ESG controversies, corporate governance, and the market for corporate control

Figures & data

Table 1. Summary statistics.

	Mean	S.D.	25th	Median	75th
Environment, Social, and Governance (ESG)
ESG Controversies Score	82.924	29.214	75.000	100.000	100.000
ESG Score	38.334	19.478	23.115	34.315	51.330
Takeover Susceptibility
Hostile Takeover Index	0.192	0.106	0.109	0.168	0.273
Firm-specific Characteristics
Total Assets	16000.000	44000.000	2595.475	5258.250	12000.000
Total Debt/Total Assets	0.240	0.176	0.115	0.222	0.335
Capital expenditures/Total Assets	0.049	0.048	0.020	0.034	0.059
Advertising Expense/Total Assets	0.015	0.035	0.000	0.000	0.014
R&D Expense/Total Assets	0.029	0.053	0.000	0.004	0.035
Cash Holdings/Total Assets	0.150	0.147	0.042	0.101	0.209
Dividends/Total Assets	0.017	0.023	0.000	0.008	0.025
Fixed Assets/Total Assets	0.505	0.354	0.220	0.407	0.741
SG&A Expense/Total Assets	0.209	0.172	0.078	0.168	0.297
Profitability Measures
EBITDA/Total Assets	0.153	0.086	0.102	0.145	0.197
EBIT/Total Assets	0.112	0.084	0.065	0.105	0.155
ROA (Net Income/Total Assets)	0.059	0.088	0.030	0.063	0.102

The ESG controversies score is provided by Refinitiv. A high value of the score indicates fewer ESG controversies, relative to the industry peers. The hostile takeover index is constructed by Cain, McKewon, and Solomon (2017) primarily based on the staggered adoption of state legislations. A higher value of the takeover index suggests higher takeover vulnerability. The ESG score is also provided by Refinitiv. A higher value indicates more ESG activities. Total assets are in millions.

Table 2. The effect of hostile takeover vulnerability on ESG controversies.

	(1)	(2)
	ESG Controversies Score	ESG Controversies Score
Hostile Takeover Index	30.350***	27.897***
	(4.213)	(4.612)
Firm Size		−1.889
		(−1.237)
Leverage		1.291
		(0.297)
Profitability		23.173**
		(2.717)
Capital Investments		9.195
		(0.532)
Advertising Intensity		−40.102
		(−0.895)
R&D Intensity		22.930
		(1.197)
Cash Holdings		−3.539
		(−0.599)
Dividend Payouts		6.249
		(0.192)
Asset Tangibility		−2.200
		(−0.430)
Discretionary Spending		−9.881
		(−0.802)
ESG Score		−0.103
		(−1.560)
Constant	77.080***	98.146***
	(57.889)	(6.213)
Firm Fixed Effects	Yes	Yes
Year Fixed Effects	Yes	Yes
Observations	6,226	6,226
Adjusted R-squared	0.339	0.341

Robust t-statistics in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1.

The ESG controversies score is provided by Refinitiv. A high value of the score indicates fewer ESG controversies, relative to the industry peers. The hostile takeover index is constructed by Cain, McKewon, and Solomon (2017) primarily based on the staggered adoption of state legislations. A higher value of the takeover index suggests higher takeover vulnerability. The ESG score is also provided by Refinitiv. A higher value indicates more ESG activities.

Table 3. Propensity score matching.

Panel A: Diagnostic testing
	(1)	(2)
	Pre-Match	Post-Match
	Treatment (High Takeover Vulnerability)	Treatment (High Takeover Vulnerability)
Firm Size	0.286***	0.016
	(3.108)	(0.168)
Leverage	−0.666	−0.325
	(−1.347)	(−0.551)
Profitability	−1.542	−0.006
	(−1.516)	(−0.005)
Capital Investments	−5.516**	−1.135
	(−2.180)	(−0.441)
Advertising Intensity	2.036	1.292
	(0.752)	(0.373)
R&D Intensity	−1.654	0.471
	(−0.794)	(0.146)
Cash Holdings	−2.708***	0.168
	(−3.572)	(0.187)
Dividend Payouts	10.903***	−2.790
	(3.303)	(−0.700)
Asset Tangibility	0.351	−0.178
	(1.057)	(−0.485)
Discretionary Spending	−0.224	−0.451
	(−0.329)	(−0.611)
ESG Score	0.016***	0.001
	(4.143)	(0.132)
Constant	−3.684***	0.160
	(−4.290)	(0.176)
Pseudo R-squared	0.105	0.004
Observations	6,236	3,118
Robust z-statistics in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1.
Panel B: Regression analysis with propensity score matching
	(1)
	ESG Controversies Score
Hostile Takeover Index	18.071**
	(2.641)
Firm Size	−5.047
	(−1.687)
Leverage	6.233
	(0.704)
Profitability	41.566**
	(2.308)
Capital Investments	33.784
	(0.982)
Advertising Intensity	11.197
	(0.127)
R&D Intensity	89.780
	(1.004)
Cash Holdings	1.684
	(0.140)
Dividend Payouts	82.087*
	(1.900)
Asset Tangibility	2.438
	(0.291)
Discretionary Spending	−64.493**
	(−2.391)
ESG Score	−0.026
	(−0.248)
Constant	121.071***
	(4.051)
Firm Fixed Effects	Yes
Year Fixed Effects	Yes
Observations	3,003
Adjusted R-squared	0.419

The ESG controversies score is provided by Refinitiv. A high value of the score indicates fewer ESG controversies, relative to the industry peers. The hostile takeover index is constructed by Cain, McKewon, and Solomon (2017) primarily based on the staggered adoption of state legislations. A higher value of the takeover index suggests higher takeover vulnerability. The ESG score is also provided by Refinitiv. A higher value indicates more ESG activities.

Robust t-statistics in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1.

Table 4. Entropy balancing.

	(1)
	ESG Controversies Score
Hostile Takeover Index	16.990**
	(2.369)
Firm Size	−3.592
	(−1.366)
Leverage	7.107
	(0.896)
Profitability	39.423**
	(2.692)
Capital Investments	15.153
	(0.551)
Advertising Intensity	41.287
	(0.528)
R&D Intensity	76.967
	(0.603)
Cash Holdings	10.407
	(0.857)
Dividend Payouts	67.589
	(1.142)
Asset Tangibility	2.529
	(0.331)
Discretionary Spending	−42.105
	(−1.680)
ESG Score	−0.072
	(−0.909)
Constant	105.380***
	(3.858)
Firm Fixed Effects	Yes
Year Fixed Effects	Yes
Observations	6,226
Adjusted R-squared	0.394

Robust t-statistics in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1.

The ESG controversies score is provided by Refinitiv. A high value of the score indicates fewer ESG controversies, relative to the industry peers. The hostile takeover index is constructed by Cain, McKewon, and Solomon (2017) primarily based on the staggered adoption of state legislations. A higher value of the takeover index suggests higher takeover vulnerability. The ESG score is also provided by Refinitiv. A higher value indicates more ESG activities.

Table 5. Instrumental-variable analysis.

	(1)	(2)
	Hostile Takeover Index	ESG Controversies Score
Hostile Takeover Index (City-average)	0.454***
	(10.161)
Hostile Takeover Index (Instrumented)		56.186**
		(2.074)
Firm Size	−0.001	−1.874
	(−0.874)	(−1.575)
Leverage	−0.004	1.290
	(−0.929)	(0.329)
Profitability	0.006	22.888***
	(1.400)	(3.337)
Capital Investments	0.001	9.627
	(0.130)	(0.617)
Advertising Intensity	0.047**	−41.486
	(2.183)	(−1.213)
R&D Intensity	−0.007	22.873
	(−1.042)	(1.478)
Cash Holdings	−0.008**	−3.214
	(−2.343)	(−0.626)
Dividend Payouts	0.053**	3.895
	(2.129)	(0.154)
Asset Tangibility	−0.003	−2.170
	(−0.721)	(−0.558)
Discretionary Spending	−0.008	−9.435
	(−1.025)	(−1.113)
ESG Score	−0.000	−0.101***
	(−0.964)	(−2.797)
Constant	0.095***	102.050***
	(6.709)	(8.133)
Firm Fixed Effects	Yes	Yes
Year Fixed Effects	Yes	Yes
Observations	6,236	6,236
Adjusted R-squared	0.961	0.474
Cragg-Donald Wald F statistic	1735.44***

Robust t-statistics in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1.

The ESG controversies score is provided by Refinitiv. A high value of the score indicates fewer ESG controversies, relative to the industry peers. The hostile takeover index is constructed by Cain, McKeon, and Solomon (2017) primarily based on the staggered adoption of state legislations. A higher value of the takeover index suggests higher takeover vulnerability. The ESG score is also provided by Refinitiv. A higher value indicates more ESG activities.

Table 6. The effect of ESG controversies on profitability.

	(1)	(2)	(3)	(4)
	ROA	EBIT/Total Assets	EBITDA/Total Assets	Profitability Index
ESG Controversies Score	0.019***	0.009**	0.012**	0.219***
	(3.939)	(3.050)	(2.997)	(4.180)
Firm Size	−0.029**	−0.020***	−0.016	−0.362**
	(−2.357)	(−3.614)	(−1.301)	(−2.468)
Leverage	−0.144**	−0.062***	−0.099**	−1.641***
	(−2.941)	(−3.887)	(−2.197)	(−3.111)
Capital Investments	0.126	0.222***	0.141	2.908*
	(1.418)	(3.262)	(1.278)	(2.084)
Advertising Intensity	−0.036	0.017	0.060	0.274
	(−0.108)	(0.066)	(0.168)	(0.053)
R&D Intensity	−0.625***	−0.144	−0.345*	−5.771**
	(−4.129)	(−1.653)	(−1.787)	(−2.893)
Cash Holdings	0.012	0.002	−0.024	−0.045
	(0.315)	(0.089)	(−0.693)	(−0.093)
Dividend Payouts	0.708***	0.784***	0.976**	14.024***
	(3.635)	(5.333)	(3.031)	(4.115)
Asset Tangibility	−0.104***	−0.090***	−0.046	−1.356***
	(−3.633)	(−5.419)	(−1.427)	(−3.459)
Discretionary Spending	−0.033	0.092**	0.115	1.102
	(−0.537)	(2.491)	(1.769)	(1.299)
ESG Score	−0.000	0.000	−0.000	−0.001
	(−1.082)	(0.038)	(−0.055)	(−0.426)
Constant	0.399***	0.295***	0.299**	3.658**
	(3.360)	(5.375)	(2.436)	(2.537)
Firm Fixed Effects	Yes	Yes	Yes	Yes
Year Fixed Effects	Yes	Yes	Yes	Yes
Observations	6,226	6,226	6,224	6,224
Adjusted R-squared	0.385	0.696	0.593	0.616

Robust t-statistics in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1.

The ESG controversies score is provided by Refinitiv. A high value of the score indicates fewer ESG controversies, relative to the industry peers. The hostile takeover index is constructed by Cain, McKeon, and Solomon (2017) primarily based on the staggered adoption of state legislations. A higher value of the takeover index suggests higher takeover vulnerability. The ESG score is also provided by Refinitiv. A higher value indicates more ESG activities. For ease of interpretation, we divide the ESG controversies score by 100.

Table 7. The effect of ESG controversies on firm-specific risk.

	(1)
	Firm-Specific Risk
ESG Controversies Score	−0.010*
	(−1.834)
Firm Size	−2.860**
	(−2.466)
Leverage	5.737*
	(1.930)
Profitability	−27.884***
	(−3.737)
Capital Investments	−2.104
	(−0.213)
Advertising Intensity	24.683
	(1.164)
R&D Intensity	0.545
	(0.071)
Cash Holdings	3.108
	(1.117)
Dividend Payouts	−61.239**
	(−3.031)
Asset Tangibility	1.096
	(0.350)
Discretionary Spending	5.345
	(1.001)
ESG Score	0.008
	(0.501)
Constant	52.550***
	(4.801)
Firm Fixed Effects	Yes
Year Fixed Effects	Yes
Observations	3,758
Adjusted R-squared	0.728

Robust t-statistics in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1.

Daily stock returns are regressed against daily market returns. Then, we calculate the standard deviation of the regression's residuals. This variable captures idiosyncratic risk by excluding the influence of broad market risk The ESG controversies score is provided by Refinitiv. A high value of the score indicates fewer ESG controversies, relative to the industry peers. The hostile takeover index is constructed by Cain, McKewon, and Solomon (2017) primarily based on the staggered adoption of state legislations. A higher value of the takeover index suggests higher takeover vulnerability. The ESG score is also provided by Refinitiv. A higher value indicates more ESG activities.

Table A1. Variable definitions.

Variable	Definition
ESG
ESG Controversies Score	The ESG Controversies Score from Refinitiv indicates the percentile rank score
	of a firm’s engagement in ESG controversial activities relative to its industry
	peers. The higher the score, the fewer ESG controversies the firm engages in
ESG Score	The ESG Score from Refinitiv indicates the percentile rank score of a firm’s
	engagement in ESG activities relative to its industry peers. The higher
	the score, the more ESG activities the firm engages in
Hostile Takeover Exposure
Hostile Takeover Index	This index is constructed by Cain, McKeown, and Solomon (2017) based
	on state legislations, capital liquidity, and firm age
Firm-specific Characteristics
Firm Size	Total Assets
Leverage	Total Debt/Total Assets
Profitability	EBIT/Total Assets
Capital Investments	Capital Expenditures/Total Assets
Advertising Intensity	Advertising Expense/Total Assets
R&D Intensity	R&D Expense/Total Assets
Dividend Payouts	Dividends/Total Assets
Cash Holdings	Cash Holdings/Total Assets
Discretionary Spending	SG&A Expense/Total Assets
Asset Tangibility	Fixed Assets/Total Assets
Alternative Profitability Measures
EBITDA Ratio	EBITDA/Total Assets
ROA	Net Income/Total Assets

Table A2. Instrumental-variable analysis with additional control variables.

	(1)	(2)
	Hostile Takeover Index	ESGControversies Score
Hostile Takeover Index (City-average)	0.456***
	(3.904)
Hostile Takeover Index (Instrumented)		53.425**
		(1.969)
Firm Size	−0.002	−2.127*
	(−0.539)	(−1.745)
Leverage	−0.005	2.650
	(−0.654)	(0.658)
Profitability	0.002	23.613***
	(0.354)	(3.273)
Capital Investments	0.002	7.453
	(0.173)	(0.473)
Advertising Intensity	0.053	−45.798
	(1.069)	(−1.244)
R&D Intensity	−0.006	18.406
	(−0.484)	(1.161)
Cash Holdings	−0.008	−0.939
	(−1.160)	(−0.180)
Dividend Payouts	0.066	−12.742
	(1.244)	(−0.467)
Asset Tangibility	−0.004	−3.257
	(−0.412)	(−0.813)
Discretionary Spending	−0.010	−7.067
	(−0.583)	(−0.814)
ESG Score	−0.000	−0.108***
	(−0.207)	(−2.969)
Staggered Boards	0.007**	1.552
	(2.299)	(0.988)
Share Repurchases	0.003	−5.709
	(0.345)	(−0.806)
Constant	0.126***
	(3.341)
Firm Fixed Effects	Yes	Yes
Year Fixed Effects	Yes	Yes
Observations	6,066	6,066
Adjusted R-squared	0.960	0.343
Cragg-Donald Wald F statistic	1696.05***

Robust t-statistics in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1.

The ESG controversies score is provided by Refinitiv. A high value of the score indicates fewer ESG controversies, relative to the industry peers. The hostile takeover index is constructed by Cain, McKeon, and Solomon (2017) primarily based on the staggered adoption of state legislations. A higher value of the takeover index suggests higher takeover vulnerability. The ESG score is also provided by Refinitiv. A higher value indicates more ESG activities.

Table A3. Regression analysis with additional control variables.

	(1)
	ESG Controversies Score
Hostile Takeover Index	16.174**
	(2.354)
Firm-specific Characteristics
Firm Size	−9.613***
	(−7.461)
Leverage	8.854
	(1.605)
Profitability	18.629*
	(1.928)
Capital Investments	28.451
	(1.649)
Advertising Intensity	−63.617*
	(−1.980)
R&D Intensity	−2.324
	(−0.161)
Cash Holdings	−16.747***
	(−3.147)
Dividend Payouts	−21.160
	(−0.771)
Asset Tangibility	−5.643**
	(−2.203)
Discretionary Spending	−7.184
	(−1.184)
ESG Score	−0.193**
	(−2.940)
Board Characteristics
Ln (Board Size)	7.954*
	(1.872)
Board Independence (% Independent Directors)	−0.035
	(−0.706)
Board Gender Diversity (% Female Directors)	0.059
	(0.798)
Board Ethnic Diversity (% Ethnic Minority Directors)	−0.036
	(−0.848)
Institutional Ownership
Institutional Ownership (%)	14.433***
	(4.721)
Industry-level Variables
Herfindahl Index (Market Competition)	−4.918
	(−1.398)
Industry Leverage	−9.220
	(−1.175)
Industry Profitability	−33.570*
	(−1.811)
Constant	153.005***
	(12.982)
Year Fixed Effects	Yes
Observations	4,139
Adjusted R-squared	0.237

Robust t-statistics in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1.

The ESG controversies score is provided by Refinitiv. A high value of the score indicates fewer ESG controversies, relative to the industry peers. The hostile takeover index is constructed by Cain, McKewon, and Solomon (2017) primarily based on the staggered adoption of state legislations. A higher value of the takeover index suggests higher takeover vulnerability. The ESG score is also provided by Refinitiv. A higher value indicates more ESG activities.

Cain, M.D., S.B. McKeon, and S.D. Solomon. 2017. Do takeover laws matter? Evidence from five decades of hostile takeovers. Journal of Financial Economics 124, no. 3: 464–485. doi:10.1016/j.jfineco.2017.04.003.

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