How do ESG controversies moderate the nexus between ESG performance and cost of capital? Evidence from European listed companies (UNDER REVIEW)



Year of publication 2024
Type Article in Periodical
Magazine / Source Managerial Finance
MU Faculty or unit

Faculty of Economics and Administration

Keywords ESG performance, controversies, responsibility, cost of equity, cost of debt, financing cost, moderating effect
Description ESG (environmental, social, and governance) controversies serve as a means of alerting stakeholders to negative news and scandals related to companies’ harmful ESG practices, which can influence stakeholders’ perceptions of risk and affect the cost of provided capital to the affected companies. This study aims to investigate the effect of ESG controversies and their moderating role in the relationship between ESG performance and the cost of equity and overall, short-term and long-term debt capital of European listed companies in 2017–2022. The study employs two-way fixed effects panel linear regression models on the balanced longitudinal dataset of 231 European non-financial companies listed in the MSCI Europe Index. The results suggest a crossover moderating effect of ESG controversies in ESG performance and cost of equity relationship. Additionally, the results reveal the significant effect of ESG performance (negative) and ESG controversies (positive) on the cost of debt capital and the substantial moderating effect of ESG controversies. The findings contribute to corporate practice and empirically support legitimacy and stakeholder theories.
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