Does effective corporate governance mitigate the negative effect of ESG controversies on firm value?

Abstract

This study examines the effect of corporate governance on the relationship between ESG controversies and firm value. Panel data consisting of 883 non-financial Chinese listed firms from 2018 to 2022 are analyzed. We find a significant and negative impact of ESG controversies on firm value. The presence of effective corporate governance is found to mitigate the negative impact of ESG controversies on firm value. The findings are robust to the two step GMM, 2SLS method and heteroskedasticity test. Then we explore the influence of internal governance factors and external corporate governance factors respectively. Among the internal factors, we find that board gender diversity, board independence, equity incentive, and high reputation VC/PE shareholdings all have a significant and positive impact, while board size and sustainability committees have no significant impact. In terms of external governance factors, ESG controversies in regions with fierce market competition have a relatively small impact on firm value, while those in regions with perfect legal environment have a more severe impact on firm value. Further analysis shows that environmental, social and governance controversies urge enterprises to improve their environmental and social performance and reduce inefficient investment respectively, and these effects are more pronounced in the corporate governance group with high level. However, governance controversies have no impact on accounting information quality. These findings have important policy implications for managers and practitioners by supporting the idea of companies adopting appropriate corporate governance practices that can effectively mitigate the negative effects of corporate controversies.