Abstract

Using a sample of 354 Vietnamese non-financial listed firms from 2010 to 2023, this study examines the intricate relationships among financial constraints, Environmental, Social, and Governance (ESG) factors, and investment efficiency. The study confirms that a lack of financial resources directly leads to inefficient investment decisions, highlighting that access to capital is critical for business growth and sound investment strategy. In contrast, ESG practices are shown to improve investment efficiency through two mechanisms: facilitating disciplined investment evaluations and attracting investors who prioritize sustainability. Compared to over-investment, ESG disclosure has a more pronounced effect on mitigating under-investment. Nonetheless, the study does not validate the hypothesis that ESG disclosure can mitigate the negative effects of financial constraints. Firm size positively correlates with investment efficiency, whereas other factors (leverage, age, operating cash flow, and Tobin's Q) exhibit a negative correlation. Moreover, this study also provides an in-depth analysis of both over-investment and under-investment from a company's internal factors. Factors like firm size, age, and financial leverage are statistically significant drivers of both over-investment and under-investment, suggesting that a company's unique profile heavily influences its investment behavior. Adopting ESG practices and disclosing this information helps firms improve their investment efficiency. This occurs through more rigorous project vetting and attracting a specific group of investors who value sustainability. This research provides insights that enable financial managers to enhance their decision-making processes and, in turn, cultivate stronger financial performance, greater sustainability, and improved economic outcomes, all while the study's conclusions concurrently serve as a valuable resource for stakeholders in navigating corporate activities and addressing complex issues like agency problems and information asymmetry.