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ESG controversies and the cost of equity capital of European listed companies: the moderating effects of ESG performance and market securities regulation

Fabio La Rosa (Department of Law, University of Catania, Catania, Italy, and)
Francesca Bernini (Department of Economics and Management, University of Pisa, Pisa, Italy)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Article publication date: 29 August 2022

Issue publication date: 30 September 2022

2295

Abstract

Purpose

This paper aims to investigate the effect of environmental, social and governance (ESG) controversies on the cost of equity (COE) capital, exploring the moderating role of both positive ESG performance and market securities regulation.

Design/methodology/approach

This paper adopts a sample of 2,599 time observations related to European listed companies for which the authors examine a set of 30 negative ESG scores across the three pillars in terms of controversies, compliance and other negative issues. This study uses the average of seven implied COE estimates.

Findings

The results show that negative ESG performance, particularly environmental controversies, increases the COE, although this impact is mitigated when associated with company efforts to improve environmental performance. Besides, environmental controversies are likely to increase the COE in countries where the market regulation is stronger, as a consequence of higher investors’ expectations towards the scrutiny role of more efficient markets against companies’ controversies.

Practical implications

Companies should take care seriously of environmental issues such as biodiversity, product impact and resource impact, because investors do react accordingly. As despite no direct effects of positive ESG performance are observed in terms of COE reduction, the mitigating role on the ESG controversies–COE relationship makes ESG practices still significant for European investors.

Social implications

The effects of ESG performance on company financial performance should be investigated under the assumption that bad events weight more than positive ESG performance.

Originality/value

Because no prior studies have specifically assessed the effect of the European listed companies’ ESG controversies on their COE, this paper delivers insights into the relationship between positive and negative ESG performance and their effects on capital market financing.

Keywords

Acknowledgements

We would like to thank two anonymous reviewers for their very helpful comments and suggestions during the whole reviewing process.

Citation

La Rosa, F. and Bernini, F. (2022), "ESG controversies and the cost of equity capital of European listed companies: the moderating effects of ESG performance and market securities regulation", International Journal of Accounting & Information Management, Vol. 30 No. 5, pp. 641-663. https://doi.org/10.1108/IJAIM-03-2022-0047

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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