The discordance of governance performance from environmental and social performance on idiosyncratic risk: The effect of board composition

Figures & data

Table 1. The number of companies per year and sector

Panel A: number of companies per year			Panel B: number of companies per sector
Year	N	%	Sector	N	%
2005	231	2.27	Academic& Educational Services	80	0.79
2006	260	2.56	Basic Materials	826	8.12
2007	271	2.66	Consumer Cyclicals	2,246	22.08
2008	298	2.93	Consumer Non-Cyclicals	833	8.19
2009	388	3.82	Energy	751	7.38
2010	447	4.4	Healthcare	1,789	17.59
2011	475	4.67	Industrials	2,006	19.72
2012	489	4.81	Real Estate	1,063	10.45
2013	497	4.89	Utilities	576	5.66
2014	506	4.98
2015	542	5.33
2016	932	9.16
2017	1,305	12.83
2018	1,689	16.61
2019	1,840	18.09

Notes: this table presents the distribution of the number of firms across year and sector. TRBC Economic Sector Classifications are used to categorise sectors.

Table 2. Definitions of variables used

Variable	Description
Dependent
IV	Idiosyncratic Volatility
Independent
ESG performance variables
GOV	Governance dimension of ESG performance
ENV	Environmental dimension of ESG performance
SOC	Social dimension of ESG performance
ESG-perform	Overall ESG performance based on Refinitiv ESG score
Control
ROA	Return on assets. The ratio of net income to total assets.
SIZE	Firm size. Natural log of total asset.
LEV	Firm leverage. The ratio of long-term debt to total assets.
AGE	Natural log of one plus firm age, where the firm age equals the number of years since the stock inclusion in the CRSP database.
MB	Market-to-book equity ratio. The ratio of market value of equity divided by the book value of equity.
CAPEX	Capital expenditure. The ratio of capital expenditure to total asset.
Moderators
GEND	Gender diversity. The percentage of female director on board.
BSIZE	Board size. The number of members on board.

Table 3. Descriptive statistics for the variables

Variable	Mean	SD	Median	Min	Max	N
IVt	31.064	19.788	25.011	10.495	188.591	9966
GOV t-1	50.979	21.579	52.014	5.026	92.681	8159
ENV t-1	28.435	27.866	20.99	0	89.705	8242
SOC t-1	43.394	20.563	39.997	6.925	92.013	8159
ESGt-1	41.557	19.084	38.14	7.866	86.352	8158
ROA t-1	0.039	0.109	0.049	−0.74	0.286	8159
SIZE t-1	8.461	1.485	8.508	4.143	12.012	8158
LEV t-1	0.261	0.177	0.252	0	0.849	8242
AGE t-1	3.025	0.821	3.135	0.693	4.043	8273
MB t-1	3.542	4.661	2.588	−26.071	42.734	8150
CAPEXt-1	−0.042	0.040	−0.032	−0.239	0.000	8241
GEND t-1	15.704	9.999	15.385	0	44.444	8044
BSIZE t-1	9.791	2.211	10	5	16	8153

Notes: this table presents descriptive statistics for the sample firms of the study. The table provides the mean, standard deviation, median, minimum, maximum, and the number of observations for the panel data set from year 2005 to 2019.

Table 4. Pearson correlation coefficients

	IVt	ESG t-1	ENV t-1	SOC t-1	GOV t-1	ROA t-1	SIZE t-1	LEV t-1	AGE t-1	M.B. t-1	CAPEX t-1	GEND t-1	BSIZE t-1
IVt	1
ESG t-1	−0.255***	1
ENV t-1	−0.255***	0.873***	1
SOC t-1	−0.179***	0.866***	0.705***	1
GOV t-1	−0.231***	0.658***	0.413***	0.360***	1
ROA t-1	−0.402***	0.146***	0.161***	0.072***	0.141***	1
SIZE t-1	−0.359***	0.532***	0.566***	0.441***	0.312***	0.242***	1
LEV t-1	−0.091***	0.069***	0.085***	0.068***	0.068***	−0.060***	0.236***	1
AGE t-1	−0.273***	0.362***	0.354***	0.252***	0.302***	0.250***	0.355***	−0.036***	1
MB t-1	−0.01	0.023**	0.01	0.041***	−0.036***	0.037***	−0.061***	−0.041***	−0.029***	1
CAPEX t-1	−0.030***	−0.053***	−0.090***	0.005	−0.058***	−0.120***	−0.076***	0.079***	−0.088***	−0.004	1
GEND t-1	−0.125***	0.373***	0.293***	0.301***	0.297***	0.094***	0.176***	0.029***	0.218***	0.051***	−0.009	1
BSIZE t-1	−0.222***	0.448***	0.473***	0.371***	0.223***	0.173***	0.538***	0.059***	0.383***	−0.002	−0.095***	0.222***	1

Notes: This table reports the correlation coefficients between the idiosyncratic volatility, ESG, ESG pillars, gender diversity, board size and control variables for the overall sample. * indicate significance at 10%, ** indicate significance at 5%, *** indicate significance at 1%.

Table 5. Multicollinearity checks

Variable	VIF	1/VIF
ESG t-1	1.46	0.686967
ENV t-1	1.51	0.661717
SOC t-1	1.28	0.780300
GOV t-1	1.14	0.874822
SIZE t-1	1.64	0.608386
AGE t-1	1.23	0.811276
ROA t-1	1.12	0.890787
LEV t-1	1.13	0.887776
CapEx t-1	1.03	0.971438
MB t-1	1.02	0.983618

Table 6. Effects of ESG and its pillars’ performance on idiosyncratic volatility (Fama-French three-factor model)

	(1)	(2)	(3)	(4)
GOV t-1	−0.004
	(−0.38)
ENV t-1		−0.046***
		(−3.19)
SOC t-1			−0.034**
			(−2.13)
ESG t-1				−0.055***
				(−2.65)
ROA t-1	−25.523***	−27.947***	−26.600***	−26.777***
	(−5.59)	(−6.11)	(−5.83)	(−5.96)
SIZE t-1	−0.187	0.092	0.127	0.076
	(−0.21)	(0.10)	(0.14)	(0.09)
LEV t-1	8.848***	8.491***	9.747***	9.300***
	−3.79	−3.34	−4.06	−3.95
AGE t-1	−4.697***	−4.628***	−4.926***	−4.427***
	(−2.92)	(−2.75)	(−2.95)	(−2.64)
M.B. t-1	−0.078*	−0.080*	−0.076*	−0.073*
	(−1.91)	(−1.91)	(−1.81)	(−1.74)
CAPEX t-1	−17.320*	−21.755**	−21.677**	−22.930**
	(−1.78)	(−2.16)	(−2.12)	(−2.25)
_cons	42.175***	39.603***	40.509***	40.129***
	(5.06)	(4.60)	(4.71)	(4.72)
Year F.E.	Yes	Yes	Yes	Yes
Firm F.E.	Yes	Yes	Yes	Yes
N	7408	7476	7423	7419
r2	0.182	0.188	0.19	0.187
r2_a	0.18	0.186	0.188	0.184
F	28.052	28.559	28.481	28.897

Notes: t-statistics in parentheses, * indicate significance at 10%, ** indicate significance at 5%, *** indicate significance at 1%.

Table 7. The moderating roles of board gender diversity

	(1)	(2)	(3)
ENV t-1	−0.059**
	(−2.49)
SOC t-1		−0.065**
		(−2.46)
ESG t-1			−0.087***
			(−2.72)
GEND t-1	−0.024	−0.091	−0.087
	(−0.60)	(−1.53)	(−1.41)
ENV t-1*GEND t-1	0.001
	(1.01)
SOC t-1*GEND t-1		0.002*
		(1.67)
ESG t-1*GEND t-1			0.002*
			(1.68)
ROA t-1	−26.796***	−26.783***	−25.799***
	(−5.83)	(−5.64)	(−5.70)
SIZE t-1	0.217	0.334	0.161
	(0.25)	(0.38)	(0.19)
LEV t-1	7.773***	7.606***	8.504***
	(3.03)	(2.74)	(3.62)
AGE t-1	−4.566***	−4.823***	−3.975**
	(−2.67)	(−2.82)	(−2.41)
MB t-1	−0.068	−0.064	−0.062
	(−1.65)	(−1.54)	(−1.50)
CAPEX t-1	−19.819**	−20.041**	−20.701**
	(−2.04)	(−2.03)	(−2.10)
_cons	38.772***	40.241***	39.482***
	(4.64)	(4.84)	(4.85)
Year F.E.	Yes	Yes	Yes
Firm F.E.	Yes	Yes	Yes
N	7231	7179	7176
r2	0.196	0.195	0.196
r2_a	0.194	0.193	0.193
F	26.323	26.753	26.902

Notes: t-statistics in parentheses, * indicate significance at 10%, ** indicate significance at 5%, *** indicate significance at 1%.

Table 8. The moderating roles of board size

	(1)	(2)	(3)
ENV t-1	−0.118***
	(−2.59)
SOC t-1		−0.013
		(−0.23)
ESG t-1			−0.132*
			(−1.93)
BSIZE t-1	−0.207	0.109	−0.307
	(−0.79)	(0.32)	(−0.79)
ENV t-1*BSIZE t-1	0.008*
	(1.81)
SOC t-1*BSIZE t-1		−0.002
		(−0.30)
ESG t-1*BSIZE t-1			0.008
			(1.24)
ROA t-1	−27.400***	−27.327***	−26.355***
	(−5.95)	(−5.76)	(−5.81)
SIZE t-1	−0.114	−0.043	−0.154
	(−0.13)	(−0.05)	(−0.18)
LEV t-1	8.069***	8.039***	8.777***
	(3.14)	(2.89)	(3.71)
AGE t-1	−4.285**	−4.981***	−4.003**
	(−2.56)	(−3.00)	(−2.49)
M.B. t-1	−0.080*	−0.073*	−0.071*
	(−1.91)	(−1.73)	(−1.69)
CAPEX t-1	−16.968*	−17.161*	−17.706*
	(−1.78)	(−1.77)	(−1.83)
_cons	42.641***	41.361***	44.134***
	(5.09)	(4.71)	(5.04)
Year F.E.	Yes	Yes	Yes
Firm F.E.	Yes	Yes	Yes
N	7349	7296	7291
r2	0.197	0.195	0.195
r2_a	0.194	0.192	0.193
F	28.307	28.491	28.523

Notes: t-statistics in parentheses, * indicate significance at 10%, ** indicate significance at 5%, *** indicate significance at 1%.

Table 9. Effects of ESG and its pillars’ performance on idiosyncratic volatility (the market model and Fama-French four-factor model)

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
ENV t-1	−0.049***				−0.045***
	(−3.32)				(−3.21)
SOC t-1		−0.034**				−0.033**
		(−2.08)				(−2.14)
GOV t-1			−0.004				−0.005
			(−0.32)				(−0.42)
ESG t-1				−0.057***				−0.055***
				(−2.70)				(−2.70)
ROA t-1	−29.751***	−28.407***	−27.274***	−28.568***	−27.354***	−25.978***	−24.984***	−26.149***
	(−6.26)	(−5.98)	(−5.73)	(−6.10)	(−6.05)	(−5.77)	(−5.55)	(−5.88)
SIZE t-1	0.033	0.071	−0.258	0.022	−0.031	−0.01	−0.301	−0.054
	(0.04)	(0.08)	(−0.28)	(0.02)	(−0.04)	(−0.01)	(−0.35)	(−0.06)
LEV t-1	9.419***	10.671***	9.799***	10.211***	8.352***	9.640***	8.721***	9.172***
	(3.60)	(4.30)	(4.05)	(4.21)	(3.32)	(4.07)	(3.78)	(3.95)
AGE t-1	−4.825***	−5.173***	−4.958***	−4.660***	−4.333***	−4.641***	−4.396***	−4.135**
	(−2.80)	(−3.02)	(−3.01)	(−2.73)	(−2.59)	(−2.80)	(−2.76)	(−2.49)
M.B. t-1	−0.093**	−0.089**	−0.091**	−0.085**	−0.075*	−0.071*	−0.075*	−0.069*
	(−2.17)	(−2.06)	(−2.15)	(−1.98)	(−1.84)	(−1.75)	(−1.86)	(−1.68)
CAPEX t-1	−22.564**	−22.433**	−17.922*	−23.820**	−18.289*	−18.127*	−14.144	−19.293*
	(−2.19)	(−2.15)	(−1.79)	(−2.28)	(−1.85)	(−1.81)	(−1.48)	(−1.93)
_cons	40.991***	42.004***	43.792***	41.615***	39.660***	40.692***	42.155***	40.248***
	(4.63)	(4.73)	(5.09)	(4.75)	(4.66)	(4.78)	(5.11)	(4.78)
Year F.E.	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Firm F.E.	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	7474	7421	7406	7417	7477	7423	7409	7420
r2	0.204	0.206	0.199	0.203	0.185	0.187	0.18	0.184
r2_a	0.202	0.204	0.196	0.201	0.183	0.185	0.177	0.182
F	28.895	29.066	28.65	29.356	28.37	28.179	27.751	28.623

Notes: t-statistics in parentheses, * indicate significance at 10%, ** indicate significance at 5%, *** indicate significance at 1%.

Table 10. Endogeneity test: 2SLS-IV and dynamic GMM regressions

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
IV t-1					0.213***	0.211***	0.174***	0.197***
					(5.24)	(4.92)	(3.95)	(4.73)
ENV t-1	−0.385***				−0.177**
	(−4.79)				(−2.53)
SOC t-1		−0.310**				−0.364**
		(−2.52)				(−2.51)
GOV t-1			−0.042				−0.191
			(−0.99)				(−1.37)
ESG t-1				−0.609***				−0.277***
				(−3.49)				(−2.58)
ROA t-1	−28.192***	−24.946***	−24.808***	−26.668***	−21.016	−22.626	−45.207**	−25.612*
	(−6.78)	(−6.14)	(−6.23)	(−6.47)	(−1.46)	(−1.33)	(−1.98)	(−1.72)
SIZE t-1	1.797**	1.495	0.096	2.260**	−0.665	0.086	−1.575	−0.482
	(2.13)	(1.60)	(0.15)	(2.31)	(−0.60)	−0.06	(−1.59)	(−0.41)
LEV t-1	5.052**	9.943***	8.880***	7.646***	20.737**	20.843**	31.698**	21.882***
	(2.04)	(4.53)	(4.33)	(3.22)	(2.51)	(2.46)	(1.97)	(2.67)
AGE t-1	−0.954	−3.169**	−3.534***	0.919	0.13	0.467	−0.049	0.351
	(−0.64)	(−2.31)	(−2.64)	−0.46	(0.15)	(0.48)	(−0.03)	(0.38)
M.B. t-1	−0.082*	−0.062	−0.086**	−0.064	−0.289	−0.167	−0.475	−0.194
	(−1.80)	(−1.38)	(−2.05)	(−1.32)	(−1.50)	(−0.82)	(−0.93)	(−1.06)
CAPEX t-1	−28.625***	−28.077***	−18.806**	−29.307***	23.421	15.321	4.791	19.364
	(−3.10)	(−2.85)	(−2.11)	(−3.01)	(0.80)	(0.49)	(0.09)	(0.66)
_cons					27.510***	0	0	31.524***
					(2.64)	(0)	(0)	(3.34)
Year F.E.	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Firm F.E.	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	6952	6916	6890	6905	7387	7335	7321	7334
r2	0.073	0.143	0.183	0.048
Kleibergen-Paap Under.(p)	0.000	0.000	0.000	0.000
Cragg-Donald Wald F statistic	96.696	54.821	248.954	41.134
Hansen J Statistic Overid (p)	0.5102	0.1107	0.3375	0.4510	0.182	0.154	0.109	0.138
AR(1)					0.000	0.000	0.000	0.000
AR(2)					0.226	0.152	0.115	0.178

Notes: t-statistics in parentheses, * indicate significance at 10%, ** indicate significance at 5%, *** indicate significance at 1%.

Table 11. Effects of ESG and its pillars’ performance on idiosyncratic volatility (inclusion of companies in the technology sector)

	(1)	(2)	(3)	(4)
GOV t-1	0.000
	(−0.05)
ENV t-1		−0.027*
		(−1.86)
SOC t-1			−0.012
			(−0.74)
ESG t-1				−0.028
				(−1.40)
ROA t-1	−20.611***	−22.606***	−22.413***	−21.578***
	(−5.59)	(−6.07)	(−5.92)	(−5.90)
SIZE t-1	−0.615	−0.432	−0.364	−0.483
	(−0.77)	(−0.55)	(−0.45)	(−0.61)
LEV t-1	7.693***	7.513***	7.425***	8.318***
	(3.94)	(3.50)	(3.27)	(4.23)
AGE t-1	−4.082***	−4.131***	−4.338***	−4.043***
	(−4.14)	(−4.04)	(−4.17)	(−3.97)
M.B. t-1	−0.058	−0.056	−0.051	−0.049
	(−1.64)	(−1.57)	(−1.41)	(−1.37)
CAPEX t-1	−6.841	−11.176	−11.176	−12.03
	(−0.80)	(−1.23)	(−1.21)	(−1.31)
_cons	45.104***	43.732***	43.996***	44.331***
	(6.61)	(6.37)	(6.33)	(6.51)
Year F.E.	Yes	Yes	Yes	Yes
Firm F.E.	Yes	Yes	Yes	Yes
N	8855	8932	8867	8866
r2	0.186	0.188	0.189	0.188
r2_a	0.184	0.186	0.187	0.187
F	35.367	35.34	36.079	36.229

Data availability statement

Raw data were generated at Refinitiv and the Center of Research in Security Prices (CRSP). Derived data supporting the findings of this study are available from the corresponding author on request.