Environmental, Social, and Governance Performance and Financial Sustainability: The Moderating Role of Managerial Overconfidence in a Spatial Panel Framework

Nikzad Ghadikolaei, Mahdis; Khalili, Yassaman; Heydari Rostami, Keramatollah

doi:10.22054/joer.2026.89639.1306

Environmental, Social, and Governance Performance and Financial Sustainability: The Moderating Role of Managerial Overconfidence in a Spatial Panel Framework

Document Type : Research Paper

Authors

Mahdis Nikzad Ghadikolaei ¹

Yassaman Khalili ²

Keramatollah Heydari Rostami ³

¹ Assistant Professor, Department of Accounting, Faculty of Economics and Administrative Science, University of Mazandaran, Babolsar, Iran

² Assistant Professor, Department of Accounting, Payame Noor University, Tehran, Iran

³ Assistant Professor, Management Department, Faculty of Administrative Sciences and Economics, Arak University, Arak, Iran

https://doi.org/10.22054/joer.2026.89639.1306

Abstract

This study investigates the impact of ESG performance on the financial sustainability of companies listed on the Tehran Stock Exchange from 2018 to 2024. It analyzes the moderating role of senior managers' characteristics, particularly overconfidence, using a maximum likelihood-based spatial panel regression approach. In emerging economies like Iran, which face environmental, social, and institutional challenges, ESG performance is considered a key tool for reducing financial risks and enhancing long-term firm stability. Global studies suggest that strong ESG performance can lower financing costs and increase resilience against economic shocks, but findings in emerging markets have been inconsistent, often overlooking spatial effects and the role of managers. The statistical population consists of non-financial listed companies, with a final sample of 125 companies (875 observations) selected based on inclusion and exclusion criteria. Hypothesis testing results indicate that ESG performance positively affects firms' financial sustainability, and this relationship is confirmed when accounting for spatial and regional dependencies. Additionally, managers' overconfidence, as a moderating factor, weakens this positive impact and influences spatial spillover effects. The study emphasizes that enhancing ESG performance can improve the financial stability of firms in emerging economies like Iran, but managers' behavioral biases must be managed to maximize sustainability benefits.

Introduction

In emerging economies like Iran, which face environmental, social, and institutional challenges, Environmental, Social, and Governance (ESG) performance is recognized as a key tool for reducing financial risks and enhancing the long-term stability of firms. However, research findings in this area have been inconsistent, often overlooking spatial effects and the role of managers’ characteristics, particularly overconfidence. This study focuses on companies listed on the Tehran Stock Exchange from 2018 to 2024, examining the impact of ESG performance on financial sustainability and analyzing the moderating role of managers’ overconfidence using an innovative maximum likelihood-based spatial panel regression approach. The study aims to address gaps in the literature by explicitly accounting for spatial dependencies and managers' behavioral biases in the context of Iran's economy.

Methods and Material

The statistical population comprises non-financial companies listed on the Tehran Stock Exchange. The final sample includes 125 companies (875 observations) selected based on exclusion criteria (e.g., incomplete data) and inclusion criteria (e.g., availability of ESG reports). Financial sustainability was measured using Altman’s Z-score, ESG performance was assessed via a weighted average score of its three dimensions. Managers’ overconfidence was measured using the Malmendier and Tate (2005) method. A spatial panel regression model (SDM) was estimated using the maximum likelihood approach, accounting for spatial dependencies based on a geographical distance-weighted matrix. Data were collected from the Codal system and companies’ annual reports and analyzed using Stata 18 and GeoDa software. Pre-tests (e.g., Moran’s I, L[agrange]M[ultiplier] tests, Hausman test) and robustness checks (e.g., substitution with O-score, removal of outliers) ensured the model’s validity.

Results and Discussion

The results indicate that ESG performance has a significant positive impact on financial sustainability (total coefficient 0.083, p < 0.01), accounting for 58% of the total effect as direct within-firm effects and 42% as indirect spatial spillover effects. This finding confirms regional dependencies, such as the influence of Tehran-based companies on neighboring provinces. Managers’ overconfidence weakens this positive effect (interaction coefficient = −0.044, p < 0.05), likely through inefficient resource allocation. Control variables such as firm size and profitability showed positive effects, while financial leverage had a negative effect. Robustness tests, including substitution of Z-score with O-score and alteration of the weight matrix, confirmed the stability of the results.

Conclusion

This study confirms that ESG performance enhances financial sustainability in emerging economies, but managers’ behavioral biases, particularly overconfidence, diminish this effect. Spatial dependencies play a critical role in amplifying ESG effects, particularly in Iran, given regional heterogeneity in environmental and sustainability policies. The findings align with global studies (e.g., Wu et al., 2025) but highlight Iran-specific aspects, such as spatial spillovers. Limitations include limited access to ESG data and the focus on listed companies.

Keywords

ESG Performance

Financial Sustainability

Managerial Overconfidence

Spatial Panel Regression

Overconfidence

Subjects

The Economics of Technology, Energy and Sustainable Development

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