The Effect of ESG Performance on Firm Value: The Moderating Role of Digital Transformation—Evidence from Saudi Listed Firms

Abstract

This study examines the joint and interactive effects of environmental, social, and governance (ESG) performance and digital transformation on firm value by using a sample of 64 non-financial firms listed on the Saudi Exchange over 2020–2024. The empirical analysis employs panel data techniques, feasible generalized least squares (FGLS), Driscoll–Kraay standard errors, and two-stage least squares (2SLS) estimation. The results show that ESG performance is positively associated with firm value, which suggests that capital markets reward firms for sustainability activities. Digital transformation also shows a positive association with firm value and is consistent with its role as a driver of firm valuation. The positive interaction between ESG and digital transformation suggests that digitalization reinforces the association between ESG practices and firm value. The findings remain robust across alternative model specifications and firm value measures. Digital transformation is measured with a text-based disclosure index built from digital-related keywords in annual reports. The index captures disclosed digital orientation rather than realized digital capability, so a high disclosure frequency may partly reflect signalling or impression management rather than fully deployed digital infrastructure. The findings show the importance of adding digital strategies to sustainability practices and provide useful implications for managers, investors, and policymakers under Saudi Vision 2030.