Environmental, Social, and Governance Factors as Tools for Improving Market Efficiency: A Study on Equity Misvaluation

ABSTRACT This study investigated whether superior environmental, social, and governance (ESG) practices enhance corporate value and market efficiency under various economic theories. Using a multi‐country panel of 31 economies from 2015 to 2022, we find that both ESG performance and disclosure improve intrinsic value and mitigate equity misvaluation. The results show that performance exerts a stronger effect than disclosure, encouraging managers to prioritize substantive improvements over greenwashing initiatives. Additionally, ESG practices are negatively associated with overvaluation and positively associated with undervaluation, indicating that higher ESG practices can help improve market efficiency. Moreover, the findings suggest that managers allocate more resources to ESG in advanced economies, where the effects are materially stronger than in emerging market and developing economies (EMDEs). Overall, our evidence generalizes beyond single‐country studies and suggests the importance of incorporating ESG information in strategy and decision‐making.