Quality of corporate governance, firm value, and ESG controversies: Further evidence

This study focuses on the relationship between corporate governance quality and environmental, social, and governance (ESG) controversies and how these two affect firm value. The study differs from recent and contemporaneous research on ESG controversies in that we use corporate governance indices that not only focus on the basic attributes required in corporate governance codes but also features that dictate how corporate boards (and executives) operate (behave). In addition, we examine the mediation effect of ESG controversies on the corporate governance-firm value relationship. We apply agency, legitimacy, and structural contingency theories to support our hypotheses that firms with high environmental-related ESG controversies are more likely to structure their corporate governance differently, and with higher quality, than those with low controversies. We also contend that environmental-related ESG controversies mediate the relationship between firm value and corporate governance. With 6,043 firm-year observations spanning the 2010–2023 period, we construct three corporate governance indices that together comprise 22 board features. We conduct both univariate analysis and multivariate analysis, including mediation analysis, in SAS software. We find significant empirical support for our hypotheses and reveal that the basic characteristics of corporate governance do not influence firm value. Our findings support the transparent reporting hypothesis of corporate governance and not the opportunistic reporting hypothesis. We conclude that firms with ESG controversies have significantly higher corporate governance quality and lower firm value. Furthermore, ESG controversies significantly mediate this relationship. We also discuss the limitations of our study and recommend areas of further research.