The Effect of ESG, Earnings Per Share, and Dividend Payout Ratio on Stock Returns of the ESG Quality 45 Kehati Index, Moderated by Stock Liquidity

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Jakarta— ESG Performance and Stock Liquidity Boost Returns on Indonesia's Sustainable Index. Research conducted by Hilman Hadianto and Hakiman from Mercu Buana University, published in January 2026 in the International Journal of Business and Applied Economics.

The research conducted by Hilman Hadianto and Hakiman from Mercu Buana University shows that Environmental, Social, and Governance (ESG) performance has a significant effect on stock returns in the ESG Quality 45 KEHATI Index. This research confirms that sustainability factors and stock liquidity now have a greater impact on market performance than traditional financial indicators such as earnings per share.

ESG Returns Still Face Investor Skepticism

During the 2021–2024 period, the ESG Quality 45 KEHATI Index produced a cumulative return of around 9.4 percent. In comparison, the Jakarta Composite Index grew by 18.1 percent over the same timeframe. In 2024 alone, the ESG index declined by 12.7 percent.

These figures reflect the ongoing skepticism around ESG investing. While sustainability is often promoted as a long-term strategy, investors still want evidence that ESG-based stocks can generate strong financial performance in real market conditions.

The authors argue that earlier studies often treated ESG as a single combined score, which made it difficult to see how each ESG pillar—environmental, social, and governance—contributes to stock returns. In addition, many analyses focused heavily on financial fundamentals such as earnings per share and dividend policy, while overlooking the market factor of stock liquidity.

A Clear and Practical Research Design

The study examined 22 companies that were consistently included in the ESG Quality 45 KEHATI Index from 2021 to 2024. The dataset covered 88 firm-year observations.

The researchers evaluated several variables: overall ESG scores, the three ESG pillars (environmental, social, governance), earnings per share (EPS), dividend payout ratio, and stock liquidity. The analysis measured how each factor influenced stock returns, and whether liquidity strengthened the relationship between ESG performance and returns.

In simple terms, the study looked at how sustainability performance interacts with market trading conditions to shape investor gains.

Key Findings: ESG Matters, and Liquidity Makes It Stronger

The results show a consistent and market-relevant pattern:

ESG performance has a positive and significant effect on stock returns, both as an overall score and through all three ESG pillars.
The Environmental pillar has the strongest influence, followed by Social and Governance.
Dividend payout ratio positively affects stock returns, confirming that dividend distribution remains an attractive signal for investors.
Earnings per share does not significantly affect stock returns, indicating that investors may be shifting away from short-term profit metrics.
Stock liquidity directly increases stock returns and strengthens the impact of ESG, but it does not strengthen the effects of EPS or dividend payout ratio.

This means that companies with strong ESG performance generate better returns when their shares are actively traded and easy to buy or sell.

Why Environmental and Social ESG Scores Lead the Market

Among the ESG pillars, environmental performance stands out as the strongest driver of returns. Investors increasingly consider environmental responsibility as a measure of risk management and long-term resilience. Companies with stronger environmental practices are seen as better prepared for climate-related regulations, supply chain disruptions, and efficiency challenges.

Social performance also plays a major role. Strong labor policies, community engagement, and consumer protection are interpreted as signs of operational stability. Investors view social responsibility not only as ethical behavior but also as a practical indicator of business sustainability.

Governance remains important but has a slightly weaker impact. The authors suggest that good governance is often treated as a baseline requirement rather than a competitive advantage. It supports trust and transparency, but it may not generate excess returns as strongly as environmental and social performance.

Stock Liquidity: The Missing Link in ESG Investing

One of the most valuable contributions of this study is its focus on stock liquidity. Liquidity reflects how easily a stock can be traded without significantly affecting its price. Highly liquid stocks are attractive because they reduce transaction costs, enable faster portfolio adjustments, and allow market information to be reflected more efficiently in prices.

The study finds that liquidity strengthens the influence of ESG on stock returns. In liquid stocks, ESG-related information spreads faster and is priced more quickly, amplifying its impact on valuation and investor returns.

On the other hand, liquidity does not strengthen the impact of earnings per share or dividend payout ratio. The researchers suggest this happens because those financial signals are already widely known and quickly incorporated into prices regardless of trading volume.

What This Means for Investors and Companies

For investors, the study provides a practical takeaway: ESG investing in Indonesia works best when sustainability performance is paired with high stock liquidity. Investors looking for stronger returns should not only evaluate ESG ratings but also consider whether the stock is actively traded.

For companies, the findings highlight that improving ESG performance across all pillars can enhance market value. Environmental and social strategies, in particular, can generate meaningful investor confidence. At the same time, companies should maintain transparency and investor communication to support stock liquidity, ensuring ESG performance is recognized by the market.

Author Profiles

Hilman Hadianto, S.E., M.M. - Universitas Mercu Buana.
Hakiman, S.E., M.M. - Universitas Mercu Buana

Research Source

Hadianto, H., & Hakiman, H. (2026). The Effect of ESG, Earnings Per Share, and Dividend Payout Ratio on Stock Returns of the ESG Quality 45 KEHATI Index, Moderated by Stock Liquidity. International Journal of Business and Applied Economics, Vol. 5 No. 1, January 2026, pp. 325–342.

DOI: https://doi.org/10.55927/ijbae.v5i1.581
Journal URL: https://nblformosapublisher.org/index.php/ijbae