ESG Controversies and Firm Value : Moderating Role of ESG Performance

This study investigates whether Environmental, Social, and Governance (ESG hereafter) controversies affect firm value in Korea. Moreover, based on a risk management perspective on ESG performance, this study analyzes whether firms causing ESG controversies can benefit from ESG engagement. Using unique research setting in Korea, this study reveals a negative and significant relationship between ESG controversies and firm value. In this study, a fixed-effect panel regression model is applied to examine the moderating effect of ESG performance. As a result, the loss of firm value partially recovers from ex-ante ESG activities before the ESG controversies. The findings are robust when conducting a subgroup analysis indicates that ESG performance has a moderating effect in the face of negative ESG controversial issues only for highly visible firms such as (1) a large conglomerate commonly called ‘chaebol’, (2) more searched on the Internet and (3) high analyst coverage. In sum, this study contributes to the literature on ESG and stakeholder theory and sheds light on the negative consequences of controversies and the insurance-like effect of ESG performance on the controversies. These findings encourage corporate executives to engage in ESG activities for risk management purposes