Do ESG ratings mediate the relationship between board gender diversity and firm financial performance? Evidence from the U.S. Market

Abstract

The impact of board gender diversity on firm value is inconclusive. The paper investigates whether a firm’s environmental, social, and governance (ESG) performance mediates the relationship between board gender diversity and firm financial performance. The study employs a sample of 1514 non-financial firms listed on the National Association of Securities Dealers Automated Quotations (NASDAQ) and New York Stock Exchanges (NYSE) from 2016 to 2020. It reveals that a firm improves its ESG ratings and financial performance when there are more female directors on its board. When controlling ESG performance, the significant relationship between board gender diversity and firm performance turns insignificant, and ESG performance has a significant positive impact on a firm’s financial performance. These findings confirm the mediating role of ESG performance in the studied relationship. A firm’s management can refer to these findings to employ more women on its board, which creates additional firm financial value through better ESG practices. Investors may incorporate the factors of board gender diversity and corporate ESG performance into their investment decisions.