Abstract
The aim of this paper is to investigate the relationship between environmental, social, and governance (ESG) controversies and firm market value. We use a unique dataset of more than 4000 firms from 58 countries during 2002–2011. Primary analysis surprisingly shows that ESG controversies are associated with greater firm value. However, when interacted with the corporate social performance (CSP) score, ESG controversies are found to have no direct effect on firm value while the interaction appears to be highly and significantly positive. Building on this evidence, we attempt to explore the channels through which CSP may enhance market value. Conducting sample split analysis indicates that higher CSP score has an impact on market value only for high-attention firms, those firms which are larger, perform better, located in countries with greater press freedom, more searched on the Internet, more followed by analysts, and have an improved corporate social reputation. Thus, our findings provide new insights on the role of firm visibility through which firms can profit from their CSP.
Similar content being viewed by others
Notes
For instance, as Da et al. (2011) point out, “…a news article in the Wall Street Journal does not guarantee attention unless investors actually read it.”.
Since the dummy method would induce a loss of information, we have re-run our baseline models with the raw level of ESG controversies. The results remain unchanged and are available upon request.
Results are available upon request.
References
Adams, C. A. (2002). Internal organisational factors influencing corporate social and ethical reporting: Beyond current theorising. Accounting, Auditing & Accountability Journal, 15(2), 223–250.
Al-Tuwaijri, S. A., Christensen, T. E., & Hughes, K. (2004). The relations among environmental disclosure, environmental performance, and economic performance: A simultaneous equations approach. Accounting, Organizations and Society, 29(5), 447–471.
Arora, P., & Dharwadkar, R. (2011). Corporate governance and corporate social responsibility (CSR): The moderating roles of attainment discrepancy and organization slack. Corporate Governance, 19(2), 136–152. doi:10.1111/j.1467-8683.2010.00843.x.
Arouri, M., & Pijourlet, G. (2015). CSR performance and the value of cash holdings: International evidence. Journal of Business Ethics. doi:10.1007/s10551-015-2658-5.
Barber, B. M., & Odean, T. (2008). All that glitters: The effect of attention and news on the buying behavior of individual and institutional investors. Review of Financial Studies, 21(2), 785–818.
Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics, 97(1), 71–86.
Barnett, M. L. (2007). Stakeholder influence capacity and the variability of financial returns to corporate social responsibility. Academy of Management Review, 32(3), 794–816.
Barnett, M. L. (2014). Why stakeholders ignore firm misconduct a cognitive view. Journal of Management, 40(3), 676–702.
Barnett, M. L., & Salomon, R. M. (2012). Does it pay to be really good? Addressing the shape of the relationship between social and financial performance. Strategic Management Journal, 33(11), 1304–1320.
Barth, M. E., & McNichols, M. F. (1994). Estimation and market valuation of environmental liabilities relating to superfund sites. Journal of Accounting Research, 32, 177–209.
Baum, C. F. (2006). An introduction to modern econometrics using Stata. College Station, TX: Stata Press.
Bebchuk, L. A., & Weisbach, M. S. (2010). The state of corporate governance research. Review of Financial Studies, 23(3), 939–961.
Blankespoor, E., Miller, G. S., & White, H. D. (2013). The role of dissemination in market liquidity: Evidence from firms’ use of Twitter™. The Accounting Review, 89(1), 79–112.
Boyd, J. H., Liu, Q., & Jagannathan, R. (2006). The stock market’s reaction to unemployment news, stock-bond return correlations, and the state of the economy. Journal of Investment Management, 4(4), 73–90.
Brainard, W. C., & Tobin, J. (1968). Pitfalls in financial model building. The American Economic Review, 58(2), 99–122.
Brammer, S., & Pavelin, S. (2006). Voluntary environmental disclosures by large UK companies. Journal of Business Finance & Accounting, 33(7–8), 1168–1188.
Brown, L. D., & Caylor, M. L. (2006). Corporate governance and firm valuation. Journal of Accounting and Public Policy, 25(4), 409–434.
Bushee, B. J., Core, J. E., Guay, W., & Hamm, S. J. (2010). The role of the business press as an information intermediary. Journal of Accounting Research, 48(1), 1–19.
Cai, Y., Jo, H., & Pan, C. (2012). Doing well while doing bad? CSR in controversial industry sectors. Journal of Business Ethics, 108(4), 467–480. doi:10.1007/s10551-011-1103-7.
Campbell, J. L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of management Review, 32(3), 946–967.
Capelle-Blancard, G., & Laguna, M.-A. (2010). How does the stock market respond to chemical disasters? Journal of Environmental Economics and Management, 59(2), 192–205.
Carroll, A. B. (1979). A three-dimensional conceptual model of corporate performance. Academy of Management Review, 4(4), 497–505.
Cheng, B., Ioannou, I., & Serafeim, G. (2014). Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), 1–23.
Cho, S. Y., Lee, C., & Pfeiffer, R. J. (2013). Corporate social responsibility performance and information asymmetry. Journal of Accounting and Public Policy, 32(1), 71–83.
Chollet, P., & Sandwidi, B. W. (2013). L’impact sur les marchés financiers européens de la diffusion d’alertes sociétales et de leurs évènements déclencheurs. Working paper.
Chung, K. H., & Pruitt, S. W. (1994). A simple approximation of Tobin’s Q. Financial Management, 23, 70–74.
Clarkson, P. M., Li, Y., & Richardson, G. D. (2004). The market valuation of environmental capital expenditures by pulp and paper companies. The Accounting Review, 79(2), 329–353.
Cremers, K., & Nair, V. B. (2005). Governance mechanisms and equity prices. The Journal of Finance, 60(6), 2859–2894.
Da, Z., Engelberg, J., & Gao, P. (2011). In search of attention. The Journal of Finance, 66(5), 1461–1499.
Derwall, J. (2007). The economic virtues of SRI and CSR. Erasmus Research Institute of Management (ERIM).
Di Giuli, A., & Kostovetsky, L. (2014). Are red or blue companies more likely to go green? Politics and corporate social responsibility. Journal of Financial Economics, 111(1), 158–180.
Doh, J. P., Howton, S. D., Howton, S. W., & Siegel, D. S. (2010). Does the market respond to an endorsement of social responsibility? The role of institutions, information, and legitimacy. Journal of Management, 36(6), 1461–1485.
Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. The Academy of Management Review, 20(1), 65–91. doi:10.2307/258887.
Drake, M. S., Roulstone, D. T., & Thornock, J. R. (2012). Investor information demand: Evidence from Google searches around earnings announcements. Journal of Accounting Research, 50(4), 1001–1040.
Du, S., Bhattacharya, C., & Sen, S. (2010). Maximizing business returns to corporate social responsibility (CSR): The role of CSR communication. International Journal of Management Reviews, 12(1), 8–19.
Du, S., Bhattacharya, C., & Sen, S. (2011). Corporate social responsibility and competitive advantage: Overcoming the trust barrier. Management Science, 57(9), 1528–1545.
Dyck, A., Moss, D., & Zingales, L. (2008). Media versus special interests. National Bureau of Economic Research.
Dyck, A., & Zingales, L. (2003). The media and asset prices. Working Paper, Harvard Business School.
Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, 101(3), 621–640.
El Ghoul, S., Guedhami, O., & Kim, Y. (2016). Country-level institutions, firm value, and the role of corporate social responsibility initiatives. Journal of International Business Studies, 00, 1–26.
El Ghoul, S., Guedhami, O., Kwok, C. C., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking & Finance, 35(9), 2388–2406.
Faccio, M. (2006). Politically connected firms. American Economic Review, 96(1), 369–386. doi:10.1257/000282806776157704.
Fiss, P. C., & Zajac, E. J. (2006). The symbolic management of strategic change: Sensegiving via framing and decoupling. Academy of Management Journal, 49(6), 1173–1193.
Flammer, C. (2013). Corporate social responsibility and shareholder reaction: The environmental awareness of investors. Academy of Management Journal, 56(3), 758–781. doi:10.5465/amj.2011.0744.
Fombrun, C. (1996). Reputation: Realizing value from the corporate image. Boston: Harvard Business Press.
Fombrun, C., Gardberg, N. A., & Barnett, M. L. (2000). Opportunity platforms and safety nets: Corporate citizenship and reputational risk. Business and Society Review, 105(1), 85–106.
Fombrun, C., & Shanley, M. (1990). What’s in a name? Reputation building and corporate strategy. Academy of Management Journal, 33(2), 233–258.
Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitman.
Friedman, M. (2002). The social responsibility of business is to increase its profits. Applied Ethics, 5, 57.
Frooman, J. (1997). Socially irresponsible and illegal behavior and shareholder wealth a meta-analysis of event studies. Business and Society, 36(3), 221–249.
Galema, R., Plantinga, A., & Scholtens, B. (2008). The stocks at stake: Return and risk in socially responsible investment. Journal of Banking & Finance, 32(12), 2646–2654.
Garcia-Castro, R., Ariño, M. A., & Canela, M. A. (2010). Does social performance really lead to financial performance? Accounting for endogeneity. Journal of Business Ethics, 92(1), 107–126.
Gode, D., & Mohanram, P. (2003). Inferring the cost of capital using the Ohlson–Juettner model. Review of Accounting Studies, 8(4), 399–431.
Godfrey, P. C., Merrill, C. B., & Hansen, J. M. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30(4), 425–445.
Gormley, T. A., & Matsa, D. A. (2014). Common errors: How to (and not to) control for unobserved heterogeneity. Review of Financial Studies, 27(2), 617–661.
Gray, R., Kouhy, R., & Lavers, S. (1995). Corporate social and environmental reporting: A review of the literature and a longitudinal study of UK disclosure. Accounting, Auditing & Accountability Journal, 8(2), 47–77.
Greening, D. W., & Gray, B. (1994). Testing a model of organizational response to social and political issues. Academy of Management Journal, 37(3), 467–498.
Groening, C., & Kanuri, V. K. (2013). Investor reaction to positive and negative corporate social events. Journal of Business Research, 66(10), 1852–1860. doi:10.1016/j.jbusres.2013.02.006.
Grullon, G., Kanatas, G., & Weston, J. P. (2004). Advertising, breadth of ownership, and liquidity. Review of Financial Studies, 17(2), 439–461.
Guenster, N., Bauer, R., Derwall, J., & Koedijk, K. (2011). The economic value of corporate eco-efficiency. European Financial Management, 17(4), 679–704.
Guidry, R. P., & Patten, D. M. (2012). Voluntary disclosure theory and financial control variables: An assessment of recent environmental disclosure research. Accounting Forum, 36(2), 81–90.
Hoffman, A. J. (2001). From heresy to dogma: An institutional history of corporate environmentalism. Stanford, CA: Stanford University Press.
Irvine, P. J. (2003). The incremental impact of analyst initiation of coverage. Journal of Corporate Finance, 9(4), 431–451.
Jiao, Y. (2010). Stakeholder welfare and firm value. Journal of Banking & Finance, 34(10), 2549–2561.
Johnson, H. H. (2003). Does it pay to be good? Social responsibility and financial performance. Business Horizons, 46(6), 34–40.
Kacperczyk, A. (2009). With greater power comes greater responsibility? Takeover protection and corporate attention to stakeholders. Strategic Management Journal, 30(3), 261–285.
Kang, J., & Kim, Y. H. (2013). The impact of media on corporate social responsibility. Available at SSRN 2287002.
Kiesler, S., & Sproull, L. (1982). Managerial response to changing environments: Perspectives on problem sensing from social cognition. Administrative Science Quarterly, 27, 548–570.
Kim, Y., Li, H., & Li, S. (2014). Corporate social responsibility and stock price crash risk. Journal of Banking & Finance, 43, 1–13.
Klassen, R. D., & McLaughlin, C. P. (1996). The impact of environmental management on firm performance. Management Science, 42(8), 1199–1214.
Klein, J., & Dawar, N. (2004). Corporate social responsibility and consumers’ attributions and brand evaluations in a product—Harm crisis. International Journal of Research in Marketing, 21(3), 203–217.
Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do managers withhold bad news? Journal of Accounting Research, 47(1), 241–276.
Krüger, P. (2014). Corporate goodness and shareholder wealth. Journal of Financial Economics, 115(2), 304–329.
Kuhnen, C. M., & Niessen, A. (2012). Public opinion and executive compensation. Management Science, 58(7), 1249–1272.
Lang, L. H., & Stulz, R. M. (1993). Tobin’s Q, corporate diversification and firm performance. National Bureau of Economic Research.
Liu, B., & McConnell, J. J. (2013). The role of the media in corporate governance: Do the media influence managers’ capital allocation decisions? Journal of Financial Economics, 110(1), 1–17.
López, M. V., Garcia, A., & Rodriguez, L. (2007). Sustainable development and corporate performance: A study based on the Dow Jones sustainability index. Journal of Business Ethics, 75(3), 285–300.
Lou, D. (2014). Attracting investor attention through advertising. Review of Financial Studies, 27(6), 1797–1829.
Luo, X., Wang, H., Raithel, S., & Zheng, Q. (2015). Corporate social performance, analyst stock recommendations, and firm future returns. Strategic Management Journal, 36(1), 123–136.
Luo, X., Zhang, J., & Duan, W. (2013). Social media and firm equity value. Information Systems Research, 24(1), 146–163.
Mackey, A., Mackey, T. B., & Barney, J. B. (2007). Corporate social responsibility and firm performance: Investor preferences and corporate strategies. Academy of Management Review, 32(3), 817–835.
Maignan, I., & Ferrell, O. (2004). Corporate social responsibility and marketing: An integrative framework. Journal of the Academy of Marketing Science, 32(1), 3–19.
Maignan, I., & Ralston, D. A. (2002). Corporate social responsibility in Europe and the US: Insights from businesses’ self-presentations. Journal of International Business Studies, 33(3), 497–514.
Marsat, S., & Williams, B. (2013). CSR and market valuation: International evidenc. Bankers, Markets & Investors, 123, 29–42.
Martin Curran, M., & Moran, D. (2007). Impact of the FTSE4Good Index on firm price: An event study. Journal of Environmental Management, 82(4), 529–537.
Martínez-Sola, C., García-Teruel, P. J., & Martínez-Solano, P. (2013). Corporate cash holding and firm value. Applied Economics, 45(2), 161–170.
McConnell, J. J., Servaes, H., & Lins, K. V. (2008). Changes in insider ownership and changes in the market value of the firm. Journal of Corporate Finance, 14(2), 92–106.
McWilliam, A., & Siegel, D. (2000). Corporate social responsibility and financial performance: Correlation or misspecification?. Strategic Management Journal, 21(5), 603–609.
McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 26(1), 117–127.
Meznar, M. B., & Nigh, D. (1995). Buffer or bridge? Environmental and organizational determinants of public affairs activities in American firms. Academy of Management Journal, 38(4), 975–996.
Mondria, J., & Wu, T. Asymmetric attention and stock returns. In AFA 2012 Chicago Meetings Paper, 2011.
Moneva, J. M., & Cuellar, B. (2009). The value relevance of financial and non-financial environmental reporting. Environmental & Resource Economics, 44(3), 441–456.
Montgomery, C. A., & Wernerfelt, B. (1988). Diversification, Ricardian rents, and Tobin’s Q. The Rand Journal of Economics, 19, 623–632.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175.
Nelson, P. (1974). Advertising as information. The Journal of Political Economy, 82(4), 729–754.
Oikonomou, I., Brooks, C., & Pavelin, S. (2012). The impact of corporate social performance on financial risk and utility: A longitudinal analysis. Financial Management, 41(2), 483–515.
Orlitzky, M. (2013). Corporate social responsibility, noise, and stock market volatility. The Academy of Management Perspectives, 27(3), 238–254. doi:10.5465/amp.2012.0097.
Palazzo, G., & Scherer, A. G. (2006). Corporate legitimacy as deliberation: A communicative framework. Journal of Business Ethics, 66(1), 71–88.
Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. The Review of Financial Studies, 22(1), 435–480.
Pfau, M., Haigh, M. M., Sims, J., & Wigley, S. (2008). The influence of corporate social responsibility campaigns on public opinion. Corporate Reputation Review, 11(2), 145–154.
Rodriguez, P., Siegel, D. S., Hillman, A., & Eden, L. (2006). Three lenses on the multinational enterprise: Politics, corruption, and corporate social responsibility. Journal of International Business Studies, 37(6), 733–746.
Roman, R. M., Hayibor, S., & Agle, B. R. (1999). The relationship between social and financial performance repainting a portrait. Business and Society, 38(1), 109–125.
Rountree, B., Weston, J. P., & Allayannis, G. (2008). Do investors value smooth performance? Journal of Financial Economics, 90(3), 237–251.
Salancik, G. R., & Pfeffer, J. (1978). A social information processing approach to job attitudes and task design. Administrative Science Quarterly, 23, 224–253.
Servaes, H., & Tamayo, A. (2013). The impact of corporate social responsibility on firm value: The role of customer awareness. Management Science, 59(5), 1045–1061.
Smith, C. W., & Watts, R. L. (1992). The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics, 32(3), 263–292.
Starbuck, W. H., & Milliken, F. J. (1988). Executives’ perceptual filters: What they notice and how they make sense. The Executive Effect, 35, 65.
Suchman, M. C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610.
Surroca, J., Tribó, J. A., & Waddock, S. (2010). Corporate responsibility and financial performance: The role of intangible resources. Strategic Management Journal, 31(5), 463–490.
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), 15–29.
Vanhamme, J., & Grobben, B. (2009). “Too Good to be True!”. The effectiveness of CSR history in countering negative publicity. Journal of Business Ethics, 85(2), 273–283.
Wang, M., Qiu, C., & Kong, D. (2011). Corporate social responsibility, investor behaviors, and stock market returns: Evidence from a natural experiment in China. Journal of Business Ethics, 101(1), 127–141.
Wang, T., & Bansal, P. (2012). Social responsibility in new ventures: Profiting from a long-term orientation. Strategic Management Journal, 33(10), 1135–1153.
Weick, K. E., Sutcliffe, K. M., & Obstfeld, D. (2005). Organizing and the process of sensemaking. Organization Science, 16(4), 409–421.
Weigelt, K., & Camerer, C. (1988). Reputation and corporate strategy: A review of recent theory and applications. Strategic Management Journal, 9(5), 443–454.
Wooldridge, J. M. (2003). Cluster-sample methods in applied econometrics. American Economic Review, 93(2), 133–138.
Yoon, Y., Gürhan-Canli, Z., & Schwarz, N. (2006). The effect of corporate social responsibility (CSR) activities on companies with bad reputations. Journal of Consumer Psychology, 16(4), 377–390.
Zhou, X. (2001). Understanding the determinants of managerial ownership and the link between ownership and performance: Comment. Journal of Financial Economics, 62(3), 559–571.
Zyglidopoulos, S. C., Georgiadis, A. P., Carroll, C. E., & Siegel, D. S. (2012). Does media attention drive corporate social responsibility? Journal of Business Research, 65(11), 1622–1627.
Acknowledgments
We acknowledge the support of the “CSR & Value” Chair from the University of Auvergne Foundation and are grateful to Asset4-Thomson Reuters for providing ESG Data. We thank the participants of the CRCGM workshop and CIGE 2014 international conferences for their suggestions and comments. The ideas, methodology, and findings expressed in this paper are the sole responsibility of the authors.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Aouadi, A., Marsat, S. Do ESG Controversies Matter for Firm Value? Evidence from International Data. J Bus Ethics 151, 1027–1047 (2018). https://doi.org/10.1007/s10551-016-3213-8
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10551-016-3213-8