Sustainability, 10(8), 2607.

Journal of Accounting and Finance Vol. 21(4) 2021 29