ESG controversies, corporate governance, and the market for corporate control

Abstract

ABSTRACT Capitalizing on a unique measure of takeover vulnerability, we examine how the takeover market, which is widely regarded as a crucial instrument of external governance, influences environmental, social, and governance (ESG) controversies. This paper is the first to investigate how corporate control markets are influenced by the market for corporate control. The sample consists of unbalanced panel data from 6,236 firm-year observations during 2002–2014. We use Propensity Score Matching (PSM) and Instrumental Variable (IV) analyses to address potential endogeneity, and entropy-balancing approach to address the issue of observable selection. The results show that the disciplinary mechanism associated with the takeover market compels managers to take actions that benefit shareholders, thus avoiding ESG controversies. An increase in takeover susceptibility by one standard deviation resulted in a 10.12% decline in controversial activities. Furthermore, we find that firm profitability drops, and risk increases substantially in response to ESG controversies.