Lakhasly

Studies have identified numerous factors that affect firm performance, including financial, operational, and sustainability factors. As the goal of this article is to develop a comprehensive measure of firm performance, in this subsection, we review the literature on the relationship between sustainability (i.e., ESG measures) and firm performance. In subsection 2.2, we review studies evaluating the influence of financial, operational, and sustainability perspectives on firm performance using DEA.

A rapidly emerging strand of the literature has suggested that ESG characteristics determine firm performance and has investigated the relationship between ESG activities and firm performance (for a review see Gillan, Koch, and Starks Citation2021; D. Z. Huang Citation2021). However, findings regarding the impact of ESG measures on firm performance are inconsistent. Friede, Busch, and Bassen (Citation2015) reviewed approximately 2,000 papers and found that the majority of the reviewed articles reported that higher ESG performance led to better firm performance. Fatemi, Glaum, and Kaiser (Citation2018), Alareeni and Hamdan (Citation2020) and Bruna et al. (Citation2022) reported that an increase in ESG or corporate social responsibility (CSR) performance enhanced firm performance. However, other studies have documented a negative impact of ESG performance on firm performance (Lahouel et al. Citation2021; Rahi, Akter, and Johansson Citation2021). Meanwhile, Azmi et al. (Citation2021) and Atan et al. (Citation2018) found no relationship between ESG measures and firm performance. These contradictory findings may have arisen because management decisions with regard to firm responsibility (such as ESG activities) are not immediately reflected in firm performance.

Another stream of literature has focused on investigating the impact of single ESG measures on firm performance. For example, Hsieh, Lee, and Shen (Citation2023), Kasbar et al. (Citation2023), Din et al. (Citation2021), Rahi, Akter, and Johansson (Citation2021) and Siddiqui, YuSheng, and Tajeddini (Citation2023) investigated the relationships between corporate governance factors (e.g., ownership structure and the attributes of the board of directors) and firm performance. They documented that in general, ownership concentration, institutional ownership, and corporate governance quality promoted firm performance. Regarding environmental impact, Lee, Yahya, and Razzaq (Citation2022) found a positive relationship between environmental performance and stock prices for renewable energy stocks in China. Cek and Eyupoglu (Citation2020) investigated the relationship between the ESG performance and economic performance of S&P 500 companies. In all of their regression models, social and governance performance significantly affected economic performance, but environmental performance had no statistically significant effect.

Contradictory results have also been reported by studies examining the influence of ESG and its three individual components on firm performance. For instance, Alareeni and Hamdan (Citation2020) and Lu et al. (Citation2023) found that although ESG initiatives improved firm performance overall, the effects of individual ESG factors differed. Specifically, Alareeni and Hamdan (Citation2020) found that environmental disclosure and social disclosure were negatively associated with firms’ financial and operational performance, but environmental disclosure was positively related to firms’ market performance. Alareeni and Hamdan (Citation2020) also found that individual governance disclosure was positively related to firms’ market performance and negatively related to firms’ financial performance. Lu et al. (Citation2023) investigated the impact of ESG ratings and the three individual ESG elements on the eco-efficiency and profitability efficiency of Apple Incorporated’s value-chain counterparts. They found that environmental and social ratings significantly and positively affected firm efficiency, but there was no significant correlation between governance and efficiency.

Many of the above studies used regression analysis to estimate the relationship between firm sustainability and firm performance. However, another stream of literature has moved beyond regression analysis to use the DEA method to determine firms’ production efficiency. DEA overcomes the single metric problem and provides a holistic approach to measuring firm performance by considering multiple productivity measures, such as financial and operational metrics (Xie et al. Citation2019). In the following subsection, we review research that has adopted the DEA approach to assess firm performance. We also show how this approach yields rich insights into firm performance.