Can Sustainability (ESG) Controversies Be Offset with Advertising? An Empirical Investigation into Advertising, Negative ESG, and Firm Value

Can advertising improve firm value following an incident of negative sustainability (i.e., a negative environmental, social or governance (NESG) occurrence?) This study provides an empirical investigation into NESG, its individual domains, and the mitigating role of advertising on firm value. We investigate firm level ESG sustainability violations and any corresponding advertising expenditures, utilized to counter negative opinions. First, we examine whether an NESG occurrence reduces firm value. Next, we investigate if firms experiencing an NESG occurrence alter their advertising expenditures and assess the resulting impact of this advertising spending on firm value. Finally, we determine if certain NESG occurrences benefit more from advertising than others. Using a sample of firms which engaged in at least one NESG event between 1995 and 2019, we find that firms increase advertising as a way to engage in damage control. Increasing advertising expenditures to offset NESG occurrences ultimately impacts firm value. Specifically, increasing advertising helps to reduce the NESG occurrence’s effect on firm value, but the individual domains of ESG do not respond the same to advertising efforts, suggesting that advertising as a mitigation tool remains nuanced, with the greatest positive effect being for environmental crises, no significant effect for social crises, and a negative effect for governance crises.