Environmental, social and governance ratings and firm performance: The moderating role of internal control quality

Abstract

Despite the burgeoning interest in environmental, social and governance (ESG) ratings, current results regarding ESG rating‐performance relationship are inconclusive. Since what affects this disagreement is ambiguous, we examine how internal control weaknesses (ICW) may affect the relationship between ESG rating and a firm's performance. In fact, employing a sample of French listed firms during the period between 2012 and 2018, we predicted and found that both ICW and ESG ratings have a positive and significant influence on a firm's performance. In addition, the results indicate that ICW negatively and significantly moderates the relationship between ESG ratings and corporate performance. Moreover, the robustness of the results is checked through the generalized method of moments regression. We also offer theoretical and practical implications to drive policymakers and businesses to assure sustainable development. We expect that our study can help managers to strengthen their internal resources, such as the internal control (IC) and ESG ratings to improve a firm's performance.

Full text

RESEARCH ARTICLE
Environmental, social and governance ratings and firm
performance: The moderating role of internal control quality
Mounia Boulhaga
1
| Abdelfettah Bouri
1
| Ahmed A. Elamer
2,3
|
Bassam A. Ibrahim
4
1
Faculty of Economic Sciences and
Management of Sfax, University of Sfax, Sfax,
Tunisia
2
Brunel Business School, Brunel University
London, Uxbridge, London, UK
3
Department of Accounting, Faculty of
Commerce, Mansoura University, Mansoura,
Egypt
4
Department of Management, Faculty of
Commerce, Mansoura University, Mansoura,
Egypt
Correspondence
Ahmed A. Elamer, Brunel Business School,
Brunel University London, Uxbridge, London,
UK.
Email: ahmed.a.elamer@gmail.com
Abstract
Despite the burgeoning interest in environmental, social and governance (ESG) ratings,
current results regarding ESG rating-performance relationship are inconclusive. Since
what affects this disagreement is ambiguous, we examine how internal control weak-
nesses (ICW) may affect the relationship between ESG rating and a firm's performance.
In fact, employing a sample of French listed firms during the period between 2012 and
2018, we predicted and found that both ICW and ESG ratings have a positive and sig-
nificant influence on a firm's performance. In addition, the results indicate that ICW
negatively and significantly moderates the relationship between ESG ratings and corpo-
rate performance. Moreover, the robustness of the results is checked through the gen-
eralized method of moments regression. We also offer theoretical and practical
implications to drive policymakers and businesses to assure sustainable development.
We expect that our study can help managers to strengthen their internal resources,
such as the internal control (IC) and ESG ratings to improve a firm's performance.
KEYWORDS
corporate social responsibility, environmental, firm's performance, internal control
weaknesses, social and governance ratings, stakeholder engagement, sustainable development
1|INTRODUCTION
Recently, the incorporation of environmental, social and governance
(ESG) information by investors and financial analysts in trading decisions
is considered one of the major advances in financial markets (Adomako
and Tran, 2022; Alcaide González et al., 2020; Ali et al., 2020; Alshbili
et al., 2020,2021; Alshbili & Elamer, 2019; Christensen et al., 2022;
Elmagrhi et al., 2019). For instance, it is estimated that about $30 trillion
is financed by employing sustainable plans that employ ESG rating in
financing analyzes and portfolio choices (GSIA, 2018). Notwithstanding
this increased interest, there is little research regarding the role of inter-
nal control, ESG rating and firm's financial performance. Therefore, our
work is intended to contribute to the current debate by examining how
internal control weaknesses (ICW) may influence the relationship
between ESG ratings and firm's performance in France.
Meanwhile, regulations require companies to enhance their social
and environmental performance assessed through ESG ratings (Briones
Peñalver et al., 2018; Guerrero-Villegas et al., 2018; Javed et al., 2020;
Kong et al., 2020; Meier & Cassar, 2018). While there are several grow-
ing CSR practices, there are instances where corporations do green-
washing (Hassan et al., 2021). These considerations prompt researchers
to extend the realization of the impact of corporate social responsibility
(CSR) on performance by contemplating that merely investing in CSR
activities is not enough to improve performance, acknowledging that a
more inclusive position must be established. In this vein, the literature
suggests that participation in sustainable development practices signals
Received: 22 January 2022 Revised: 6 June 2022 Accepted: 19 June 2022
DOI: 10.1002/csr.2343
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium,
provided the original work is properly cited.
© 2022 The Authors. Corporate Social Responsibility and Environmental Management published by ERP Environment and John Wiley & Sons Ltd.
134 Corp Soc Responsib Environ Manag. 2023;30:134–145.
wileyonlinelibrary.com/journal/csr

the wealth of companies (Eccles et al., 2014) and enhances their rela-
tionships with external stakeholders by improving performance
(Barnett & Salomon, 2012). However, CSR practices entail expenses that
can result in a competitive burden for companies compared to their rivals
(Barnett & Salomon, 2012). However, despite the abundant research on
the connection between CSR and performance, previous work, such as
those of Garay and Font (2012) and Lahouel et al. (2019), have found
mixed results, which can be explained by taking into account the endo-
geneity problem. It is for this reason that generalized method of
moments (GMM) is necessary to remedy the endogeneity biases of the
variables. Moreover, it is clear from the stakeholder theory that the
effect of CSR on performance can be inconclusive since external stake-
holders can reward companies that are successful in CSR practices, but
their response does not influence performance when companies perform
poorly. In other words, the costs of CSR are not outweighed by gains.
However, firms with poor CSR practices can even be punished by exter-
nal stakeholders, whose adverse opinions toward these companies can
adversely affect performance (Carlos & Lewis, 2018). Therefore, in this
work, we intend to help fill this gap by examining the effect of IC as well
as CSR on performance. In fact, the importance of CSR has raised the
necessity for doing business, deliberately integrating social environmental
and economic concerns into the business action (Hernández et al., 2020).
Besides, ample research has paid a lot of consideration to CSR, which is
considered to be a significant issue (Xu et al., 2018). While companies
have the right to seek to sell their products, they do have a certain ethi-
cal responsibility (Hou, 2019). Research has also shown that CSR perfor-
mance is well documented worldwide and that its frontiers are
commonly widening (Hickle, 2017). In fact, currently, it is extremely cru-
cial for companies as it pays great attention to the environment (Arrive
et al., 2019). While businesses have focused so far on profit-maximiza-
tion, now, they are shifting to work on sustainability (Kraus et al., 2018).
Although several papers highlighted that internal control (IC) has a
significant act in enhancing the reliability of financial reporting and cor-
porate performance (Cheng et al., 2013; Sun, 2016), its role in moderat-
ing the ESG rating and the firm's performance relationship is not
explored. Therefore, in this article, we have examined the impact of
ICW as well as that of CSR on listed French firms' financial performance
belonging to the SBF 120 index. The core of this performance is to
express how company profitability is for a particular financial period. It
is, therefore, crucial to study the interaction between ICW and CSR on
financial performance in the French context. This need arises from two
structural shortcomings. First, there is a scarcity of research findings on
the issue in France, particularly, in the situation of companies belonging
to the SBF 120 index. Second, the literature that identified the five com-
ponents of IC did not include CSR in the model using the GMM method
analysis technique. Moreover, most earlier research works had exam-
ined only item answers on each of the elements or tried to integrate
responses into an ANOVA model, which exclusively tracks the dynamics
of including CSR variables into the GMM model.
Then, our paper emphasizes the French background by delving into
the challenges of the ESG score and internal control in the context of firms
listed on the SBF 120 index, which have become an appealing institutional
venue for empirical evidence due to several reasons. First, the CSR effi-
ciency may vary among nations based on the country-specific setting
(Cormier & Magnan, 2007). Therefore, our empirical findings found a new
institutional environment considering that first, prior empirical research
has focused particularly on international evidence and other countries
(Reverte, 2009). Second, France is one of the few nations to have enacted
regulations forcing environmental and social information disclosure
(Chauvey et al., 2015). Third, our analysis starts with the year 2012, when
the Grenelle II Act began to be applied. It extended the nonfinancial disclo-
sure structure proposed by the New Economic Regulations (NER) Act,
which called the registered firms to reveal major gages of nonfinancial per-
formance concerning the environmental, sustainability and social behav-
iors in annual reports. This regulation enforces fines for nonconformity
(Chelli et al., 2014). Additionally, examining the time in the wake of the
first mandatory offers much richer and more widespread information on
CSR disclosure (Reverte, 2009). Therefore, our current study may be
expected to contribute to the current literature in the following ways.
First, the results obtained by the means of the GMM regression indicated
a positive and significant connection between ICW, CSR, and the com-
pany's performance. Moreover, they emphasized the advantages of a
strong IC system beyond mere compliance with the law. Furthermore, this
study may contribute to previous studies by noting that French companies
should become more committed to the integrity of ethical values, compe-
tence, and social responsibility, in addition to the progress of control
actions over the technology engagement and procedures and policies
standardization that approve, verify and reconcile transactions. Third, this
article may contribute to broader research questions about the impact of
IC while previous studies have focused mainly on the weaknesses of IC as
a whole. However, this work gave mixed results and did not address the
impact of IC weaknesses as well as CSR. SOX 404 demands management
to utilize a framework to assess the effectiveness of IC. Since most com-
panies use the COSO IC framework, we try to investigate the effect of
both the ICW and CSR on the performance of companies which, to the
best of our knowledge, has not been investigated in the French context.
We also add to the research by emphasizing the role of IC in improving
operational efficiency whereas the existing research on IC concentrates
more on how limitations in IC influence the reliability of financial reporting.
Moreover, our study sheds further light on the effect of the quality of
both the IC and the CSR since a weak IC system reduces operational effi-
ciency, which translates into poor financial performance.
As a consequence, the remaining part of this article is structured
as follows; the Section 2presents a literature review and the hypothe-
sis formulation, the Section 3explains the adopted methodology then,
the Section 4discusses the results of the regression model relating to
the determinants of corporate performance and finally Section 5, the
conclusion is presented and future avenues of research are suggested.
2|LITERATURE REVIEW AND
HYPOTHESIS DEVELOPMENT
2.1 |The effect of internal control on the firm's
financial performance
SOX section 404 concentrates on reliable financial reporting but reveals
nothing about operational efficiency. However, as COSO argues, a good
BOULHAGA ET AL.135

IC system should lead not only to trustworthy financial reporting but
also to operational efficiency. Therefore, to achieve this goal, we need a
management control system based on an efficient accounting system
that should affect the control of resources and business processes
beyond strategic planning and control. More precisely, an accounting
system centered on an efficient IC system should be incorporated into
business processes to attain operational efficiency. Ultimately, business
processes that are efficient lead to the achievement of the objectives or
goals stated in the strategic plan, involving financial goals, such as return
on investment and profits. In this vein, previous research studies have
shown that a weak IC system can facilitate for-profit management and
financial reporting restatements (Ashbaugh-Skaife et al., 2007;Doyle
et al., 2007; Järvinen & Myllymäki, 2016). Operational efficiency will
lessen the necessity for management to control profits. The IC, COSO
definition achieves three goals, which involve three categories of risks
that must be monitored by the IC system, namely operational risk, infor-
mation risk, and compliance risk. The control of operational risk is the
most crucial for the way companies obtain competitive advantages and
conduct and manage their business processes (McAfee &
Brynjolfsson, 2008;Simons,1990). Nowadays, a large part of the pro-
cesses within companies rely on technology to achieve their objectives
(Barua et al., 1995; Bharadwaj et al., 1999) and the reliability of informa-
tion depends on good control of the IT system to achieve goals. There-
fore, IT controls have an immediate effect on the creation of value for
companies (Masli et al., 2010). This reasoning explains why COSO
unequivocally associates IC with operational efficiency. In addition, the
link between the IC system and the performance of the company is evi-
dent as the weakness of this system affects the performance of the
company. According to Jensen (2003), the IC system is intended to
improve financial performance by increasing the sense of responsibility
of information providers within an organization. Moreover, previous
studies have shown that a weak IC system can affect the reliability of
financial reporting (Costello & Wittenberg-Moerman, 2011;Järvinen&
Myllymäki, 2016; Klamm & Watson, 2009). The IC system contributes
to the improvement of operational efficiency and the strengthening of
the company's strategy. Thus, as an integral part of organizational con-
trol, IC notably plays a crucial role in influencing the behavior of mem-
bers of the company, as its efficiency is based on its ability to prevent
risks at all levels of the organization and reduce those that are likely to
degrade performance. In addition, one of the rare studies (Jokipii, 2010),
carried out among 741 Finnish companies and focusing on the determi-
nants of the IC system, based on a contingent approach, shows that this
system ensures improved performance of the company.
The main focus of the study is on the lack of enterprise manage-
ment induced by low-level IC. In an empirical examination of 261 com-
panies with IC faults reported by the Securities and Exchange
Commission, Ge and Mcvay (2005) discovered that control points
prone to large difficulties had more complex business processes and
lower profitability. Their findings were also validated by Kim and Park
(2009) and other researchers. More and more research on the favor-
able benefits of IC on businesses has been recently undertaken. For
their part, Brown et al. (2014) suggested that by decreasing uninten-
tional accounting errors or deliberate accounting manipulation, a good
IC system can enhance the quality of internal data information or
internal management reporting.
Stoel and Muhanna (2011) examine the relationship between
information technology (IT) internal control weaknesses (ICWs) and
both accounting earnings (a real-time measure of a company's perfor-
mance) and the market value (a forward-looking, risk-adjusted mea-
sure of a firm's performance). Their results showed that companies
with an ICW IT have lower accounting earnings than those with
strong IT internal control, according to a dataset that provides audited
annual assessments of the effectiveness of both IT and non-IT internal
control for a cross-section of companies as mandated by the
Sarbanes-Oxley Act of 2002.
Many studies have looked into the possible causal links between
each component of the IC system and performance (Jokipii, 2010). As
a result, a powerful IC system should lead to increased operational
efficiency and the achievement of corporate goals. According to
previous research, a weak IC system leads to less reliable financial
reporting (Ashbaugh-Skaife et al., 2007; Costello & Wittenberg-
Moerman, 2011; Doyle et al., 2007; Järvinen & Myllymäki, 2016;
Klamm & Watson, 2009), affects the cost of equity and business value
(Ashbaugh-Skaife et al., 2009; Li et al., 2016; Sun, 2016). The follow-
ing hypothesis has been proposed.
Hypothesis 1. Internal control weaknesses have a nega-
tive impact on a firm financial performance.
2.2 |The effect of CSR practice on firm financial
performance
CSR is recognized as a concept encompassing ethical, economic,
philanthropic and legal, aspects (Carroll, 1999). Based on stakeholder
theory (Freeman et al., 2004), CSR is the strategic orientation of
companies, capable of implementing environmentally and socially
responsible practices while pursuing their economic objectives
(Para-González et al., 2020; Russo & Perrini, 2010; Schons &
Steinmeier, 2016; Story & Castanheira, 2019; Uyar et al., 2021), taking
all stakeholders and trying to create value for them (Freeman
et al., 2004). Stakeholder pressure is one of the main reasons compa-
nies address CSR practices (Iyer & Jarvis, 2019). The theory indicates
that the stakeholders control the resources that are crucial to busi-
nesses, and so the relationships built with them must be efficiently
managed in order to guarantee profitability (Salancik & Pfeffer, 1978;
Wang et al., 2016; Wang et al., 2020). As a result, businesses should
limit the negative environmental externalities of their operations
(De Grosbois, 2012). Moreover, the stakeholders who are conscious
of their commitment tend to reward the enterprises that demonstrate
a good effect on the environment. Therefore, CSR is a strategy for
firms to create relationships with their stakeholders.
Companies, in particular, boost the market prospects by minimizing
the costs of transaction (Barnett & Salomon, 2012) and improving both
productivity (Kim et al., 2017) and customer satisfaction (Servaes &
Tamayo, 2013). These beneficial benefits, in turn, boost performance.
136 BOULHAGA ET AL.

However, stakeholders must believe that corporate CSR practices are
credible (Guix et al., 2018; Roberts et al., 2021; Warmate et al., 2021).
They do not react to corporations' CSR operations which are not viewed
as trustworthy and beneficial to society. Moreover, stakeholders may
have negative sentiments about the corporations the claims of which do
not correspond to concrete results in socially responsible actions. Cus-
tomers, for instance, may no longer be trustworthy to the company
(Carlos & Lewis, 2018). Therefore, inadequate levels of CSR might raise
reputational problems, in addition to the cost of implementation. This
suggests that CSR has both costs and benefits for businesses, and that
simply conducting social activities is not enough to improve perfor-
mance. As a result, the idea of CSR that optimizes the advantages above
the costs generated by such actions is an important one to investigate.
This link has already been studied in the context of tourism and hospi-
tality, with varied results (Franco et al., 2020).
While earlier research has identified a positive or negative rela-
tionship between CSR and performance, few articles have attempted
to realize that both elements can characterize this relationship. The
existing research has helped define potential ways for CSR to affect
financial performance, particularly by categorizing CSR into multiple
aspects. However, the conflicting results showed that taking into
account both the positive and negative links between CSR and perfor-
mance is an important gap that has to be addressed. In this vein, Font
and Lynes (2018) stated in one of the few research studies they con-
ducted that the relationship between CSR and performance would
follow a pattern. The reason is that CSR has a favorable impact on
performance to the point where the expenses outweigh the benefits.
However, this reasoning ignores the possibility that stakeholders will
be more inclined to reward the corporations that produce extremely
high CSR achievements even if these results come at a financial cost.
For their part, Kraus et al. (2020) used data from 297 large indus-
trial enterprises in Malaysia to study the impact of CSR on environ-
mental performance. Their findings showed that while CSR has no
direct impact on the environmental performance, it is positively corre-
lated with green innovation and environmental strategy both of which
enhance the environmental performance, implying that they signifi-
cantly act as a mediator between CSR and environmental perfor-
mance. Moreover, the role of the CEO's integrity and the business's
reputation in the relationship between CSR disclosure and corporate
performance was investigated by Pham and Tran (2020). Furthermore,
the results of an analysis of 3588 firm-year observations of 833 for-
tune world's most admired businesses in 31 countries from 2005 to
2011 revealed that CSR disclosure has a favorable impact on corpo-
rate reputation, which in turn considerably contributes to financial
performance. According to the findings, the CEO's integrity consider-
ably enhances the favorable impact of CSR disclosure on corporate
reputation. Three indicators of business financial success (ROA, ROE,
and Tobin's Q) and three proxies of CEO's honesty all showed similar
outcomes. The research also explained how a company's reputation
and CEO's honesty affect the benefits of CSR disclosure to the firm's
performance and how not taking these elements into account could
explain why prior studies' findings were inconsistent. On the other
hand, in the global energy sector, Shahbaz et al. (2020) examined the
relationship between the board of directors' qualities and CSR
engagement, in addition to the relationship between corporate perfor-
mance and CSR engagement.
In addition, only a few studies have looked at the energy sector's
social performance (Lu et al., 2019; Valor, 2012). Energy businesses
work on lowering negative externalities, according to Valor (2012).
(health, safety, and the environment). Lu et al. (2019) discovered that
CSR can help reduce corruption at the company level in the energy
sector. Companies that produce renewable energy contribute to a
country's long-term development. Governments encourage people to
cut less carbon-intensive fuels and take action to combat climate
change (Moseñe et al., 2013). Another study looked at CSR practices
in the renewable energy industry (Chaiyapa et al., 2018).
Furthermore, CSR provides businesses with a competitive advan-
tage over their rivals (Hasan et al., 2018). As a result, the market position
will be strengthened, and profitability and performance will improve.
Investors reward companies that are socially and ecologically responsi-
ble with a greater market valuation (Kong et al., 2014;Lo&Sheu,2007;
Rodgers et al., 2013). Investing in environmentally friendly methods can
also boost operational efficiency (Jo et al., 2015). Another viewpoint
contends that allocating scarce resources to CSR initiatives may be at
the expense of shareholders (Hasan et al., 2018). If there are agency
issues, managers may overinvest in CSR activities, resulting in high CSR
costs (Gregory et al., 2014), which can impair the company's profitability
and value. Except during periods of low confidence, Petitjean (2019)
was unable to find a meaningful association between environmental pol-
icies and financial success. However, several other researchers have
found a link between financial performance and corporate social respon-
sibility (Beck et al., 2018; Hasan et al., 2018; Jo et al., 2015;Kong
et al., 2014;Lo&Sheu,2007; Rodgers et al., 2013). Engagement in CSR
practices, in particular, is favorably associated with firm performance. As
a result, we make the following hypothesis in our study: CSR has a
favorable effect on FP.
Hypothesis 2. Corporate social responsibility has a favor-
able impact on financial performance.
2.3 |The effect of the interaction between ICW
and CSR practice on firm financial performance
For its part, China published the “IC provisions”in January 2014.
However, there are flaws in the creation of IC, such as poor environ-
mental IC management, a difficult internal audit function, insufficient
personnel capacity, and so on (Yongming & Yini, 2017). According to
research by Yongming and Yini (2017), incorporating CSR practices
into a company's IC system improves IC operations and makes the IC
system more efficient. According to some academics, there is a game
going on between CSR and the firm's success in which CSR has an
impact on the IC process, which affects financial performance
(Yongming & Yini, 2017). Therefore, the question is how corporate
social responsibility affects IC and performance. Nowadays, the direc-
tion of CSR's impact on corporate performance is unclear. Using data
BOULHAGA ET AL.137

from Shenzhen's A-share market listed manufacturing enterprises
from 2010 to 2014, Yongming and Yini (2017) investigate the influ-
ence of the coupling interaction of IC and CSR on corporate perfor-
mance from the perspective of stakeholders. The findings revealed
that IC helps companies enhance their performance, but it is swayed
by CSR. The company's responsibility to shareholders, as well as a
government responsibility, plays a vital part in IC and has a favorable
impact on corporate performance. Nowadays, the direction of CSR's
impact on corporate performance is unclear. Using data from Shenz-
hen's A-share market listed manufacturing enterprises from 2010 to
2014, Yongming and Yini (2017) investigated the effect of coupling
interaction with IC and CSR on corporate performance from the per-
spective of the stakeholders. The findings revealed that IC helps com-
panies enhance their performance, but it is swayed by CSR. Company
responsibility to shareholders, as well as a government responsibility,
play a vital part in IC and have a favorable impact on corporate perfor-
mance. Corporate responsibility to creditors, on the other hand, has a
detrimental impact on the IC. Corporate duty to suppliers, employees,
customers, and IC is not visible. Companies in the hospitality industry
are increasingly investing in CSR to build strong ties with stakeholders
while also improving their performance. CSR, on the other hand, both
benefit and cost the focal company. Franco et al. (2020) investigate
how CSR affects corporate financial performance, finding that CSR is
a cost that only delivers significant rewards when it fosters strong
relationships between organizations and their stakeholders. We can
offer the following hypothesis based on what has been presented.
Hypothesis 3. The relationship between CSR practice
and corporate financial performance is moderated by ICW.
3|RESEARCH METHODOLOGY
This section presents the sample, the data collection, the used vari-
ables measurements and the model specifications.
3.1 |Sample selection
The research is conducted over a seven-year period, from 2012 to
2018, on a sample of French registered companies in the SBF
120 index. The choice of this index is justified by its representative-
ness and the SBF 120's broad, faithful, and diversified market view,
which allows us to collect a sufficiently large population to conduct
statistical tests. The study period begins from the date of the adop-
tion of the Grenelle II law, which entered into force in 2012, to
avoid any kind of controversy concerning the level of conservatism
after the adoption of the new economic regulations (New Economic
Regulations). Considering the initial population, we excluded the
financial and real estate companies because of the sector specific-
ities and the accounting regime of the credit institutions. Therefore,
the final sample is made up of 98 companies covering a 7-year
period for a total of 686 observations. The whole accounting and
stock market information was extracted from the Thomson Reuters
database (Datastream) and the Thomson Reuters ASSET4 ESG
database.
3.2 |Variables measurements
3.2.1 | The dependent variable: The firm's financial
performance
We utilize Tobin's Q as a proxy for business financial performance
based on the prior studies of Stoel and Muhanna (2011), Pham and
Tran (2020), and Shahbaz et al. (2020). Tobin's Q is calculated as
(Market value +Preferred stock +Long-term debt)/Total assets
(Lahouel et al., 2019).
3.2.2 | Measurement of the independent and
control variables
This study used IC deficiency (ICW) as a proxy variable of the level of
internal control quality where Internal control is a dummy variable
coded 1 if the company discloses information on internal control
weaknesses, and 0 if it does not (Doyle et al., 2007; Ashbaugh-Skaife
et al., 2007; Stoel & Muhanna, 2011), Then, the data on the internal
control weaknesses were manually collected from financial reports
and reference documents published on the French listed companies'
website. On the other hand, corporate social responsibility is mea-
sured with the ESG score retrieved from Thomson Reuters's ASSET4
ESG (Lahouel et al., 2019; Yang & Baasandorj, 2017). The company
size corresponds to the logarithm of total assets (Karim et al., 2021;
Sardana et al., 2020; Shahbaz et al., 2020; Singh & Misra, 2021). The
long-term debt deflated by the ratio of the total assets is used to cal-
culate LEV (Pham & Tran, 2020; Shahbaz et al., 2020). The change in
total revenue deflated by total revenue is used to calculate growth
(Stoel & Muhanna, 2011). If the corporation is audited by at least one
firm in the BIG 4 network, BIG4 is a binary variable coded
1 (Chouaibi & Boulhaga, 2020; Stoel & Muhanna, 2011). We also
included the company's age measured by the logarithm years of com-
pany establishment (Singh & Misra, 2021; Stoel & Muhanna, 2011;
Wang et al., 2020).
3.3 |Model specification
In this study of the French context, we are interested in some organi-
zational factors explaining the inter-company's disparities in the level
of conservatism. Therefore, this developed model is written as
follows:
Tobin Qit ¼β0þβ1ICWit þβ2FSIZEit þβ3LEVit þβ4GROWTHit
þβ5AGEit þβ6AUDTQit þIndustry fixed effect
þFirm fixed effect þεit ,ð1Þ
138 BOULHAGA ET AL.

Tobin Qit ¼β0þβ1CSRit þβ2FSIZEit þβ3LEVit þβ4GROWTHit
þβ5AGEit þβ6AUDTQit þIndustry fixed effect
þFirm fixed effect þεit :ð2Þ
To further study the impact of the interaction of IC and CSR on firm
performance, this article adds the interaction of IC and CSR.
Tobin Qit ¼β0þβ1ICWit þβ2CSRit þβ3IC CSRit þβ4FSIZEit þβ5LEVit
þβ6GROWTHit þβ7AGEit þβ8AUDTQit
þIndustry fixed effect þFirm fixed effect þεit :
ð3Þ
With Tobin's Q: financial performance, ICW: a dummy variable coded
1 if the corporation publishes information about IC weaknesses, and
zero otherwise; CSR: measured by ESG score; SIZE corresponds to
the logarithm of total assets (TA) for year t; LEV, is measured by the
long-term debt / total assets ratio, GROWTH is calculated based on
the change in the total revenue deflated by the total revenue; AGE is
calculated based on the years of the company's existence; BIG4 is a
variable that takes value 1 if the company is audited by at least one
BIG 4 firm; To discover possible impacts that belong to the industry
and the firm, industry and firm dummies are integrated; β0!β9:
Constitute the parameters to be estimated; ε: Error term.
4|RESULTS AND DISCUSSION
This part is devoted to the presentation of the results of statistical
processing. First, we focus on the model descriptive statistics, then
we present the analysis of the correlations between the variables and
finish with the results of the regression model.
4.1 |Descriptive statistics
The analysis of our sample descriptive statistics (Table 1) revealed the
following salient points: the mean value and the standard deviation of
Tobin's Q are almost equal to the respective values; 2.039 and 0.511.
Its minimum and maximum values are respectively equal to “0.3271”
and “2.473”. Regarding the independent variables, the average disclo-
sure of information on IC weaknesses of the firms in our sample is
around 0.588. The results also showed that on average, the compa-
nies in our sample disclose ESG information of around 51.12%. In this
regard, and according to Table 1, the average interaction between
ICW and CSR is 33.77.
4.2 |Correlation matrix
Table 2presents the correlation matrix between the variables tested
in the model. The correlation matrix indicates that most variables are
related to each other in a significant way. The Tobin Q variable, for
example, is significantly correlated at the 1% level with all the vari-
ables in the model. However, the intensity of these correlations is not
considered excessive since the correlation coefficients do not exceed
0.8. To further ensure the absence of multicollinearity, we performed
a multicollinearity diagnosis via STATA by the variance inflation factor
(VIF) (an indicator of the proportion of variance of each independent
variable explained by all the other variables). From Table 2, we notice
that the VIF does not exceed 10, which leads us to conclude that
there are no significant multicollinearity issues.
4.3 |Multivariate analyzes
Model 1 in Table 3shows the results of the OLS regression. The
results of the estimation show that the model has an explanatory and
significant power R2 =0.71 and R2 adjusted =0.66.
The results of the regression presented in Table 3show that IC
has a positive effect on a firm's performance. Thus, the coefficient
relating to this variable is positive (0.061) and significant (p=0.000)
at the 1% level. This allows us to reject the Hypothesis 1. This means
that the quality of internal control is considered a potential determi-
nant of financial performance in the French context. Therefore, profit-
able companies have managed to detect ICW before the publication
of financial statements. This result invalidates the work of Stoel and
Muhanna (2011) who found that weaknesses in IT internal control
have a negative effect on company performance by interfering with
the organizational capacity to meet essential information and systems
TABLE 1 Descriptive statistics Variables NAverage Standard deviation Minimum Maximum
Tobin Q 686 2.039 0.511 0.3271 2.473
ICW 686 0.588 0.492 0 1
ESG 686 51.122 29.833 12.77 91.76
ICW*ESG 686 33.775 35.042 0 91.76
FSIZE 686 15.824 2.121 9.964 19.458
LEV 686 0.2626 0.160 0.0002 0.804
GROWTH 686 0.0377 0.182 2.482 0.955
AGE 686 64.361 57.745 9 353
AUDTQ 686 0.9620 0.191 0 1
BOULHAGA ET AL.139

needs reliable to conduct day-to-day operations and efficiently deliver
customer service, management support and productivity gains.
Generally, the accounting and financial literature argue that finan-
cial performance has effects on the quality of IC. Indeed, companies
are interested in internal control systems to improve their perfor-
mance. In this context, most studies carried out in the American con-
text showed that companies reporting ICW are more generally less
efficient (Ashbaugh-Skaife et al., 2007; Doyle et al., 2007;Ge&
McVay, 2005; Stoel & Muhanna, 2011). For example, Ge and McVay
(2005) examined the factors likely to release ICW. They showed that
underperforming companies are associated with greater disclosure of
material IC weaknesses. Similarly, Doyle et al. (2007) and Ashbaugh-
Skaife et al. (2007) showed that companies tend to be financially
weaker to publish ICW.
CSR has a favorable impact on financial success, according to the
Hypothesis 2. To begin, observe that the findings of the regression
reported in Table 3support our Hypothesis 2that corporate social
responsibility has a considerable impact on performance. The
TABLE 2 Pearson's correlation and the VIF test
Tobin Q IC CSR FSIZE LEV GROWTH AGE AUDTQ VIF
Tobin Q 1.000
ICW 0.120*** 1.000 3.95
ESG 0.529*** 0.250*** 1.000 2.91
FSIZE 0.519*** 0.102*** 0.463*** 1.000 1.74
LEV 0.204*** 0.018 0.091*** 0.190*** 1.000 1.22
GROWTH 0.080** 0.001 0.178*** 0.131*** 0.023 1.000 1.05
AGE 0.167*** 0.016 0.146*** 0.201*** 0.042 0.047 1.000 1.06
AUDTQ 0.148*** 0.082** 0.133*** 0.131*** 0.027 0.065* 0.096*** 1.000 1.04
Note: *, **, *** significant relationship at 10%, 5%, and 1% threshold.
TABLE 3 The impact of CSR and
internal control on firm value
(1) (2) (3) ICW =1 (4) ICW =0
TBQ TBQ TBQ TBQ
ICW 0.061***
2.00
ESG 0.010*** 0.011*** 0.002***
6.23 4.59 2.8
FSIZE 0.152*** 0.151*** 0.177
***
0.030*
5.17 4.27 11.53 1.81
LEV 1.357*** 1.283*** 1.192*** 0.466*
(4.78) (5.10) (3.40) (1.78)
Growth 0.051 0.06 0.079 0.141
(0.86) (1.03) 1.29 (1.30)
ln_Age 0.354*** 0.043 0.15 0.326**
3.78 (0.54) (1.13) 2.43
AUDTQ 0.393*** 0.389*** 0.727*** 0.117**
2.66 3.4 4.37 2.42
Industry fixed effect Yes Yes Yes Yes
Firm fixed effect Yes Yes Yes Yes
_cons 1.404** 0.718 1.275*** 0.473
(2.44) (1.30) (2.78) 0.96
N681 681 402 279
R-sq 0.71 0.76 0.73 0.9
Adj. R-sq 0.66 0.71 0.64 0.87
Abbreviations: AUDTQ, Audit quality; ESG, environmental, social, and governance; FSIZE, company size;
GROWTH, is calculated based on the change in the total revenue deflated by the total revenue; ICW,
internal control weaknesses; LEV, debt level; Ln_AGE, firm age. *, **, *** significant relationship at 10%,
5%, and 1% threshold.
140 BOULHAGA ET AL.

coefficient relating to CSR is positive (0.01) and significant
(p=0.000), according to the findings.
These findings support the second idea Hypothesis 2. By over-
coming the literature's conflicting and often contradictory outcomes
to date (Font & Lynes, 2018). CSR is linked to a firm's good relation-
ship with its stakeholders, according to the literature, and strong rela-
tionships are advantageous to financial performance. Previous
findings, on the other hand, imply that poor social performance is det-
rimental to financial performance since it implies costs that a company
must bear. To see if there's a link between CSR and performance. To
accomplish so, we used a panel regression model with very recent
data from 2012 to 2018 to investigate the effect of CSR on the per-
formance of French companies in the SBF 120 index. Our findings
corroborate the notion that the relationship between these variables
might be either positive or negative, implying that only the best CSR
results are advantageous to performance. Interestingly, our findings
support prior findings that CSR has a favorable impact on perfor-
mance (Park & Lee, 2009).
To receive financial benefits, organizations must cross a CSR
threshold. This threshold corresponds to the moment at which stake-
holders begin to regard CSR policies as credible and effective, and
hence reward firms by facilitating access to the resources they
require. To put it another way, we show that considering both nega-
tive and positive characteristics at the same time allows us to
comprehend the complex relationship between CSR and performance.
Companies must recoup and exceed expenditures associated with
CSR initiatives in order to value them. Low levels of CSR, on the other
hand, are unable to cover these expenses since stakeholders tend to
blame companies whose sustainable practices fall short of being
viewed as robust and genuine. Due to minimal CSR engagement, com-
panies that perform poorly incur reputational consequences.
4.4 |The impact of CSR and internal control on
firm value using GMM
To ensure the robustness of our empirical results, we use the GMM
method. This method provides solutions to the problems of reverse cau-
sality, simultaneity bias and possible omitted variables. In addition, it
allows to control of specific temporal and individual effects and reduces
endogeneity biases. The realization of this method is done by software
(STATA) and above all, we focus on the command (XTABOND2). The
system GMM regression results are shown in Table 4below.
ICW, according to the Hypothesis 3, moderates the relationship
between CSR behavior and business financial performance. The
regression results in Table 4demonstrate that the interaction
between ICW and CSR appears to have a negative influence on finan-
cial success, which is in line with our Hypothesis 3. The coefficient for
TABLE 4 The impact of CSR and
internal control on firm value using GMM 1234
TBQ TBQ TBQ TBQ
L.TBQ 0.626*** 0.535*** 0.536*** 0.542***
298.04 155.14 150.42 132.32
ICW 0.045*** 0.041*** 0.085***
8.38 5.81 5.34
ESG 0.004*** 0.003*** 0.004***
25.36 18.16 16.39
ICW*ESG 0.001***
(3.25)
FSIZE 0.123*** 0.139*** 0.136*** 0.135***
47.77 49.66 40.76 38.22
LEV 1.581*** 1.530*** 1.558*** 1.517***
(240.07) (139.85) (106.65) (82.98)
Growth 0.001 0.002 0.009* 0
0.17 0.48 (1.82) (0.03)
AUDTQ 0.428*** 0.636*** 0.595*** 0.625***
17.06 18.69 15.84 13.6
Industry fixed effect Yes Yes Yes Yes
Firm fixed effect Yes Yes Yes Yes
_cons 1.292*** 1.770*** 1.724*** 1.704***
(15.36) (32.36) (36.71) (38.49)
N588 588 588 588
Abbreviations: AUDTQ, Audit quality; ESG, environmental, social, and governance; FSIZE, company size;
GROWTH, is calculated based on the change in the total revenue deflated by the total revenue; ICW,
internal control weaknesses; LEV, debt level; Ln_AGE, firm age. *, **, *** significant relationship at 10%,
5%, and 1% threshold.
BOULHAGA ET AL.141

the variable IC*CSR is negative (0.001) and significant (p=0.000),
according to the findings.
These results mean that corporate governance mechanisms
focused on sustainable development can be perceived by market
players as costly actions, and of a purely symbolic nature, without any
real anchoring in the strategic project of the company (Feng
et al., 2020; Hassan et al., 2020; Hazaea et al., 2022; Khatib, Abdullah,
Elamer, & Abueid, 2021; Khatib, Abdullah, Elamer, Yahaya, &
Owusu, 2021). On the other hand, investors use CSR information to
estimate returns, while shareholders use CSR information to under-
stand how their funds have been used in expectation of future profit-
ability. A high level of disclosure of CSR information affects the
behavior of shareholders with regard to the sale and purchase of
securities, which is the source of the variation in stock prices. For their
part, Barnea and Rubin (2010) suggest that there is a major conflict of
interest relating to the CSR approach between shareholders insofar as
high expenditure on CSR does not always aim to maximize the stock
market value of the company, but can rather benefit employees, espe-
cially when it comes to improving working conditions. Also, over-
investment in CSR can be beneficial for managers because it improves
their reputation when listening to societal and environmental issues.
Our findings imply that the relationship between CSR and perfor-
mance cannot be described by a single strategy, but rather requires
consideration of company-specific contingency factors that may influ-
ence how organizations engage in socially responsible activities.
Among the many elements that can be considered, this article empha-
sizes the importance of the IC system in evaluating the impact of CSR
within enterprises. We give empirical evidence of the positive influ-
ence on the performance of the interplay between IC and CSR. This
finding supports prior research (Molina-Azorín et al., 2015; Quintana-
García et al., 2018), indicating that CSR has a favorable overall influ-
ence on performance. As a result, while adopting CSR initiatives, orga-
nizations have to thoroughly evaluate the prospect of participating in
quality management techniques through ISO 9001 accreditations.
Indeed, because CSR is a strategic approach aimed at improving per-
formance through stronger interactions with stakeholders such as
employees, consumers, and suppliers, its implementation can lead to
confusion between various measures aiming at similar goals. To avoid
duplicating procedures that impair company performance, CSR and
the quality of the IC system necessitate the adoption of structural and
systematic actions, and managers must emphasize their consideration
of a restricted set of challenges (Ocasio, 1997).
However, the IC system must constitute an essential vector to
improve the ability of the company to achieve its objectives. Then,
the assessment of the efficiency of an IC system is a subjective judg-
ment based on the presence of the five components of this system
and the effectiveness of its operation. This effectiveness provides a
reasonable level of assurance that one or more categories of objec-
tives will be achieved. It is for this reason that the elements of IC con-
stitute criteria of effectiveness. Thus, the cost of not having an
effective internal control system, based on its five elements, can even
go as far as business failure. On the other hand, the IC system must
be designed at a lower cost for the IC system to be efficient.
According to the definition of the French chartered accountants
order, IC is a general management discipline to ensure better effi-
ciency of the means implemented to ensure the sustainability and per-
formance of the company.
5|CONCLUSION
To conclude, we can say that numerous stakeholders, such as inves-
tors, financial risk managers, insurance companies, and NGOs, are
increasing their pressure on French companies to measure, disclose,
monitor, and manage their ESG performance. Therefore, this work
aims to look into the effect of IC and corporate social responsibility
on financial performance. The sample includes 98 French companies
that were listed between 2012 and 2018. We employ a variety of
techniques, including multiple linear regression and system GMM. The
importance and benefits of employing the GMM estimator in a system
are demonstrated. Reverse causality, simultaneity bias, and possibly
omitted factors are all addressed by GMM. It also enables the manipu-
lation of precise temporal and individual effects.
The following sections outline the findings. We discover that ICW
improves financial performance as assessed by Tobin's Q. Despite
this, CSR has a statistically significant positive impact on financial per-
formance. Moreover, internal control and CSR interactions have a
negative and severe impact on financial performance. After using the
GMM approach to test for endogeneity, we found that the results are
reliable. Overall, our findings provide empirical evidence that internal
control is an organizational necessity and that financial markets assess
information system risk. We believe that this is the first study in
France to show a link between internal control, CSR, and financial per-
formance. Therefore, our findings confirm the social responsibility
concept presented in this study.
For practitioners, our research highlights the implications in terms
of IC and contributes to the debate on the implementation of the SOX
law. Accordingly, companies should assess internal control to secure
their systems, recognizing that a good system of IC is important to real-
ize the value-added potential of investments while mitigating risk. The
results of our study have significant implications for policymakers, pro-
fessionals, and managers. Our study framework aims to guide compa-
nies on the impact of CSR and IC on the implementation of
performance. The results highlight that CSR has no direct effect on cor-
porate performance, but due to IC, this relationship has changed. Thus,
company directors cannot ignore CSR to measure firm performance
because several researchers have confirmed that CSR improves organi-
zational performance (Long et al., 2020;Orazalin,2020). Managers and
decision-makers must focus on CSR and IC to measure performance.
As a result, we advise businesses to pay attention to human
resource management techniques. Furthermore, through the commit-
ment to technology and standardization of policies and procedures for
the approval, verification, and reconciliation of transactions, compa-
nies should become more committed to social responsibility, compe-
tence, ethical value and integrity, in addition to the development of
detection and preventive control activities. However, issues such as
142 BOULHAGA ET AL.

oversight activities, information and communication and risk assess-
ment should be addressed in accordance with the realities of each
company's operational structure so that the IC system's role will not
be jeopardized by an unbalanced approach to communication and
information, risk assessment and activity monitoring. However, like
many studies, our study has limitations as the scope of this research is
limited. The fact that the data for this study come from a single nation
(France) limits the generalization of our findings to some other coun-
tries. Nevertheless, the findings in this work are still relevant. As a
result, future scholars can investigate the influence of IC and CSR on
other countries or regions.
ORCID
Mounia Boulhaga https://orcid.org/0000-0003-0664-8986
Ahmed A. Elamer https://orcid.org/0000-0002-9241-9081
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How to cite this article: Boulhaga, M., Bouri, A., Elamer, A. A.,
& Ibrahim, B. A. (2023). Environmental, social and governance
ratings and firm performance: The moderating role of internal
control quality. Corporate Social Responsibility and
Environmental Management,30(1), 134–145. https://doi.org/
10.1002/csr.2343
BOULHAGA ET AL.145