Investigating the double-edged sword effect of environmental, social and governance practices on corporate risk-taking in the high-tech industry

• Authors: Xiaodong Teng , Kun-Shan Wu , Lopin Kuo , Bao-Guang Chang

Abstracts

EN

Research background: Corporate risk-taking (CRT) is crucial to a business's survival and performance and is a driving force for sustainable development. Environmental, social and governance (ESG) practices are critical to firm profits when considering sustainable economic growth; however, they can also be the cause of financial burdens. It is, therefore, crucial to assess the relationship between a company's ESG performance and its risk-taking. Purpose of the article: Considering the controversial results of empirical studies on the relationship between ESG and CRT, this study aims to theoretically and empirically investigate the curvilinear nexus between ESG practices and CRT within Taiwan's high-tech industry. Methods: Ordinary least square regression and quantile regression analysis was applied to investigate the curvilinear ESG-CRT relationship. The empirical studies were conducted in 38 high-tech companies on the Taiwan Stock Exchange that disclosed ESG information between 2005 and 2020, with a total of 437 firm-year observations. Findings & value added: Quantile regression estimation results reveal the ESG-CRT nexus is U-shaped (convex). Both the environmental and social pillar's relationship with CRT is nonlinear and U-shaped, whereas the governance pillar has no significant relationship with CRT. Overall, a comprehensive view is provided that shows ESG practices can have a double-edged sword effect on CRT. It is suggested that high-tech companies in Taiwan should avoid ESG practices becoming a tool for managements' self-interest. More information of ESG practices should be disclosed to stakeholders to ensure they are given full credit for the positive impact they have on capital allocation. Regulators guide firms to surpass the threshold of the U-shaped effect and take into consideration the whole benefits of stakeholders when they allocate existing resources toward environmental and social endeavors.

Keywords

EN

ESG; corporate risk-taking; quantile regression; sustainable development

• Publisher: Instytut Badań Gospodarczych
• Journal: Oeconomia Copernicana
• Year: 2023
• Volume: 14
• Issue: 2
• Pages: 511-549

Dates

published

2023

Contributors

author

Xiaodong Teng

• Shandong University of Finance and Economics

• https://orcid.org/0000000151871533

author

Kun-Shan Wu

• Tamkang University, Taiwan

• https://orcid.org/0000000195508840

author

Lopin Kuo

• Tamkang University, Taiwan

• https://orcid.org/0000000277146126

author

Bao-Guang Chang

• Tamkang University, Taiwan

• https://orcid.org/0000000193528012

References

• Abad, D., Cutillas-Gomariz, M. F., Sanchez-Ballesta, J. P., & Yague, J. (2018). Real earnings management and information asymmetry in the equity market. European Accounting Review, 27(2), 209–235. doi: 10.1080/09638180.2016.1261720.
• Al-Najjar, B., & Salama, A. (2022). Mind the gap: Are female directors and execu-tives more sensitive to the environment in high-tech us firms? Technological Forecasting & Social Change, 184, 122024. doi: 10.1016/j.techfore.2022.122024.
• Andries, A. M., Balutel, D., Ihnatov, I., & Ursu, S. G. (2020). The nexus between corporate governance, risk taking, and growth. PLoS ONE, 15(2), e0228371. doi: 10.1371/journal.pone.0228371.
• Anton, S. G. (2018). The impact of enterprise risk management on firm value: Em-pirical evidence from Romanian non-financial firms. Inzinerine Ekonomika-Engineering Economics, 29(2), 151–157. doi: 10.5755/j01.ee.29.2.16426
• Anton S. G., & Nucu, A. E. A. (2020). Enterprise risk management: A literature review and agenda for future research. Journal of Risk and Financial Manage-ment, 13, 281. doi: 10.3390/jrfm13110281.
• Aray, Y., Dikova, D., Garanina, T., & Veselova, A. (2021). The hunt for international legitimacy: Examining the relationship between internationalization, state ownership, location and CSR reporting of Russian firms. International Business Review, 30, 101858. doi: 10.1016/j.ibusrev.2021.101858.
• Avramov, D., Cheng, S., Lioui, A., & Tarelli, A. (2022). Sustainable investing with ESG rating uncertainty. Journal of Financial Economics, 145(2), 642–664. doi: 10.1016/j.jfineco.2021.09.009.
• Ayadi, M., Kusy, M. I., Pyo, M., & Trabelsi, S. (2015). Corporate social responsibil-ity, corporate governance, and managerial risk-Taking. In 2015 Canadian Aca-demic Accounting Association (CAAA) annual conference. doi: 10.2139/ssrn.2547 576.
• Azevedo, G., Oliveira, J., Sousa, L., & Borges, M.F.R. (2022). The determinants of risk reporting during the period of adoption of Basel II Accord: Evidence from the Portuguese commercial banks. Asian Review of Accounting, 30(2), 177–206. doi: 10.1108/ARA-03-2021-0051.
• Banerjee, R., & Gupta, K. (2017). The effects of environmental sustainability and R&D on corporate risk taking: International evidence. Energy Economics, 65, 1–15. doi: 10.1016/j.eneco.2017.04.016.
• Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics, 97, 71–86. doi: 10.1007/s10551-010-0496-z.
• Behl, A., Kumari, P. S. R., Makhija, H., & Sharma, D. (2022). Exploring the relation-ship of ESG score and firm value using cross-lagged panel analyses: Case of the Indian energy sector. Annals of Operations Research, 313(1), 231–256. doi: 10.1007/s10479-021-04189-8.
• Boubakri, N., Cosset, J. C., & Saffar, W. (2013). The role of state and foreign own-ers in corporate risk-taking: Evidence from privatization. Journal of Financial Economics, 108(3), 641–658. doi: 10.1016/j.jfineco.2012.12.007.
• Bruna, M. G., & Nicolò, D. (2020). Corporate reputation and social sustainability in the early stages of start-ups–A theoretical model to match stakeholders’ ex-pectations through corporate social commitment. Finance Research Letter, 35, 101508. doi: 10.1016/j.frl.2020.101508.
• Chang, B. G., & Wu, K. S. (2021). The nonlinear relationship between financial flexibility and enterprise risk-taking during the COVID-19 pandemic in Tai-wan’s semiconductor industry. Oeconomia Copernicana, 12(2), 307–333. doi: 10.24136/ oc.2021.011.
• Chang, B. G., & Wu, K. S. (2022a). Convex-concave effect of financial flexibility on hospitality performance: Quantile regression approach. International Journal of Contemporary Hospitality Management, 34(2), 687–712. doi: 10.1108/IJCHM-07-2021-0867.
• Chang, B. G., & Wu, K. S. (2022b). Concave effect of financial flexibility on semi-conductor industry performance: Quantile regression approach. Technological and Economic Development of Economy, 28(4), 948–978. doi: 10.3846/tede.2022.16622.
• Chen, L., Khurram, M. U., Gao, Y., Abedin, M. Z., & Lucey, B. (2023). ESG disclo-sure and technological innovation capabilities of the Chinese listed companies. Research in International Business and Finance, 65, 101974. doi: 10.1016/j.ribaf.202 3.101974.
• Chen, Y., Podolski, E. J., & Veeraraghavan, M. (2015). Does managerial ability facilitate corporate innovative success? Journal of Empirical Finance, 34, 313–326. doi: 10.1016/j.jempfin.2015.08.002.
• Chen, S. H., Thi Kim, D. X., & Hsu, F. J. (2021). ESG and firm’s risk-taking: Interna-tional study. In Proceedings of 5th international conference on research in manage-ment and economics (pp. 92–105). Berlin: Diamond Scientific Publishing.
• Chiang, T. C., Li, J., & Tan, L. (2010). Empirical investigation of herding behavior in Chinese stock markets: Evidence from quantile regression analysis. Global Finance Journal, 21(1), 111–124. doi: 10.1016/j.gfj.2010.03.005.
• Claessens, S., Djankov, S., & Lang, L. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58, 81–112. doi: 10.1016/S0304-405X(00)00067-2.
• Collevecchio, F., Cappa, F., Peruffo, E., & Oriani, P. (2023). When do M&As with fintech firms benefit traditional banks? British Journal of Management. Advance online publication. doi: 10.1111/1467-8551.12701.
• Di Tommaso, C., & Thornton, J. (2020). Do ESG scores effect bank risk taking and value? Evidence from European banks. Corporate Social Responsibility and Environmental Management, 27(5), 2286–2298. doi: 10.1002/csr.1964.
• El Ghoul, S., Guedhami, O., Kwok, C. C., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking & Finance, 35(9), 2388–2406. doi: 10.1016/j.jbankfin.2011.02.007.
• Faccio, M., Marchica, M. T., & Mura, R. (2016). CEO gender, corporate risk-taking, and the efficiency of capital allocation. Journal of Corporate Finance, 39, 193–209. doi: 10.1016/j.jcorpfin.2016.02.008.
• Fang, M., Nie, H., & Shen, X. (2023). Can enterprise digitization improve ESG performance? Economic Modelling, 118, 106101. doi: 10.1016/j.econmod.2022.106101.
• Fieller, E. C. (1954). Some problems in interval estimation. Journal of the Royal Statistical Society, B16, 175–185.
• Folqué, M., Escrig-Olmedo, E., & Santamaría, T. C. (2021). Sustainable develop-ment and financial system: Integrating ESG risks through sustainable invest-ment strategies in a climate change context. Sustainable Development, 29(5), 876–890. doi: 10.1002/sd.2181.
• Freeman, R. E. (1984). Stakeholder management. A strategic approach. Marchfield: Pitman.
• Gallego-Álvareza, I., & Ortas, E. (2017). Corporate environmental sustainability reporting in the context of national cultures: A quantile regression approach. International Business Review, 26, 337–353. doi: 10.1016/j.ibusrev.2016.09.003.
• Gangi, F., D’Angelo, E., Daniele, L. M., & Varrone, N. (2021). The impact of corpo-rate governance on social and environmental engagement: What effect on firm performance in the food industry? British Food Journal, 123(2), 610–626. doi: 10.1108/BFJ-02-2020-0140.
• Gangi, F., Daniele, L. M., & Varrone, N. (2020). How do corporate environmental policy and corporate reputation affect risk-adjusted financial performance? Business Strategy and the Environment, 29(5), 1975–1991. doi: 10.1002/bse.2482.
• Gangi, F., Meles, A., D’Angelo, E., & Daniele, L. M. (2019). Sustainable develop-ment and corporate governance in the financial system: Are environmentally friendly banks less risky? Corporate Social Responsibility and Environmental Management, 26, 529–547. doi: 10.1002/csr.1699.
• Haans, R. F. J., Pieters, C., & He, Z. L. (2016). Thinking about U: Theorizing and testing U- and inverted U-shaped relationships in strategy research. Strategic Management Journal, 37(7), 1177–1195. doi: 10.1002/smj.2399.
• Hair, J. F., Hult, G. T. M., Ringle, C. M., & Sarstedt, M. (2017). A primer on partial least squares structural equation modeling (PLS-SEM). Thousand Oaks: Sage.
• Harjoto, M., & Laksmana, I. (2018). The impact of corporate social responsibility on risk taking and firm value. Journal of Business Ethics, 151(2), 353–373. doi: 10.1007/s10551-016-3202-y.
• Hausman, J. (1978). Specification tests in econometrics. Econometrica, 46, 1251–1271. doi: 10.2307/1913827.
• He, F., Ding, C., Yue, W., & Liu, G. (2023). ESG performance and corporate risk-taking: Evidence from China. International Review of Financial Analysis, 87, 102550. doi: 10.1016/j.irfa.2023.102550.
• Iazzolino, G., Bruni, M. E., Veltri, S., Morea, D., & Baldissarro, G. (2023). The im-pact of ESG factors on financial efficiency: An empirical analysis for the selec-tion of sustainable firm portfolios. Corporate Social Responsibility and Environ-mental Management. Advance online publican. doi: 10.1002/csr.2463.
• Izcan, D., & Bektas, E. (2022). The relationship between ESG scores and firm-specific risk of Eurozone banks. Sustainability, 14, 8619. doi: 10.3390/su14148619.
• Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. doi: 10.1016/0304-405X(76)90026-X.
• John, K., Litov, L.P., & Yeung, B.Y. (2008). Corporate governance and risk taking. Journal of Finance, 63(4), 1679–1728. doi: 10.1111/j.1540-6261.2008.01372.x.
• Koenker, R., & Bassett, G. (1978). Regression quantiles. Econometrica, 46(1), 33–50. doi: 10.2307/1913643.
• Korinth, F., & Lueg, R. (2022). Corporate sustainability and risk management-The U-shaped relationships of disaggregated ESG rating scores and risk in the German capital market. Sustainability, 14, 5735. doi: 10.3390/su14095735.
• Lahouel, B. B., Zaied, Y. B., Managi, S., & Taleb, L. (2022). Re-thinking about U: The relevance of regime-switching model in the relationship between envi-ronmental corporate social responsibility and financial performance. Journal of Business Research, 140, 498–519. doi: 10.1016/j.jbusres.2021.11.019.
• Li, G., Li, N., & Sethi, S. P. (2021). Does CSR reduce idiosyncratic risk? Roles of operational efficiency and AI innovation. Production and Operations Management, 30(7), 2027–2045. doi: 10.1111/poms.13483.
• Li, G., Elahi, E., & Zhao, L. (2022a). Fintech, bank risk-taking, and risk-warning for commercial banks in the era of digital technology. Frontiers in Psychology, 13, 934053. doi: 10.3389/fpsyg.2022.934053.
• Li, M. Y. L., Yang, T. H., & Yu, S. E. (2015). CEO stock-based incentive compensa-tion and firm performance: A quantile regression approach. Journal of Interna-tional Financial Management & Accounting, 26(1), 39–71. doi: 10.1111/jifm.12022.
• Li, X., Liu, G., Fu, Q., Abdul Rahman, A. A., Meero, A., & Sial, M. S. (2022b). Does corporate social responsibility impact on corporate risk-taking? Evidence from emerging economy. Sustainability, 14, 531. doi: 10.3390/su14010531.
• Lind, J. T., & Mehlum, H. (2010). With or without U? The appropriate test for a U-shaped relationship. Oxford Bulletin of Economics and Statistics, 72(1), 109–118. doi: 10.1111/j.1468-0084.2009.00569.x.
• Maiti, M. (2021). Quantile regression, asset pricing and investment decision. IIMB Management Review, 33, 28–37. doi: 10.1016/j.iimb.2021.03.005.
• Mulia, R. A., & Joni, J. (2019). Corporate social responsibility (CSR) and risk taking: Evidence from Indonesia. ACRN Journal of Finance and Risk Perspectives, 8, 152– 162. doi: 10.35944/jofrp.2019.8.1.010.
• Nguyen, P. (2011). Corporate governance and risk-taking: Evidence from Japanese firms. Pacific-Basin Finance Journal, 19(3), 278–297. doi: 10.1016/j.pacfin.201 0.12.002.
• Nguyen, P., & Nguyen, A. (2015). The effect of corporate social responsibility on firm risk. Social Responsibility Journal, 11(2), 324–339. doi: 10.1108/SRJ-08-2013-0093.
• Okafor, A., Adeleye, B. N., & Adusei, M. (2021). Corporate social responsibility and financial performance: Evidence from U.S tech firms. Journal of Cleaner Production, 292, 126078. doi: 10.1016/j.jclepro.2021.126078.
• Ovide, S. (2020). Big tech versus climate change. Oxford University Press.
• Porter, M. E., & Kramer, M. R. (2006). Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84, 78–92.
• Preston, L. E., & O’Bannon, D. P. (1997). The corporate social-financial perfor-mance relationship: A typology and analysis. Business & Society, 36, 419–429. doi: 10.1177/000765039703600406.
• Qoyum, A., Sakti, M. R. P., Thaker, H. M. T., & AlHashfi, R. U. (2022). Does the Islamic label indicate good environmental, social, and governance (ESG) per-formance? Evidence from sharia-compliant firms in Indonesia and Malaysia. Borsa Istanbul Review, 22(2), 306–320. doi: 10.1016/j.bir.2021.06.001.
• Rao, S., Roy, P. P., & Koirala, S. (2022). Does mandatory CSR expenditure regula-tion induce corporate risk-taking? Journal of Corporate Finance, 72, 102158. doi: 10.213 9/ssrn.4056263.
• Reber, B., Gold, A., & Gold, S. (2022). ESG disclosure and idiosyncratic risk in initial public offerings. Journal of Business Ethics, 179, 867–886. doi: 10.1007/s10551-021-04847-8.
• Rossi, F., & Harjoto, M. A. (2020). Corporate non‑financial disclosure, firm value, risk, and agency costs: evidence from Italian listed companies. Review of Managerial Science, 14, 1149–1181. doi: 10.1007/s11846-019-00358-z.
• Saeidi, S. P., Sofian, S., Saeidi, P., Saeidi, S. P., & Saaeidi, S. A. (2015). How does corporate social responsibility contribute to firm financial performance? The mediating role of competitive advantage, reputation, and customer satisfac-tion. Journal of Business Research, 68, 341–350. doi: 10.1016/j.jbusres.2014.06.024.
• Salehi, M., Dashtbayaz, M. L., & Abdulhadi, K. H. (2022). The relationship between managerial entrenchment and firm risk-taking on social responsibility disclo-sure. Journal of Public Affairs, 22, e2511. doi: 10.1002/pa.2511.
• Sasabuchi, S. (1980). A test of a multivariate normal mean with composite hypoth-eses determined by linear inequalities. Biometrika, 67(2), 429–439. doi: 10.2307/ 2335486.
• Sun, W. B., & Cui, K. X. (2014). Linking corporate social responsibility to firm default risk. European Management Journal, 32, 275–287. doi: 10.1016/j.emj.2013.04.0 03.
• Teng, X., Ge, Y., Wu, K. S., Chang, B. G., Kuo, L., & Zhang, X. (2022). Too little or too much? Exploring the inverted U-shaped nexus between voluntary envi-ronmental, social and governance and corporate financial performance. Fron-tiers in Environmental Science, 10, 969721. doi: 10.3389/fenvs.2022.969721.
• Testa, F., Boiral, O., & Iraldo, F. (2018). Internalization of environmental practices and institutional complexity: Can stakeholders pressures encourage green-washing? Journal of Business Ethics, 147, 287–307. doi: 10.1007/s10551-015-2960-2.
• Trumpp, C., & Guenther, T. (2017). Too little or too much? Exploring U-shaped relationships between corporate environmental performance and corporate fi-nancial performance. Business Strategy and the Environment, 26(1), 49–68. doi: 10.1002/bse.1900.
• Varro, L., & Kamiya, G. (2021). 5 Ways big tech could have big impacts on clean energy transitions. Retrieved from https://www.iea.org/commentaries/5-ways-big-tech-could-have-big-impacts-on-clean-energy-transitions (04.04.2023).
• White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroscedasticity. Econometrica, 48(4), 817–838. doi: 10.2307/19 12934.
• Wu, K. S., & Chang, B. G. (2022). The concave-convex effects of environmental, social and governance on high-tech firm value: Quantile regression approach. Corporate Social Responsibility and Environmental Management, 29(5), 1527–1545. doi: 10.1002/csr.2289.
• Yarram, S. R., & Adapa, S. (2022). Women on boards, CSR and risk-taking: An investigation of the interaction effects of gender diversity and CSR on business risk. Journal of Cleaner Production, 378, 134493. doi: 10.1016/j.jclepro.2022.134493.
• Younas, Z. I., & Zafar, A. (2019). Corporate risk taking and sustainability: A case of listed firms from USA and Germany. Journal of Global Responsibility, 10(1), 2–15. doi: 10.1108/JGR-07-2018-0027.
• Zaiane, S., Dabbou, H., & Gallali, M. I. (2022). The non-uniform relationship be-tween CEO stock options and strategic risk-taking: The moderating role of firm performance. EuroMed Journal of Business. Advance online publication. doi: 10.1108/EMJB-02-2022-0023.
• Zhu, D., Gao, X., Luo, Z., & Xu, W. (2022). Environmental performance and corpo-rate risk-taking: Evidence from China. Pacific-Basin Finance Journal, 74, 101811. doi: 10.1016/j.pacfin.2022.101811.

Identifiers

DOI

10.24136/oc.2023.014

Biblioteka Nauki

19322776