Market liquidity and sustainable governance: evidence from ESG and gender diversity interactions

Purpose This paper aims to investigate the effect of environmental, social and governance (ESG) performance on stock market liquidity, focusing on the moderating role of gender diversity within corporate boards. Design/methodology/approach Based on a sample of 3,386 firm-year observations from the S&P 500 index over the period 2011–2023, the study applies the system generalized method of moments, a dynamic panel estimation technique that accounts for endogeneity, unobserved firm-level heterogeneity and temporal dependencies to analyze the relationship between ESG scores, board gender diversity and stock liquidity. Findings The authors show that increased ESG engagement correlates with a slight reduction in liquidity, likely due to short-term costs such as regulatory compliance and resource shifts. However, this negative impact is significantly lessened in firms with more gender-diverse boards, which enhance transparency and investor trust. Research limitations/implications The study offers valuable insights for regulators and corporate decision-makers seeking to align sustainability efforts with market efficiency. Practical implications The research you have provided has two main areas of practical and social implications: how board composition affects investment decisions and how regulatory actions can drive positive change. Practical implications for investors (both institutional and individual): the composition of a company’s board of directors, particularly its gender diversity, serves as a crucial signal. It provides a meaningful proxy for a company’s commitment to and credibility in ESG performance. This suggests that investors, in their evaluation process, can use board diversity as a key nonfinancial metric to better understand a company’s sustainability goals and overall governance. This can help them make more informed decisions about where to allocate their capital. For companies: the findings underscore the business case for gender diversity on boards. Companies can attract a wider range of investors by demonstrating a serious commitment to diversity. A more balanced board can be seen as an asset, signaling a more robust and credible approach to ESG that can appeal to a growing segment of the market focused on sustainable investment. Social implications For regulators and policymakers: the research offers a clear rationale for public policy interventions. Initiatives like gender balance mandates, enhanced reporting requirements or incentives for diverse boards are not just about social justice; they are a tool for promoting financial system stability. By encouraging more gender-diverse boards, policymakers can help foster more effective ESG strategies within companies, which, in turn, contributes to a more resilient and responsible market. For society at large: the study links corporate governance to broader social goals. It highlights that promoting gender equality in the corporate world – specifically at the highest levels of leadership – can have a tangible, positive effect on a company’s sustainability objectives. This suggests that the drive for a more equitable society is directly connected to the development of more sustainable and responsible business practices, benefiting both communities and the environment. Originality/value Although prior studies highlight that ESG initiatives and diverse leadership improve transparency and firm reputation, their combined influence on liquidity is not well understood.