Corporate controversies and company's financial performance: Exploring the moderating role of ESG practices

The topic of corporate social responsibility (CSR), along with the related environmental, social and governance (ESG) pillars, is playing a key role in the literature and is attracting increasing interest among managers and policymakers. Nevertheless, we still know little about how and whether corporate controversies, which are strictly related to CSR, impact firm performance. As a result, this study aims to explore the impact of corporate controversies on financial performance, and proposes the positive moderating role of ESG practices over the 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 mitigating the negative effects of controversies, but rather as ways for avoiding controversies.