Technological Forecasting & Social Change 162 (2021) 120341

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Technological Forecasting & Social Change

journal homepage: www.elsevier.com/locate/techfore

Corporate controversies and company's financial performance: Exploring the T

moderating role of ESG practices
Niccolò Nirinoa, , Gabriele Santoroa, Nicola Migliettaa, Roberto Quagliab
⁎

a
Department of Management – University of Turin
b
ESCP Europe, Paris, France

ARTICLE INFO ABSTRACT

Keywords: The topic of corporate social responsibility (CSR), along with the related environmental, social and governance
Controversies (ESG) pillars, is playing a key role in the literature and is attracting increasing interest among managers and
Csr policymakers. Nevertheless, we still know little about how and whether corporate controversies, which are
Esg strictly related to CSR, impact firm performance. As a result, this study aims to explore the impact of corporate
Performance
controversies on financial performance, and proposes the positive moderating role of ESG practices over the
Sustainability
aforementioned relationship. Using a database of 356 European listed companies, linear regression models
confirm a negative and significant relationship between corporate controversies and financial performance.
However it was not possible to confirm the positive moderating effect of ESG practices on the relationship
between controversies and financial performance. The study contributes to the literature on CSR and stakeholder
theory, shedding light on the negative consequences of controversies and indicating that, despite no mitigating
effects of ESG practices on the controversies/performance relationship have been found, ESG practices are
important for addressing stakeholders’ needs. Regarding managerial implications, this study underlines that
controversies are detrimental for firm performance, and that ESG practices should not serve as means for mi-
tigating the negative effects of controversies, but rather as ways for avoiding controversies.

Introduction and explore the benefits that sustainable practices can bring to a
company's performance, along with the value created for several sta-
Corporate social responsibility (CSR) has become a priority for keholders (Fiandrino et al., 2019; Li et al., 2019). In fact, there is evi-
companies which engage in CSR initiatives to increase their competi- dence in the literature about the positive impact of ESG efforts and CSR
tiveness, to support their reputation in the eyes of different stake- strategies on company performance, such as financial performance,
holders, to meet the laws and regulations of the countries in which they employee commitment, innovation, and corporate reputation
operate, and to be in line with established corporate values (Ghouri et al., 2019; Inigo and Albareda, 2019; Liu et al., 2014;
(Aguilera et al., 2007; Becker-Olsen et al., 2006; Campbell, 2007; Rettab et al., 2009; Sanchez et al., 2020). However, regarding the effect
Del Giudice et al., 2017). Actions related to the principles of safe- of CSR strategies on financial performance, the debate in the literature
guarding the environment and people are increasingly impacting is more complex, because there are studies that also highlight negative
modern societies and leading to important social changes (Surana et al., or insignificant effects (Kim et al., 2018; Nirino et al., 2019).
2020). In fact, companies are coping with pressures received by sta- From another perspective, problems such as global warming or
keholders and society at large to rethink their business in a more ethical plastic pollution make it necessary for companies to approach these
and sustainable way in order to come up against the changes that our phenomena and change the way they run business (Obbard et al., 2014;
society is facing (Bogers et al., 2020). As a result, the environmental, Tardivo et al., 2017). This leads them to rethink their value chain
social, and governance (ESG) factors are increasingly involved in cor- structures, to reconceive governance mechanisms, and to innovate
porate strategies and scholarly debate in recent years (Durand et al., business models (G. Santoro et al., 2018; Centobelli et al., 2020).
2019; Raimo et al., 2020). However, even if it seems logical for companies to implement actions
Hence, scholars and managers have increasingly begun to analyze related to the protection of the environment and communities, they do

Corresponding author.
⁎

E-mail addresses: [email protected] (N. Nirino), [email protected] (G. Santoro), [email protected] (N. Miglietta),
[email protected] (R. Quaglia).

https://doi.org/10.1016/j.techfore.2020.120341
Received 16 June 2020; Received in revised form 8 September 2020; Accepted 22 September 2020
Available online 05 October 2020
0040-1625/ © 2020 Elsevier Inc. All rights reserved.
N. Nirino, et al. Technological Forecasting & Social Change 162 (2021) 120341

not always comply with laws and standards, or they do not invest en-
ough of their budget in CSR initiatives. In this case, the actions and
choices of managers that are not in line with sustainability principles
can give rise to disputes and have a negative impact on their reputation
(Janney and Gove, 2011).
In fact, scandals and controversies have the potential to jeopardize a
company's reputation and thus have a negative impact on company
performance (Walsh et al., 2009). For example, the Boeing scandal with
the Boeing 737 Max has led the company to lose value on the stock
exchange and has damaged its reputation. In line with this, the financial
crisis of 2007/2008 and the shady actions of some banks and credit Fig. 1. conceptual model and hypotheses.
institutions uncovered an obscure image of the financial sector and
banking actors. The firm's reputation is a key element to enhance its
variables. In the fourth section, we perform the analysis and discuss the
performance (Aguilera et al., 2007). In this context, Kim et al. (2018)
findings. The last section presents the implications of the study and
suggested that a company's sustainable practices increase a firm's re-
underlines its relevance from a theoretical and managerial point of
putation and performance due to its commitment to the well-being of
view.
future generations.
According to the literature, controversy arises when a firm is in-
volved in actions or incidents that can adversely impact its stakeholders Literature review and hypotheses development
and the environment (Li et al., 2019). Nevertheless, the literature seems
to neglect the concept of corporate controversy and its link with the ESG practices, corporate controversy, and financial performance
related topic of CSR. Moreover, there is a gap regarding the effect of
corporate controversies on a company's performance. An exception is In the past, the corporate finance literature has considered share-
the study by Li et al. (2019), which suggests that, in case of disputes and holder value maximization as the only company objective
controversies, a company establishes new CSR strategies to bring the (Jensen, 2001; Battisti et al., 2019). However, the stakeholder theory
relationship with stakeholders back to the pre-controversy level. Hence, has proposed other firm's objectives are tied to stakeholder's interest
companies use symbolic ESG strategies after an event to mitigate the (Freeman, 1999), giving rise to the CSR field of research (Rey-Martí
negative impact in the short term. However, we still know little of et al., 2016; Belyaeva et al., 2020).
whether or how much controversies impact financial performance. This CSR has a long history, which evolved with the development of
paper tries to fill this gap by adding to the study of Li et al. (2019), businesses and led to emerging society needs (Burke and
shedding light on the relationship between corporate controversies and Logsdon, 1996; Ferrell et al., 2019). From a company's perspective, CSR
financial performance, and proposing the moderating role of ESG disclosure represents sharing information in the annual report that is
practices in the sense that ESG practices alleviate the negative effects of related to certain operations, activities, and programs deemed to affect
controversies on performance. both the public and general stakeholders (Chan et al., 2014). Previous
More specifically, we assume that the impact of corporate con- studies have also proven that CSR disclosure has a major impact on
troversies on financial performance is negative and that the establish- building trust, which is a prerequisite of corporate reputation
ment of ESG practices reduces this negative impact. To test the research (Park et al., 2014).
hypotheses, we collected data from 365 European listed companies CSR strategies cover a wide range of practices that companies can
operating in different manufacturing and service sectors, and we per- implement to meet the expectations of different stakeholders such as
formed ordinary least squares (OLS) regression analysis. the environment, society, and shareholders (Erhemjamts and
The results highlight a negative and significant relationship between Huang, 2019; Fiore et al., 2020). To capture the essence of CSR, the
controversies and performance and a negative moderating effect of ESG acronym ESG has recently been created (Environmental, Social, and
practices on the above mentioned relationship. Overall, the paper aims Governance).
to put forward the main following theoretical and managerial im- Hence, ESG strategies have become policies applied by companies to
plications. First, the study contributes to the literature on CSR by pro- achieve objectives related to the environment and society that meet the
viding empirical evidence about the negative relationship between needs of all the stakeholders (Luo and Bhattachrya, 2006;
corporate controversy and financial performance. Second, the study Bresciani et al., 2016). Following the resource based view (RBV), en-
contributes to the literature by indicating that ESG practices do not vironmental and social activities can lead to the development of a
reduce the negative impact of controversies on financial performance. competitive advantage by creating unique skills and competences
In particular, we shed light on the negative consequences of con- within a company (Hull and Rothenberg, 2008; Dressler and Paunović,
troversies and we underlined that, despite no mitigating effects of ESG 2019). When a company undertakes actions aimed at safeguarding the
strategies on the controversies/performance relationship have been environment and the well-being of future generations, it increases its
found, ESG practices are important for addressing stakeholders’ needs. reputation towards the various stakeholders (Kim et al., 2018).
Fig. 1. However, many studies about the impact of the ESG strategies on
From a managerial perspective, we underline how choices related to financial performance have shown different set of results: i.e., positive,
ESG practices could create a favourable environment within a company negative or mixed results (McWilliams et al., 2006). In fact, the ESG-
in which fraudulent practices would decrease firm's reputation and fi- financial performance relationship is more complex than a simple
nancial performance. Moreover, we suggest that managers have to cause-effect relationship, and many factors must be considered in order
consider sustainable practices as a way to increase the company's re- to understand the impact of one variable on the other. For example,
putation. However, we also advise managers that ESG practices do not customers could be sceptical about CSR initiatives (Luo and
re-establish the situation to a pre-controversy level, and that ESG Bhattachrya, 2006; Skarmeas and Leonidou, 2013), thus making these
practices are not enough to avoid a decrease in performance due to strategies ineffective. Some scholars argue that ESG practices represent
controversies. only a cost for a company, thus not bringing a real benefit for it and in
The paper is organized as follows. The next section presents the turn decreasing performance (Kim and Lyon, 2015). By contrast, others
literature and the development of the hypotheses. The third section (e.g., Porter and Kramer, 2006) have underlined the positive effect of a
shows the methodology with an explanation of the sample and company's sustainable behavior on financial performance. In fact, a

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company's environmental and social concerns can bring benefits in sustainable practices are real strategic actions, which can be seen as a
multiple areas such as reducing taxes, decreasing operational risks, cost in the short term but can really have a greater effect on perfor-
improving the ability to conclude more favourable contracts, retaining mance in the long run (Wang and Sarkis, 2017).
consumers, and increasing their favourable reputation (Malik, 2015). However, despite these benefits provided by ESG practices, some-
One of the relevant aspects of CSR, which seems to be overlooked in times companies rely on irresponsible behaviours (e.g., Boeing, Enron,
the literature, concerns corporate controversies which arise when a Parmalat, etc.) (Jasinenko et al., 2019). When it turns out that a com-
company is involved in actions or incidents that may have a negative pany is involved in controversies, the company begins to develop pro-
impact on its stakeholders and the environment (Li et al., 2019). Con- grams related to the protection of the environment, local communities,
troversies often put a firm's reputation at risk and call for effective and human rights (Livesey and Kearins, 2002). These programs can be
actions by the firm to counter the adverse effects of the controversies. In defined as “reacting social changes” in response to negative actions in
such circumstances, firms are likely to engage in CSR as a means to order to mitigate their effects. However, there is also “proactive social
restore their loss of reputation (Becker-Olsen et al., 2006). change”. According to this, companies implement actions to develop a
In the literature, it is widely accepted that a firm's reputation is a corporate culture linked to ethical and sustainability principles without
key element to enhance financial performance (e.g., Aguilera et al., being previously involved in controversies or scandals. Hence, this
2007; Li et al., 2019). In fact, a positive company reputation creates manifests itself in better social, environmental, and profit performance
loyalty among customers who identify with it, leading to value creation (Hart & Milstein, 2003).
over time (Roberts and Dowling, 2002; Saedi et al., 2015). By contrast, As a consequence, when a company is more engaged in environ-
each stakeholder (e.g., shareholders, customers, suppliers, and em- mental and social practices, stakeholders and communities are more
ployees) can have a positive or negative opinion of a company at the likely to trust the company, reacting in a less negative way to any ne-
same time (Gatzert et al., 2015). gative events. However, if these practices are only symbolic, they can't
A negative perception of the company by stakeholders can lead to mitigate the loss of confidence from stakeholders. As suggested by Klein
various consequences, such as lawsuits, revenue losses, increased fi- & Dawar (2004), if a company has implemented sustainability practices
nancial risk, and an increase in the cost of debt (Lange and in the past, they are able to decrease the risk of losing reputation after a
Washburn, 2012). Thus, corporate controversies (e.g., downsizing and negative event. In particular, real sustainable actions can enhance a
corporate crime) may damage a company's image and reputation. Love firm's reputation among stakeholders and lead to better financial per-
& Kartz (2009) underlined how an event like downsizing has a negative formance (Park et al., 2014). As such, it is reasonable to assume that
effect on employees (layoff) but a positive effect for shareholders. sustainable actions pursued by firms allow them to alleviate the nega-
Further, as underlined by Pierce (2018), criminal actions have a ne- tive effects of controversies and a negative reputation. Based on these
gative impact for shareholders by increasing the agency cost, which can considerations, we propose the following:
be a deterrent for taking actions that are against the law or against HP. 2. : ESG practices positively moderate the relationship between
corporate ethics. When a company has many ongoing controversies, it corporate controversies and financial performance in the sense that
is reasonable to forecast a decrease in its financial performance in re- higher ESG practices alleviate the negative effects of controversies on
sponse to the reactions of its stakeholders. In particular, in the case of financial performance.
listed companies, the market can also over-react to such events and
make the impact even greater. In fact, a decrease in reputation due to
corporate controversies leads to a decrease in trust. Hence, stakeholders Methodology
may undertake actions against the company. For example, customers
may no longer buy the company's products, suppliers may no longer Research design and sample
supply their products, governments may impose fines and penalties,
and shareholders may sell their stocks due to the loss of trust. The research design is based on an inductive quantitative metho-
Based on these considerations, we propose the following hypothesis: dology in order to test the relationship among corporate controversies,
HP. 1. : Corporate controversies negatively impact a firm's financial ESG practices, and financial performance. The quantitative approach is
performance justified by the fact that the study aims to test relationships in line with
previous studies on the subject (Chen et al., 2018; Hernández et al.,
2020; Singh et al., 2020). The sample selection is based on the STOXX
Moderating effect of ESG practices in the controversy and financial Europe 600 index which includes the 600 largest companies listed in
performance relationship Europe. The data was extracted from Thomson Reuter's Datastream,
database that reports the main economic and financial information and
Several studies have confirmed a positive effect of ESG investments data on ESG parameters with regard to the sustainability indices. Pre-
on a firm's financial performance (e.g., Bird et al., 2007; Margolis et al., vious studies in management and finance have already used this data-
2009; Franceschelli et al., 2019). The implementation of such actions base, thanks to the completeness of the information it contains (e.g.,
allows firms to achieve a competitive advantage by increasing the re- Akbas et al., 2018; Nirino et al., 2019). Therefore, we used secondary
lationship of trust with the company's stakeholders in the long run and data to test the relationships, which is in line with previous studies
consequently foster good financial performance (Donaldson and (Li et al., 2019; Franceschelli et al., 2019), because the research deals
Preston, 1995; Birindelli et al., 2015). In particular, sustainability with variables and data for large European companies that would be
practices show a positive image of the company, thus impacting its hard to gather in a different way.
reputation and customer's brand loyalty (Franceschelli et al., 2018; Due to different accounting standards, we decided to exclude banks
Santoro et al., 2019). Based on institutional perspectives, companies are and insurance companies. Including them would not have allowed a
engaged in environmental and social actions due to the pressure of comparison of the financial statements (Doni et al., 2019). In fact,
stakeholders (Sharma and Henriques, 2005; Aguinis and Glavas, 2012). banks and insurance companies follow different rules for writing their
More specifically, there are two main types of sustainable practices that financial statements when compared to industrial companies. This
business may implement: symbolic or substantive. As suggested by means that some accounting measures cannot be compared, and this
Kim et al. (2012) companies are engaged in symbolic sustainable would lead to a distortion of the results. For this reason, as suggested by
practices only to show a temporary positive image to their stakeholders. Doni et al. (2019), it is useful to separate financial companies from
In this way, companies that do not invest real resources to achieve the industrial ones, perhaps by carrying out two different studies. We also
goals may lose credibility over time. On the other hand, the substantive excluded all companies whose financial performance indicators or ESG

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were not available. The final sample is composed of 356 companies. the variables.

Variables Research findings

We used three different variables of performance in order to explore Descriptive statistics

potential differences. First, we used Tobin's Q ratio (Tobin, 1969) which
is a measure widely applied in management and financial fields of re- Before presenting the results of the regression analysis implemented
search when assessing the impact of sustainable practices within busi- to test the hypotheses developed in the first part of the paper, we
nesses (Kim et al., 2019). Tobin's Q is determined by the sum of market present the descriptive statistics and the correlations between the
capitalization plus the liabilities of the firm divided by total assets. variables tested (Table 2). The dependent variable (Tobin's Q) has an
To explore the effects of disputes on different measures of perfor- average value of 1.67 with a standard deviation of 1.97. The in-
mance, we also used firm's Return on Equity (ROE) and Return on dependent variable (CONT) has an average value of 43.13 with a
Assets (ROA), which are usually defined as accounting measures of standard deviation equal to 22.73. The ESG score has an average value
performance (Waddock & Graves, 1997). ROE can be defined as the of 67.30 and standard deviation of 13. To test the correlation between
ratio between a firm's net income and average shareholder equity, variables, we performed Pearson's correlation. As shown in Table 2, the
while ROA is the ratio between net income and total assets. variables do not have a high correlation among them, suggesting that
Data on controversies are based on the controversies score there are no multicollinearity problems (Allen, 1997). In detail, Tobin's
(Aouadi and Marsat, 2018; Li et al., 2019). This is measured by con- Q is positively correlated with controversy but negatively with ESG. It is
sidering the number of controversies for environmental, social, and also positively correlated with the level of liquidity but negatively with
governance issues and also other negative events that firms have faced asset and employees. In turn, controversy is negatively correlated with
during the year. Thomson Reuters define the score as follows: “The ESG all of the variables. Furthermore, to avoid any multicollinearity issues,
controversies score is calculated based on 23 ESG controversy topics. During we calculated the variance inflation factors (VIF). The results range
the year, if a scandal occurs, the company involved is penalized and this from 1.027 to 1.865, and they are below the threshold accepted by the
affects their overall controversies score and grading”. previous literature (Hair, 1995).
Data on sustainable practices are based on the ESG score.
Nollet et al. (2016) underlined that the ESG score is one of the best Research findings
parameters to measure these practices and their effect on the environ-
ment, society, and business. The overall ESG score considers three types To test our research hypotheses, we used the ordinary least square
of elements: environment, social, and governance. The environmental (OLS) model, which is a method widely used in management and fi-
score takes into account items such as water waste, pollution, use of nance literature when evaluating the impact of sustainability policies
green energy, biodiversity impact, etc. The social score is based on on company performance (Wang and Sarkis, 2017; Nirino et al., 2019).
community and human rights concerns, both internal and external to To analyze the impact of controversies on financial performance, we
the company. Finally, the governance score takes into account variables developed 4 models (Table 3). Models 1, 2, and 3 are based on three
referring to management, board composition, and compensation. different performance measures in order to capture different potential
Following previous studies, we included several control variables. types of impact. In particular, the first one considers the Tobin's Q ratio
First, firm size was considered because bigger companies, most likely, as dependent variable (Surroca et al., 2010). In turn, models 2 and 3 are
could have higher ESG practices and financial performance. To measure based on accounting measures (ROE and ROA) (Waddock & Graves,
this, we considered the natural logarithm of total assets and total em- 1997). The results of models 2 and 3 suggest that controversies have no
ployees. The natural logarithm was used as opposed to the absolute significant impact on these accounting measures. In fact, the con-
value because it allows for a decrease in the standard variation that troversies (b= −0.11; p>0.1) in Model 2 had a non-significant effect
very large companies can generate on the final sample (Wang and on ROE as well as on ROA (b = 0.09; p>0.1).
Sarkis, 2017). Further, we controlled for a firm's financial risk that If we look at the impacts on market performance, the results of
could influence the relationships we tested. In particular, we used the Model 1 and later of Model 4, in which we test the moderating effect of
leverage ratio, which is determined as the ratio between financial debts ESG practices in the controversy-performance relationship. In detail, in
and the equity of the firm (Opler and Titman; 1994; Surroca et al., Model 1, controversy negatively and significantly impacted Tobin's Q
2010). In addition, we used each company's levered beta as another (b=−0.175; p<0.01), so HP1 can be accepted considering the market
control variable for market price changes (Surroca et al., 2010). Finally, performance. If we look at the control variables, the size of the firms,
we controlled for the level of liquidity, which can influence strategic measured through the level of assets, significantly and negatively im-
decisions on sustainable practices (Li et al., 2012). The measure of pacts firm performance (b=−0.641; p<0.01). Regarding the level of
firm's liquidity is based on the current ratio, which is determined by liquidity of the company, there is a positive and significant effect on
current assets and current liabilities. Table 1 shows the description of Tobin's Q (b = 0.124; p<0.01).

Table 1
Variables description.
Variables

Dependent variable Tobin's Q Market cap + total liabilities, divided by total assets Surroca et al., 2010
Dependent variable ROA Net income to total assets Waddock & Graves, 1997
Dependent variable ROE Net income to average shareholders’ equity Waddock & Graves, 1997
Independent CONT Defined as controversy score. The score has a minimum value of 0 and a maximum of 100 Aouadi and Marsat, 2018
Moderator ESG Defined as Environmental, Social and Governance score. The score has a minimum value of 0 and a maximum of Nollet et al., 2016
100
Control variable EMPLO Natural logarithm of total employees Wang and Sarkis, 2017
Control variable ASSET Natural logarithm of total asset Wang and Sarkis, 2017
Control variable LIQ current asset divided current liabilities Li et al., 2012
Control variable LEV Leverage ratio Opler and Titman, 1994
Control variable Beta Beta levered Surroca et al., 2010

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Table 2
Correlation matrix and descriptive statistics.
N Mean ST.DV TobinQ Roa Roe CONT ESG EMPLO ASSET LIQ LEV Beta

TobinQ 356 1.67 1.97 1 −0.581** −0.436** .148** −0.153** −0.345** −0.581** .268** −0.093 −0.028
Roa 356 0.15 0.13 1 .791** .079 −0.096 −0.261** −0.432** .311** −0.091 −0.066
Roe 356 0.068 0.061 1 .019 −0.008 −0.132* −0.300** −0.091 −0.088 −0.046
CONT 356 43.13 22.73 1 −0.260** −0.376** −0.480** .110* −0.106* −0.219**
ESG 356 67.30 13 1 .353** .446** −0.092 .026 .085
EMPLO 356 9.81 1.66 1 .614** −0.250** .076 .210**
ASSET 356 22.96 1.38 1 −0.243** .055 .149**
LIQ 356 1.54 1.16 1 −0.126* .037
LEV 356 0.99 2.4 1 .031
Beta 356 0.88 0.34 1

Furthermore, in Model 4, we tested the moderator effect of ESG controversies, the negative effects remain.
practices on the controversy-financial performance relationship as As a consequence, the findings first suggest that controversies have
proposed by HP.2. First, as reported in Table 3, ESG positively affected a detrimental effect on a company's performance due to the loss of
financial performance (b = 0.127; p<0.01). It is interesting to notice reputation and the impact on the company's activities. In addition, our
that when ESG is added in the model, the CONTR is still significant but findings show that controversies have a minor negative impact on
the effect is weaker (b=−0.144; p<0.01). The interaction term be- performance when the companies implement strategies to protect the
tween CONTR and ESG is negatively and significantly related to per- environment and the community. This supports and extends the find-
formance (b=−0.079; p<0.05). The interaction term shows that the ings of studies that have found a positive relationship between CSR and
joint effect of ESG and controversies is still negative and significant. financial performance (e.g., Bird et al., 2007; Margolis et al., 2009;
This means that, while ESG somehow marginally alleviates the negative Flammer, 2013). This result is also supported by the linear effect of ESG
effect of controversies on performance, it is not enough to have an in- practices on the financial performance of Model 4. As can be seen, the
crease in performance. Hence, given that the interaction term between effect is positive and significant. This means that ESG practices allow
ESG and controversy is negatively and significantly associated with fi- listed companies in Europe not only to be compliant with the law and
nancial performance, we cannot accept HP. 2. regulations but also to increase financial performance. This supports the
Overall, the R squared and adjusted R squared values of Model 1 findings of previous studies that highlight the strategic relevance of ESG
and Model 4 can be considered acceptable to predict the impact of the practices and investments in sustainability (Kim et al., 2018;
independent variables on the dependent variable. Model 1 has an R- Nirino et al., 2019). Therefore, we can conclude that shareholders po-
squared of 0.378 and adjusted R-squared equal to 0.367. Model 4 has an sitively react when a company is engaged in ESG practices. This has a
R-squared of 0.396 and adjusted R-squared equal to 0.381. positive impact on the image of the company and improves its re-
putation. Nevertheless, as anticipated, the positive impact of ESG
practices on performance is threatened by corporate controversies. In
Discussion, contribution and future research lines
other words, the study found that ESG practices cannot re-establish the
situation to a pre-controversy level, that ESG practices are not enough
This paper has explored the relationship between corporate con-
to avoid a decrease in performance due to controversies, and thus that
troversies and financial performance in the context of European listed
ESG practices should not serve as means for mitigating the negative
companies. In addition, the study has proposed and tested the moder-
effects of controversies, but rather as ways for avoiding controversies.
ating effect of ESG practices on the relationship between corporate
These results allow us to put forward the following theoretical im-
controversies and financial performance.
plications. First, the study contributes to the literature on CSR and
Using a sample of 356 listed companies in Europe, linear regression
stakeholder theory (Freeman et al., 2004; Steurer et al., 2005; Ali et al.,
models highlighted the negative and significant relationship between
2017) by shedding light on the concept of corporate controversy in the
corporate controversies and financial performance. However, Model 4
field of CSR and providing empirical evidence on the negative re-
showed a negative and significant effect of the interaction term (con-
lationship between corporate controversy and financial performance. In
troversies and ESG practices) and financial performance, meaning that,
fact, the literature has neglected the issue regarding corporate con-
even when a company invests in ESG practices, the performance is
troversies and their potential negative impact on firm reputation and
negatively affected by corporate controversies. In other words, al-
performance (Aouadi and Marsat; 2018; Li et al., 2019). As a result, the
though ESG seems to marginally reduce the negative effects of

Table 3
Regression analysis.
Model1 (TobinQ) Model2 (ROE) Model3 (ROA) Model 4 (TobinQ)

Estimate (p.value) Estimate (p.value) Estimate (p.value) Estimate (p.value)

CONT −0.175*** (0.000) −0.011009 (0.858) 0.099214 (0.113) −0.144** (0.002)
ESG 0.1274** (0.008)
CONTxESG −0.0793* (0.048)
EMPLO 0.015 (0.788) −0.03882 (0.572) 0.018062 (0.795) −0.000785 (0.988)
ASSET −0.641*** (0.000) −0.124681 (0.082) −0.063291 (0.385) −0.696651*** (0.000)
LIQ 0.124** (0.007) −0.028501 (0.608) 0.004080 (0.942) 0.116077** (0.010)
LEV −0.064 (0.145) 0.243522*** (0.000) −0.038281 (0.481) −0.064284 (0.139)
Beta 0.016 (0.725) 0.066807 (0.224) 0.200309*** (0.000) 0.022411 (0.615)
Observation 356 356 356 356
R-Squared .378 .079 0.050 0.396
Adjusted R2 .367 .063 0.033 0.381

*p<0.05, **p<0.01, ***p<0.001.

5
N. Nirino, et al. Technological Forecasting & Social Change 162 (2021) 120341

study advances our knowledge on the dark side of CSR, highlighting the individual factors (environmental, social, and governance). It is true
negative impact of controversies on performance in the case of Eur- that the second hypothesis is not confirmed, but perhaps this was be-
opean listed companies. cause we considered ESG to be a unique variable. Future studies can
Second, the study contributes to the same streams of literature by distinguish between symbolic and substantive practices and how they
indicating the benefits of ESG practices. In this regard, while several impact performance differently.
studies found a positive impact of ESG practices and CSR strategies on
different performance measures (Porter and Kramer, 2006; Rettab et al., Author statement
2009; Liu et al., 2014), several studies found a negative or neutral re-
lationship (see for example Kim and Lyon, 2015). Therefore, we com- Authors contributed to the drafting of the paper in equal parts.
plement these studies by proposing a positive ESG practice-performance Furthermore, each part was discussed in detail among the authors.
relationship. However, our findings did not allow us to confirm a po-
sitive moderating effect of ESG practices on the relationship between Supplementary materials
corporate controversies and financial performance. In this regard, while
the significance of the interaction term is weak and lower than the Supplementary material associated with this article can be found, in
direct effect of controversies on performance, its effect is negative and the online version, at doi:10.1016/j.techfore.2020.120341.
significant. Therefore, this study contributes to the literature by ad-
vocating for the detrimental effect of corporate controversies, which References
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Li, W.X., Chen, C.C.S., French, J.J., 2012. The relationship between liquidity, corporate Niccolò Nirino is PhD candidate in Business and Management at the Department of
governance, and firm valuation: evidence from Russia. Emerging Markets Review 13 Management, University of Turin. Dr. Nirino's studies focus on the concepts of sustain-
(4), 465–477. ability and ethics within corporate finance decisions. His-research efforts have allowed
Liu, M.T., Wong, I.A., Shi, G., Chu, R., Brock, J.L., 2014. The impact of corporate social him to publish in important international journals such as the European Journal of
responsibility (CSR) performance and perceived brand quality on customer-based Innovation Management and British Food Journal. Niccolò is also a reviewer for inter-
brand preference. J. Services Marketing. national journals such as the Journal of Intellectual Capital, Business Process
Livesey, S.M., Kearins, K., 2002. “Transparent and Caring Corporations?: a Study of Management, and Journal of Business Research.
Sustainability Reports by the Body Shop and Royal Dutch/Shell. Organ Environ 15
(3), 233–258.
Love, E.G., Kraatz, M., 2009. Character, conformity, or the bottom line? How and why Gabriele Santoro is an Assistant Professor of Business Management at the Department of
Management, University of Turin, Turin, Italy. Dr. Santoro has authored/coauthored
downsizing affected corporate reputation. Academy of Management Journal 52 (2),
314–335. several papers in international journals such as Technovation, Technological Forecasting
Luo, X., Bhattacharya, C.B., 2006. Corporate social responsibility, customer satisfaction, and Social Change, Journal of Technology Transfer, Journal of Knowledge Management,
and market value. J Mark 70 (4), 1–18. and Journal of Business Research. He was the recipient of several research awards such as
Malik, M., 2015. Value-enhancing capabilities of CSR: a brief review of contemporary the Best Paper Award of the EuroMed/SIMA track at 11th EuroMed conference 2018, the
Best Paper Award at the Sinergie-SIMA conference in 2018, and the Emerald/EMRBI
literature. J. Business Ethics 127 (2), 419–438.
McWilliams, A., Siegel, D.S., Wright, P.M., 2006. Corporate social responsibility: strategic Business Research Award for Emerging Researchers at the 10th EuroMed conference in
implications. J. Management Studies 43 (1), 1–18. 2017. He is currently an Associate Member (AM-EMAB) of the EuroMed Research
Nirino, N., Miglietta, N., Salvi, A., 2019. “The impact of corporate social responsibility on Business Institute and a member of the Editorial Board of the Journal of Intellectual
firms’ financial performance, evidence from the food and beverage industry. British Capital.
Food Journal 122 (1), 1–13.
Nollet, J., Filis, G., Mitrokostas, E., 2016. Corporate social responsibility and financial Nicola Miglietta is an Associate Professor of Corporate Finance at the Department of
performance: a non-linear and disaggregated approach. Econ Model 52, 400–407. Management, University of Turin, Turin, Italy. Prof. Miglietta has published papers in
Obbard, R.W., Sadri, S., Wong, Y.Q., Khitun, A.A., Baker, I., Thompson, R.C., 2014. Global international peer reviewed journals such as Journal of Knowledge Management,
warming releases microplastic legacy frozen in Arctic Sea ice. Earth's Future 2 (6), Management Decision, and Business Process Management Journal. His-research topics
315–320. focus on the creation of value for shareholders, the dividend policy, and the financial
Opler, T.C., Titman, S., 1994. Financial distress and corporate performance. J Finance 49 structure of the company
(3), 1015–1040.
Park, J., Lee, H., Kim, C., 2014. Corporate social responsibilities, consumer trust and Roberto Quaglia is a Professor of Strategy and Management at ESCP Europe and a vis-
corporate reputation: south Korean consumers' perspectives. J Bus Res 67 (3), iting Professor at the Lorange Institute/CEIBS (Switzerland/Ghana), ESA (Lebanon). He
295–302. earned his PhD at the University Paris 2 Assas in Paris. He is an alumni of CPCL at the
Pierce, J.R., 2018. Reexamining the cost of corporate criminal prosecutions. J Manage 44 Harvard Business School (USA), EDP at MIT - Massachussets Institute of Technology
(3), 892–918. (USA), MiM at Escp Europe (France), University of Torino (Italy). He started his profes-
Porter, M.E., Kramer, M.R., 2006. The link between competitive advantage and corporate sional career as a strategic consultant at McKinsey & Co. and he then moved to Academia
social responsibility. Harv Bus Rev 84 (12), 78–92. over 15 years ago. With a true passion for teaching and consulting and a bias for corporate
Raimo, N., de Nuccio, E., Giakoumelou, A., Petruzzella, F., Vitolla, F., 2020. Non-financial clients and family businesses, he serves as a keynote speaker, a workshop facilitator, a
information and cost of equity capital: an empirical analysis in the food and beverage consultant, or a board member. Roberto specializes in strategy, leadership, decision
industry. British Food Journal. making, communication, influence, change management, and family business.
Rettab, B., Brik, A.B., Mellahi, K., 2009. A study of management perceptions of the impact
of corporate social responsibility on organisational performance in emerging