Received: 16 August 2019 Revised: 31 October 2019 Accepted: 15 November 2019

DOI: 10.1002/bse.2427

RESEARCH ARTICLE

The impact of sustainability (environmental, social, and

governance) disclosure and board diversity on firm value: The
moderating role of industry sensitivity

Muhammad Azeem Qureshi1 | Sina Kirkerud2 | Kim Theresa2 | Tanveer Ahsan3

1
Department of Finance, Oslo Metropolitan
University School of Business, Oslo, Norway Abstract
2
Department of Finance, Oslo Metropolitan Using a large panel data set comprising 812 listed European firms, this study investi-
University, Oslo, Norway
gates whether sustainability disclosure (environmental, social, and governance) and
3
Department of Finance, Rennes School of
Business, Rennes, France female representation on boards affect firm value. We observe a positive impact of
sustainability disclosure and board gender diversity on firm value, suggesting that the
Correspondence
Tanveer Ahsan, Department of Finance, best management practices, enhanced stakeholder trust, and female representation
Rennes School of Business, Rennes 35065, on boards improve firm value. We observe that the firms in sensitive industries
France.
Email: tanveer.ahsan@rennes-sb.com achieve superior social and governance performance. We also observe that the firms
with higher female representation on their boards present significantly superior envi-
ronmental, social, and governance performance. Our results are robust to different
firm and country specific control variables and to year- and country-fixed effects.

KEYWORDS

board gender diversity, ESG, shareholder theory, stakeholder theory, stock prices,
sustainability disclosure, value relevance

1 | I N T RO DU CT I O N development to improve human lives and protect the environment.

The United Nations (UN) developed the UN Environmental Program
at a conference in Stockholm1 in 1972 to encourage society and busi-
nesses to take action regarding world issues relating to the environ-
ment, poverty, and human rights. In 1983, the General Assembly
established a special commission to prepare a report regarding global
environmental problems and proposed strategies for sustainable
development. 2
In 1987, the term “sustainable development” was
stated in a published report of the World Commission on Environment
and Development3 for the first time. The purpose of the commission,
which is also known as the Brundtland Commission, is to educate and
inspire a new way of thinking on poverty and environmental issues. In
1992, at the Earth Summit,4 more than 178 countries adopted a com-
prehensive plan of action to build a global partnership for sustainable
1
https://sustainabledevelopment.un.org/milestones/humanenvironment
2
https://sustainabledevelopment.un.org/milestones/wced
3 5
https://www.un.org/ga/search/view_doc.asp?symbol=A/42/427&Lang=E
4 6
https://sustainabledevelopment.un.org/milestones/unced
Later, in 2015, the UN introduced the UN Sustainable Development
Goals (UNSDG). These goals are related to poverty, inequality, cli-
mate, environmental degradation, prosperity, peace, and justice. Their
aim is to produce a better sustainable future for all the stakeholders in
society by 2030.5 The UNSDG has provided a decision-making frame-
work to investors and corporations for their investments, strategies,
and management. The development of the UNSDG has increased the
focus on sustainability in Europe. The European Union agreed with
the UN in 2015 to set an agenda towards a sustainable Europe by
2030 for all European Union member countries and institutions
including all stakeholders and public authorities.
The Global Reporting Initiative (GRI) pioneered sustainability
reporting in 1997.6 The GRI provides a set of standards on how orga-
nizations can report their economic, environmental, and social
impacts. The purpose of reporting these standards is to provide
https://sustainabledevelopment.un.org/post2015/transformingourworld
https://www.globalreporting.org/information/about-gri/Pages/default.aspx

Bus Strat Env. 2019;1–16. wileyonlinelibrary.com/journal/bse © 2019 John Wiley & Sons, Ltd and ERP Environment 1
2 QURESHI ET AL.
reliable information to the stakeholders about an organization's
impacts and contributions to sustainable development. The GRI
divides the reporting standards in two sets: the universal standards
and the top-specific standards (environmental, social, and governance
[ESG] reports). The universal standards provide the foundation and
starting point for using the GRI standards, and the top-specific stan-
dards provide specific disclosure rules for each of the individual ESG
factors. All of these steps that have been taken by the UN and the
guidelines that have been provided by the GRI have increased the
international focus on sustainability reporting and put pressure on
corporations to play their roles in sustainable development and to dis-
close them in their financial reports. Consequently, ESG disclosure rat-
ing agencies have emerged that provide reliable data about the ESG
performance of the firms (Avetisyan & Hockerts, 2017).
The core objective of profit making organizations, on the other
hand, is to optimize their firm value (Brealey, Myers, Allen, &
Mohanty, 2012). However, the firms do respond to their operating
environment to achieve their objective of value maximization (Mirza
& Ahsan, 2019). The spending that is carried out by firms for sustain-
able development may reduce the profits of the firms and, conse-
quently, may decrease the firm value. Accordingly, it is important to
investigate the impacts of sustainability disclosure on firm value.
Because sustainability or ESG reporting falls under the umbrella of
corporate social responsibility (CSR), the empirical studies that have
been carried out in the related field can be traced back to the begin-
ning of the 1970s (Friede, Busch, & Bassen, 2015). However, the
recent focus of empirical studies on different financial markets is spe-
cifically to investigate the impacts of ESG reporting. For example, a
study by Ashwin Kumar et al. (2016) investigated the impacts of ESG
disclosure on the stock returns of 157 firms that were listed on the
Dow Jones and found that the firms incorporating ESG factors had
less volatile stock returns compared with their competitors in the
same industry. Husted and de Sousa-Filho (2017) investigated the
impacts of sustainability governance and country risk on the ESG per-
formance on 459 firms from nine countries and found that all types of
sustainability governance improve ESG performance. Lokuwaduge
and Heenetigala (2017) explored the extent of ESG reporting in the
mining and metal sector firms that are listed in the Australian Securi-
ties Exchange and found that ESG reporting is highly influenced by
the reporting regulations. Mervelskemper and Streit (2017) investi-
gated the effectiveness of a firm's ESG reporting strategy and found
that ESG reporting strongly influenced perceived ESG performance.
Li, Gong, Zhang, and Koh (2018) investigated the impact of ESG per-
formance on 350 Financial Times Stock Exchange-listed firms and
found a positive impact of ESG performance on firm value. Buallay
(2019) investigated the impact of ESG reporting on the performance
of 235 European banks and found a positive impact of ESG disclosure
on bank performance.
To the best of the authors' knowledge, none of the previous sig-
nificant studies investigated the impact of sustainability disclosure
(ESG) on the performance or value of the financial and nonfinancial-
listed firms in European economies. European economies are consid-
ered to be the leading economies advocating sustainable development
(Buallay, 2019). Accordingly, this study extends the literature regard-
ing stakeholders' theory (Freeman, 1984; Jones, 1995; Waddock &
Graves, 1997) and sustainability (ESG) disclosure by investigating the
impact of sustainability (ESG) disclosure on the value of European-
listed firms. The study collects data of 812 listed firms7 in 22 Euro-
pean countries and applies regression analysis that controls for year-
and country-fixed effects. The study contributes to the literature in
several aspects. First, the study investigates the impact of sustainably
disclosure (ESG) on the value of European-listed firms. Second, the
study investigates the moderating role of industry sensitivity on the
relationship of sustainably (ESG) disclosure and firm value. Third, the
study investigates the impact of board gender diversity on the value
of European-listed firms. Fourth, the study investigates the impact of
board gender diversity on sustainability (ESG) disclosure of European-
listed firms. The results of the study support stakeholders' theory and
explain that sustainability (ESG) disclosure by European-listed firms
enhances their firm value. The results also explain that increased rep-
resentation of female directors on boards increases firm value. Fur-
ther, we observe increased significance of ESG disclosure on firm
value for environmentally sensitive industries. We also observe that
firms in sensitive industries present better social and governance per-
formance, whereas the firms with more female directors on their
boards present better ESG performance. To ensure that our results
are not dominated by one single country and year, we control for
year- and country-fixed effects. Furthermore, to ensure that our
results are not dominated by firm-specific factors, we control for a
number of time-varying firm-specific variables. Our results are robust
to different institutional settings in Europe.
The study is organized in five sections. In Section 2, we develop
the theoretical framework. In Section 3, we describe our data and the
methodology. The results are presented in Section 4, and Section 5
provides conclusions and policy implications. The references are at
the end.
2 | THEORETICAL FRAMEWORK
The shareholder and stakeholder theories are two opposing corporate
theoretic frameworks. Shareholder theory states that corporations'
only responsibility is maximizing shareholders' value (Friedman, 1970).
If a corporation's engagement in social activities negatively affects the
value creation for shareholders, it will violate their core responsibility.
Friedman (1970) further argues that the managers who spend money
on behalf of businesses should only act in the interests of the share-
holders and that spending money on social activities is a violation of
their duty. On the other hand, stakeholder theory states that corpora-
tions have a responsibility towards all of their stakeholders, and it
describes stakeholders as employees, customers and suppliers, share-
holders, government, environmentalists, and other groups or individ-
uals who are affected by a corporation (Freeman, 2010). Stakeholder
theory suggests that a corporation that is involved in activities beyond
7
The 812 firms include financial and non-financial firms from 16 different industries.
QURESHI ET AL.
profit maximization will consequently be rewarded with value creation
for the firm and its stakeholders. Further, the literature defines CSR as
a framework that considers social aspects such as environmental pro-
tection, employees' welfare, community programs, and transparent
processes (Goergen, 2012). These activities go beyond the normal
scope of corporate activities. Sustainability development and ESG dis-
closure are considered as the new trends under the umbrella of CSR
(Buallay, 2019; Lokuwaduge & Heenetigala, 2017; Mervelskemper &
Streit, 2017). Accordingly, shareholder theory opposes sustainability
or ESG disclosure, whereas stakeholder theory supports sustainability
or ESG disclosure.
Elkington (1994) introduces the sustainability framework as the
“triple bottom line” and explains how corporations can achieve sus-
tainable development by integrating the economic, social, and envi-
ronmental aspects of their business. Elkington (1994) argues that
corporations need to play an active role in achieving sustainable
development goals because focusing on sustainable strategies can
improve their profits, their customers, and the environment, which
will be a “win-win-win” strategy. Porter and Kramer (2002) discuss
how social improvements related to a corporation's business can lead
to competitive advantages and economic benefits for the company.
They explain that social and economic goals are fundamentally con-
nected. They also state that one of the most effective methods for
dealing with world issues is in fact to mobilize corporations in ways
that benefit both society and the company. According to Porter and
Kramer (2002), a company can achieve higher economic benefits
when they use their resources efficiently and produce goods that con-
sumers value. This is in line with stakeholder theory, where companies
create value by becoming more socially responsible and gaining a
competitive advantage.
On the other hand, Barnea and Rubin (2010) argue that over-
investing and commitments to sustainability can create conflicts
among shareholders because it reduces shareholders' wealth and firm
value, which is in line with shareholder theory. However, most of
empirical evidence favors stakeholder theory; for example,
Schadewitz and Niskala (2010) explain that sustainability reporting is
one of the significant explanatory factors of Finnish firms' market
value during the years from 2002 to 2005. De Klerk, de Villiers, and
van Staden (2015) find that CSR disclosure has a positive association
with share prices in the United Kingdom. M. Miralles-Quirós, J.
Miralles-Quirós, and Valente Gonçalves (2018) define sustainability
using three pillars (ESG) and explain that the Brazilian market posi-
tively values the three ESG pillars. Another study supports an overall
positive impact of ESG disclosure on bank performance in Europe;
however, it finds mixed results for individual ESG pillars (Buallay,
2019). Following the reasoning of stakeholder theory and in the light
of the empirical evidence, we develop our first hypothesis:
Hypothesis 1. There is a positive association between sustainability
(ESG) disclosure and the market value of European firms.
A firm's focus on different ESG pillars may differ according to the
business type, operating environment, and management's preferences
3
(Friede et al., 2015). Today, the environmental factor is frequently
highlighted as the most pressing issue because climate change is
something that affects people all over the globe. The Paris Agree-
ment8 is one of the significant steps regarding the global response to
the threat of climate change. Carroll (1979) suggested that the core
responsibility of a corporation is to meet consumers' needs and pref-
erences in society. Because the world is changing, so are consumer
preferences. Therefore, it is becoming vital to run more environmen-
tally friendly businesses. Further, our sample firms consist of
European firms, and European economies have a very high social and
moral development indexes,9 especially those of the Scandinavian
region (Qureshi, Ahsan, Aziz, & Yousaf, 2019). Europe is considered as
the leading region in regard to the implementation of human rights.
Furthermore, the empirical evidence regarding the three pillars of ESG
disclosure provides different results for different dimensions. For
example, an empirical study that was carried out by Ziegler, Schröder,
and Rennings (2007) finds that environmental performance has a posi-
tive effect, whereas social performance has a negative effect on firm
value. Another study that was carried out for the European banking
sector finds a highly significant impact of environmental and social
disclosure on market performance and no impact of governance dis-
closure on market performance (Buallay, 2019). Considering that our
sample data set encompasses Europe and the results of previous
empirical studies, we develop our second hypothesis:
Hypothesis 2. Environmental and social disclosures are more relevant
for the value of European firms than governance disclosure.
Further, previous empirical evidence states that the impact of
ESG disclosure can differ between the firms operating in environmen-
tally sensitive industries and nonsensitive industries because of their
operating activities (De Klerk et al., 2015; Garcia, Mendes-Da-Silva, &
Orsato, 2017; Miralles-Quirós, Miralles-Quirós, & Valente Gonçalves,
2018). Environmentally sensitive firms are the corporations operating
within the social contact or that are more visible. The ESG disclosure
effect on valuation can be more significant for the firms operating in
the industries that are more likely to be exposed to environmental
issues; therefore, the ESG requirements are higher for the firms in
sensitive industries (Miralles-Quirós et al., 2018). Garcia et al. (2017)
study sensitive industries in depth and find that the firms operating in
these industries tend to have higher overall ESG scores because the
firms bear a higher risk. Accordingly, we develop our third hypothesis:
Hypothesis 3. The association between sustainability (ESG) disclosure
and market value is stronger among the European firms operating
in sensitive industries.
Moreover, the international focus and social debates on gender
equality make it an important topic today. Following the lead of
8
https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
9
http://www.humantruth.info/europe.html
4 QURESHI ET AL.
TABLE 1 Dependent and independent variables, their model name, and proxy
Variable level Variable name
Dependent Firm value
Independent Environmental disclosure
Social disclosure
Governance disclosure
ESG disclosure
Board gender diversity
Control (Firm level) Earnings per share
Book value per share
Firm size
Leverage
Control (Country level) Inflation
Economic growth
Banking development
Stock market development
Dummy Industry sensitivity
Abbreviation: ESG, environmental, social, and governance.
Norway in 2003 (Strøm, 2019), many European countries mandated
gender quotas of between 30% and 40% to tackle the underrepre-
sentation of women on boards. Consequently, many firms have to
change the structure of their boards to increase board gender
diversity and the female presence on their boards. The previous
research on board gender diversity and ESG provides some con-
flicting results on how board gender diversity might affect com-
pany performance. Rose (2007) finds that there is no association
between board diversity and the performance of Danish firms.
Adams and Ferreira (2009) find that females on boards impact
firms' performance because they are better monitors and have bet-
ter attendance. According to Bear, Rahman, and Post (2010), a
female presence on the board affects a firm's reputation and finan-
cial performance; hence, the firm achieves higher CSR ratings.
Cucari, Esposito De Falco, and Orlando (2018) find that a female
presence on the boards of Italian-listed firms has a negative effect
on ESG disclosure. Birindelli, Dell'Atti, Iannuzzi, and Savioli (2018)
find a U-shaped association between board gender diversity and
ESG performance in the Banking system. Our aim is to investigate
the impacts of board gender diversity on the firm value and sus-
tainability (ESG) disclosure of European firms; therefore, we
develop our fourth and fifth hypotheses:
Hypothesis 4. There is a positive association between a female presence
on the board and the market value of European firms.
Hypothesis 5. There is a positive association between a female presence
on the board and the sustainability (ESG) disclosure of European
firms.
Model name Proxy
Pit Historic share price close as of the fiscal period end
date
Eit Thomson Reuters score for environmental disclosure.
Sit Thomson Reuters score for social disclosure.
Git Thomson Reuters score for governance disclosure.
ESGit Thomson Reuters combined score for environmental,
social, and governance disclosure.
BGDit Percentage of female directors on board
EPSit Net income before extraordinary items/average shares
outstanding
BVPSit Total equity/average shares outstanding
SZit Ln (Total Assets)
LVit Long-term debt/Equity
INFjt Annual inflation (consumer prices) rate
GDPjt Annual per capita GDP growth rate
BDjt Domestic credit to private sector by banks (percentage
of GDP)
SMDjt Stocks traded, total value (percentage of GDP)
D_Sensi 1 for sensitive industries, 0 otherwise
3 | DATA, VARIABLES, AND
METHODOLOGY
3.1 | Data
We use the Thomson Reuters Eikon database to collect our sample
data set because it provides the ESG disclosure indexes for the firms
and it is widely used by researchers and analysts. We use two criteria
for the selection of the firms. First, we include firms with headquar-
ters in Europe. Second, we include firms with ESG disclosure scores
that were reported during the sample period. After screening, we are
left with 812 firms and 5,684 firm-year observations during the period
from 2011 to 2017 from 22 European countries (Austria, Belgium,
Cyprus, the Czech Republic, Denmark, Finland, France, Germany,
Greece, Hungary, Ireland, Italy, Luxemburg, Malta, the Netherlands,
Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United
Kingdom). We collect the data for the country-level variables from the
World Bank Database.10 These 812 listed firms cover 16 different
industries, including Accommodations and Food Services; Administra-
tive and Support and Waste Management and Remediation Services;
Arts, Entertainment, and Recreation; Construction; Finance and Insur-
ance; Health Care and Social Assistance; Information; Manufacturing;
Mining, Quarrying, and Oil and Gas Extraction; Other Services (except
Public Administration); Professional, Scientific, and Technical Services;
Real Estate and Rental and Leasing; Retail Trade; Transportation and
Warehousing; Utilities; and Wholesale Trade. Table 1 summarizes the
10
https://www.worldbank.org/
QURESHI ET AL. 5

dependent and independent variables along with their measurement
proxies.
3.2 | Methodology
In this study, we propose using the benchmark price model of Ohlson
(1995) to measure firm value. Some of the previous empirical studies
use return models (changes in monthly stock returns) to measure
stock performance (Ashwin Kumar et al., 2016; Ziegler et al., 2007).
Using a return model is appropriate when the objective of the study is
to investigate changes in stock returns. However, the objective of this
study is to investigate the impacts of ESG disclosure and board gender
diversity on firm value; therefore, Ohlson's price model is appropriate
for this study (De Klerk et al., 2015). Ohlson (1995) explains that a
company's market value is a function of both financial information
and nonfinancial information. This makes the model useful and rele-
vant for our study because we want to investigate the value relevance
of ESG disclosure and board gender diversity (BGDit) as the non-
financial information and we use the book value per share (BVPSit) and
earnings per share (EPSit) as the financial information in our basic
regression model. Ohlson's price model has been used by many empir-
ical studies in related fields (De Klerk et al., 2015; Hassel, Nilsson, &
Nyquist, 2005; Kaspereit & Lopatta, 2016; Miralles-Quirós et al.,
2018; Schadewitz & Niskala, 2010). Our baseline valuation model
(Hypotheses 1 and 2) is presented as follows:
Pit = β0 + β1 EPSit + β2 BVPSit + β3 ESGit + αi + μt + εit , ð1Þ
where Pit is stock price of firm i at time t. EPSit is the earnings per
share of firm i at time t, BVPSit is the book value per share of firm i at
time t, ESGit is one of the three measures of disclosure (ESG) of firm i
at time t, αi is the country-fixed effects, μt is the time-fixed effects,
and εit is the error term for firm i at time t.
We further extend our model to investigate whether ESG disclo-
sure is associated with higher stock prices for the firms operating in
sensitive industries (Hypothesis 3). We identify the manufacturing,
construction, transportation and warehousing, mining, quarrying, oil
and gas extraction and administrative, waste management, and reme-
diation services sectors as the sensitive industries in our data set. The

TABLE 2 Pairwise correlation

Variables Pit Eit Sjt Git ESGit BGDit EPSit BVPSit

Pit 1.000
Eit 0.118*** 1.000
0.000
Sjt 0.113*** 0.671*** 1.000
0.000 0.000
Git −0.011 0.236*** 0.296*** 1.000
0.406 0.000 0.000
ESGit 0.097*** 0.822*** 0.846*** 0.630*** 1.000
0.000 0.000 0.000 0.000
BGDit 0.086*** 0.313*** 0.265*** 0.225*** 0.346*** 1.000
0.000 0.000 0.000 0.000 0.000
EPSit 0.736*** 0.087*** 0.066*** 0.000 0.069*** 0.083*** 1.000
0.000 0.000 0.000 0.980 0.000 0.000
BVPSit 0.769*** 0.082*** 0.033** −0.029** 0.040*** 0.030** 0.662*** 1.000
0.000 0.000 0.014 0.027 0.003 0.023 0.000
SZit 0.168*** 0.453*** 0.410*** 0.185*** 0.454*** 0.230*** 0.169*** 0.279***
0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
LVit −0.127*** 0.103*** 0.073*** 0.009 0.080*** 0.025* −0.142*** −0.101***
0.000 0.000 0.000 0.545 0.000 0.097 0.000 0.000
INFjt −0.281*** −0.077*** −0.053*** −0.001 −0.061*** −0.164*** −0.203*** −0.243***
0.000 0.000 0.000 0.970 0.000 0.000 0.000 0.000
GDPjt 0.018 −0.022 0.001 0.019 0.000 0.047*** 0.029** −0.017
0.186 0.104 0.922 0.145 0.985 0.000 0.027 0.207
BDjt −0.031** −0.021 −0.025* 0.026** −0.009 −0.178*** −0.015 −0.076***
0.020 0.114 0.057 0.047 0.478 0.000 0.269 0.000
SMDjt 0.026* 0.005 −0.020 0.036** 0.009 −0.132*** 0.046*** −0.022
0.069 0.723 0.153 0.012 0.547 0.000 0.001 0.118
6 QURESHI ET AL.

selection is based on the North American Industry Classification Sys-
tem sector codes; these industries are identified as environmentally
sensitive industries. We present our second model as follows:
Pit = β0 + β1 EPSit + β2 BVPSit + β3 ESGit + β4 ESGit *DSensi + αi + μt + εit , ð2Þ
We also control for country specific time-varying variables in our
model and present our fourth model as follows:
Pit = β0 + β1 EPSit + β2 BVPSit + β3 ESGit + β4 SZit + β5 LV it + β6 CNT jt + μt + εit ,
ð4Þ

where ESGit * D_Sensi is the dummy interaction of the industry's sensi-
tivity with one of the three measures of ESG disclosure of firm i at
time t.
We further extend our model to control for firm specific time-
varying variables and present our third model as follows:
Pit = β0 + β1 EPSit + β2 BVPSit + β3 ESGit + β4 SZ it + β5 LV it + αi + μt + εit , ð3Þ
where SZit is the natural logarithm of the total assets of firm i at
time t and LVit is the ratio of long-term debt over equity of firm i
at time t.
where CNTjt is one of the four country-specific time-varying factors
(annual inflation rate, annual per capita gross domestic product (GDP)
growth, banking development, and stock market development) of
country j at time t, μt is the time-fixed effects, and εit is the error term
for firm i at time t.
To investigate the impact of board gender diversity on the market
value of European firms (Hypothesis 4), we develop the following
regression model:
Pit = β0 + β1 BGDit + β2 EPSit + β3 BVPSit + β4 SZ it + β5 LV it + β6 CNT jt + αi + μt + εit
ð5Þ

TABLE 2 Pairwise correlation

Variables SZit LVit INFjt GDPjt BDjt SMDjt VIF

Pit
Eit 2.03

Sjt 1.95

Git 1.18

ESGit 2.03

BGDit 1.25

EPSit 2.01

BVPSit 2.12

SZit 1.000 1.56

LVit 0.282*** 1.000 1.13

0.000
INFjt −0.153*** 0.017 1.000 1.15
0.000 0.254
GDPjt −0.025* −0.067*** −0.170*** 1.000 1.10
0.061 0.000 0.000
BDjt −0.204*** 0.062*** 0.143*** −0.152*** 1.000 3.37
0.000 0.000 0.000 0.000
SMDjt −0.163*** 0.039** 0.062*** −0.043*** 0.820*** 1.000 3.15
0.000 0.018 0.000 0.002 0.000

Note. The table presents pairwise correlation between independent, explanatory, and control variables. The table also presents the results of variation
inflation factor (VIF).
***
p < .01.**p < .05.*p < .1.
QURESHI ET AL. 7

TABLE 3 Descriptive statistics

Variables Obs. Mean STD Median Minimum Maximum

Panel A
Pit 5,684 261.648 356.339 120.778 6.459 1,616.457
Eit 5,684 64.590 20.019 66.724 21.853 94.771
Sjt 5,684 61.470 19.820 63.311 19.459 93.362
Git 5,684 51.763 20.336 52.056 15.030 87.491
ESGit 5,684 59.552 15.581 60.707 26.716 86.143
BGDit 5,684 20.671 12.518 20.000 0.000 45.455
EPSit 5,684 12.601 22.545 5.868 −27.547 95.631
BVPSit 5,684 143.855 209.789 59.293 1.132 956.903
SZit 5,677 24.774 1.749 24.572 21.808 28.906
LVit 4,319 0.818 0.858 0.531 0.004 3.811
INFjt 07 1.357 1.241 1.220 −2.097 5.652
GDPjt 07 1.723 2.249 1.789 −9.132 25.117
BDjt 07 120.680 35.737 129.382 33.175 253.146
SMDjt 07 61.023 34.937 60.832 0.119 140.508

Panel B

Mean difference by industry sensitivity Mean difference by female presence at board

Not sensitive Sensitive t statistic p value No female at board Female at board t statistic p value
Eit 64.734 64.240 0.908 .363 48.759 66.614 −22.213 .000***
Sit 59.330 63.354 −7.496 .000 ***
48.009 63.170 −18.774 .000***
Git 51.139 52.361 −2.220 .026** 40.622 53.264 −15.186 .000***
ESGit 58.669 60.302 −3.826 .000 ***
45.913 61.333 −24.604 .000***

Mean difference by firm size Mean difference by firm leverage

Smaller size Bigger size t statistic p value Low leverage High leverage t statistic p value
Eit 57.235 71.710 −28.459 .000*** 66.565 67.915 −2.258 .023**
Sit 54.475 68.301 −27.242 .000*** 62.905 64.854 −3.231 .001***
Git 48.765 54.775 −11.021 .000 ***
52.851 53.348 −0.795 .426
ESGit 53.656 65.351 −29.338 .000 ***
61.081 62.388 −2.753 .005***

Mean difference by inflation Mean difference by economic growth (GDP)

Low inflation High inflation t statistic p value Low GDP growth High GDP growth t statistic p value
Eit 65.945 63.021 5.395 .000 ***
64.040 64.998 −1.759 .078*
Sit 62.169 60.553 2.998 .002*** 60.614 62.226 −2.983 .002***
Git 51.806 51.706 0.180 .856 50.897 52.749 −3.359 .000***
ESGit 60.391 58.594 4.212 .000*** 58.845 60.243 −3.265 .001***

Mean difference by banking development Mean difference by stock market development

Low developed High developed t statistic p value Low developed High developed t statistic p value
***
Eit 65.820 63.139 4.945 .000 64.852 63.004 3.144 .001***
***
Sit 62.718 59.995 5.057 .000 62.314 59.998 3.998 .000***
Git 50.849 52.670 −3.311 .000*** 50.891 53.020 −3.642 .000***
***
ESGit 60.191 58.792 3.276 .001 59.696 58.888 1.744 .081*

Note. The table presents descriptive statistics for the dependent, explanatory, and control variables. The table also presents the results of mean
comparison t test to compare the mean values of environmental (Eit), social (Sit), governance (Git), and ESG-combined score for different firm-level and
country-level low vs. high categories. We downloaded data from Thomson Reuters Eikon database, and all the data are in the same monetary unit, that is,
Norwegian Krone (NOK).
***
p < .01.**p < .05.*p < .1.
 8

TABLE 4 Countrywise means values

Country Pit Eit Sjt Git ESGit BGDit EPSit BVPSit SZit LVit INFjt GDPjt BDjt SMDjt Firms Obs.
1 Austria 273.35 59.06 58.27 54.14 57.29 19.28 15.79 208.66 25.13 0.72 1.89 1.43 88.73 7.44 12 84
2 Belgium 427.71 58.80 51.88 48.32 53.37 21.49 20.81 351.41 24.95 0.60 1.78 1.20 59.14 20.55 24 168
3 Cyprus 900.54 67.29 84.45 57.14 70.29 27.89 41.36 617.62 23.37 1.52 0.10 0.20 237.69 0.65 1 7
4 Czech Republic 140.62 53.00 48.36 55.63 52.13 10.37 8.35 98.43 24.82 0.83 1.49 2.19 50.31 7.14 4 28
5 Denmark 348.57 60.35 57.78 49.22 56.13 21.79 13.11 141.17 24.20 0.72 1.19 1.59 174.25 – 23 161
6 Finland 172.80 71.82 60.07 50.37 61.15 28.91 8.58 81.34 24.45 0.56 1.38 0.81 93.22 – 25 175
7 France 452.34 77.39 69.83 50.74 66.47 31.90 21.43 260.06 25.60 0.78 0.96 1.21 96.45 41.70 77 539
8 Germany 456.95 66.16 67.74 51.44 62.18 19.84 23.09 238.57 25.29 0.74 1.29 1.85 79.97 37.39 65 455
9 Greece 198.14 58.86 52.05 49.70 53.88 11.02 7.11 156.10 24.85 0.76 0.17 −2.58 112.20 8.71 17 119
10 Hungary 97.73 67.21 70.82 50.00 63.24 9.96 5.41 81.67 24.99 0.27 1.97 2.33 43.07 7.49 4 28
11 Ireland 316.95 59.36 60.29 50.68 57.00 17.09 9.47 124.62 24.93 0.73 0.71 7.34 79.70 6.22 25 175
12 Italy 122.41 60.43 61.16 48.90 57.13 22.82 2.21 82.32 25.74 1.42 1.21 −0.03 88.78 51.66 40 280
13 Luxembourg 308.00 63.29 61.54 47.00 57.88 14.45 16.29 177.02 25.36 0.68 1.56 2.57 94.33 0.17 6 42
14 Malta 41.54 30.05 27.13 47.19 34.26 3.17 4.14 38.83 23.52 – 1.42 5.43 99.00 0.65 1 7
15 Netherlands 370.17 67.39 65.90 52.19 62.21 20.89 16.52 170.57 25.18 0.73 1.51 1.26 114.17 53.70 29 203
16 Norway 99.59 65.29 64.61 51.73 61.19 40.84 5.26 57.86 24.85 0.65 1.96 1.69 113.56 26.02 16 112
17 Poland 148.58 46.50 41.52 50.95 45.66 14.38 9.79 108.91 24.79 0.44 1.34 3.29 52.21 11.99 23 161
18 Portugal 49.24 72.80 72.94 55.84 67.75 9.76 −0.89 38.84 24.87 1.35 1.27 0.06 130.83 16.10 8 56
19 Spain 122.74 71.46 72.61 50.86 65.62 15.90 5.73 75.14 25.44 1.39 1.16 0.79 133.40 66.45 40 280
20 Sweden 144.40 70.21 65.54 52.43 63.07 31.33 9.40 79.83 24.82 0.79 0.91 2.21 129.99 – 44 308
21 Switzerland 770.75 62.33 57.44 50.91 57.08 13.68 39.34 412.84 25.03 0.69 −0.25 1.65 169.16 116.74 62 434
22 United Kingdom 101.21 62.26 59.13 53.56 58.48 18.09 5.14 47.96 24.06 0.86 2.02 2.01 146.24 86.49 266 1862
Total 812 5684

Note. The table presents countrywise mean values for the dependent, explanatory, and control variables. The table also presents number of firms and firm-year observations for each of the 22 European
countries included in our sample.
QURESHI ET AL.
QURESHI ET AL. 9

where Pit is the stock price of firm i at time t. BGDit is the ratio of
female directors on the board of firm i at time t, EPSit is the earnings
per share of firm i at time t, BVPSit is the book value per share of firm i
at time t, SZit is the natural logarithm of total assets of firm i at time t,
LVit is the ratio of long-term debt over equity of firm i at time t, CNTjt
is one of the four country-specific time-varying factors (annual infla-
tion rate, annual per capita GDP growth, banking development, and
stock market development) of country j at time t, αi is the country-
fixed effects, μt is the time-fixed effects, and εit is the error term for
firm i at time t.
Further, to investigate the impact of board gender diversity on
the sustainability (ESG) disclosure of European firms (Hypothesis 5),
we develop the following regression model:
calculating the variation inflation factor. We find a variation inflation
factor of less than 10 for all of our regression models (Table 2); there-
fore, our models are robust for multicollinearity (Ott & longnecker,
2015). Second, we carry out the Breusch-Pagan and Cook-Weisberg
tests for heteroskedasticity and use robust standard errors as a rem-
edy (Baltagi, 2008). Third, we control firm size and leverage in our
regression models, and the results of our main explanatory variables
stay the same. Fourth, along with firm-level control variables (firm size
and leverage), we control for the country-level time-varying economic
(annual inflation rate and annual per capita GDP growth), and institu-
tional (banking development and stock market development) factors
in our regression models, and the results of our main explanatory vari-
ables stay the same.

ESGit = β0 + β1 BGDit + β2 EPSit + β3 BVPSit + β4 SZit + β5 LV it + αi + μt + εit ,

ð6Þ 4 | RESULTS AND DISCUSSION

where ESGit is one of the three measures of sustainability disclosure
(ESG) of firm i at time t. BGDit is the ratio of female directors on the
board of firm i at time t, EPSit is the earnings per share of firm i at time
t, BVPSit is the book value per share of firm i at time t, SZit is the natu-
ral logarithm of total assets of firm i at time t, LVit is the ratio of long-
term debt over equity of firm i at time t, αi is the country-fixed effects,
μt is the time-fixed effects, and εit is the error term for firm i at time t.
3.3 | Robustness and diagnostics
To investigate the robustness of our analysis, we perform several
diagnostic tests. First, we investigate the multicollinearity problem by
4.1 | Descriptive statistics
Table 3 (Panel A) presents the descriptive statistics of our dependent,
explanatory, and control variables for the complete dataset from 22
European countries comprising 812 firms and 5,684 firm-year obser-
vations. The mean value for the stock price (Pit) of European firms is
261.648 with a standard deviation of 356.339 and the mean of book
value per share (BVPSit) is 143.855, showing that the market value of
European firms is much higher than their book value. The mean ESGit
disclosure score for European firms in our sample is 59.552, and it
ranges from 26.716 to 86.143. This result shows that there is a large
variation in the best ESG performing and worst ESG performing firms.

TABLE 5 The impact of sustainability (ESG) disclosure on firm value

(1) (2) (3) (4) (5)

Variables Pit Pit Pit Pit Pit

*** *** *** ***
EPSit 5.787 (0.358) 5.766 (0.357) 5.726 (0.355) 5.785 (0.358) 5.750*** (0.357)
*** *** *** ***
BVPSit 0.746 (0.042) 0.743 (0.042) 0.748 (0.042) 0.746 (0.042) 0.746*** (0.042)
Eit 0.622*** (0.160)
Sit 1.139*** (0.157)
Git 0.081 (0.123)
ESGit 0.986*** (0.201)
Constant −24.786* (14.235) −59.147*** (16.185) −87.515*** (16.240) −29.102* (15.298) −78.553*** (17.181)
Observations 5,684 5,684 5,684 5,684 5,684
No. of firms 812 812 812 812 812
R2 .715 .716 .719 .715 .717
*** *** *** ***
F statistic 235.199 232.100 243.004 231.628 236.502***
Year effect Yes Yes Yes Yes Yes
Country effect Yes Yes Yes Yes Yes

Note. The table represents the results of regression analysis controlled for year- and country-fixed effects. Dependent variable (Pit) is market share price.
EPSit is earnings per share, BVPSit is book value per share, Eit is Thomson Reuters score for environmental disclosure, Sit is Thomson Reuters score for social
disclosure, Git is Thomson Reuters score for governance disclosure, and ESGit is Thomson Reuters combined score for environmental, social, and
governance disclosure. Standard errors are in parentheses.
Abbreviation: ESG, environmental, social, and governance.
***
p < .01.**p < .05.*p < .1.
10 QURESHI ET AL.

For the individual ESG factors, the mean environmental (Eit) disclosure
is 64.590, the mean social (Sit) disclosure is 61.470, and the mean gov-
ernance (Git) disclosure is 51.763. Board gender diversity (BGDit) has a
mean percentage of 20.672 with a maximum of 45.455% and a mini-
mum of zero. The mean firm size (SZit) is 24.774, and the mean lever-
age (LVit) is 0.818. The maximum value of 3.811 for LVit represents a
high leverage ratio for some European firms; however, these high
ratios are for financial firms; therefore, they are quite normal. Further,
there are 4,319 firm-year observations for LVit due to the many miss-
ing values for the firms in our sample, especially for the firms operat-
ing in Malta.
Panel B of Table 3 presents the results of the mean compari-
son t test that was carried out to investigate the sustainability
(ESG) disclosure performances for different categories. The mean
difference of industry sensitivity explains that the firms in sensitive
industries have higher social, governance, and overall ESG disclo-
sure scores compared with the firms operating in less sensitive
industries. This finding suggests that the regulatory frameworks or
constraints that are present in the sectoral environments do addi-
tionally affect the corporate response to sustainability compliance,
which is considered to be essential by society. The mean
difference in the female presence on corporate boards explains
that the firms with a female presence on their board have very
high disclosure scores for all three dimensions of sustainability or
ESG compared with firms with no female on their board. These
results favor Hypothesis 5 of the study; that is, there is a positive
association between a female presence on boards and the sustain-
ability (ESG) disclosure of European firms. The mean differences in
firm size and leverage explain that bigger firms have higher disclo-
sure scores for all three dimensions of sustainability (ESG) com-
pared with smaller firms, and highly leveraged firms have higher
environmental and social disclosure scores compared with less lev-
eraged firms. This finding indicates that bigger and levered firms
are potentially more visible and subject to monitoring by many
stakeholders, including creditors, leading such firms to be more
responsive to ESG compliance. Further, the mean differences in
inflation and economic growth explain that the firms perform bet-
ter on environmental and social disclosures during low inflationary
periods and perform better on social and governance disclosures
during high economic growth periods. This finding highlights the
intertwined nature of economic factors and the ESG performance
of the European firms. Furthermore, the mean difference in

TABLE 6 The impact of sustainability (ESG) disclosure on firm value in environmentally sensitive industries

(1) (2) (3) (4)

Variables Pit Pit Pit Pit

EPSit 5.723*** 5.685*** 5.765*** 5.713***
(0.354) (0.353) (0.357) (0.355)
BVPSit 0.751*** (0.042) 0.754*** (0.041) 0.753*** (0.042) 0.753*** (0.042)
**
Eit 0.340 (0.165)
Eit × Sensitive industries 0.672*** (0.077)
Sit 0.727*** (0.166)
Sit × Sensitive industries 0.659*** (0.079)
Git −0.265* (0.136)
Git × Sensitive industries 0.628*** (0.086)
ESGit 0.618*** (0.209)
ESGit × Sensitive industries 0.697*** (0.082)
Constant −68.243 ***
(16.030) −89.458 ***
(15.949) −35.664 (15.131)
**
−84.761*** (16.946)
Observations 5,684 5,684 5,684 5,684
No. of firms 812 812 812 812
R2 .720 .722 .717 .720
*** *** ***
F statistic 234.018 244.347 230.481 238.197***
Year effect Yes Yes Yes Yes
Country effect Yes Yes Yes Yes

Note. The table represents the results of regression analysis controlled for year- and country-fixed effects. Dependent variable (Pit) is market share price.
EPSit is earnings per share, BVPSit is book value per share, Eit is Thomson Reuters score for environmental disclosure, Eit × Sensitive industries is dummy
interaction of environmental disclosure with sensitive industries, Sit is Thomson Reuters score for social disclosure, Sit × Sensitive industries is dummy
interaction of social disclosure with sensitive industries, Git is Thomson Reuters score for governance disclosure, Git × Sensitive industries is dummy
interaction of governance disclosure with sensitive industries, ESGit is Thomson Reuters combined score for environmental, social, and governance
disclosure, ESGit × Sensitive industries is dummy interaction of combined score of environmental, social, and governance disclosure with sensitive
industries. Standard errors are in parentheses.
Abbreviation: ESG, environmental, social, and governance.
***
p < .01.**p < .05.*p < .1.
QURESHI ET AL. 11

banking and stock market development support that the firms
operating in lowly developed banking and stock market environ-
ments perform better on environmental and social disclosures and
the firms operating in highly developed banking and stock market
environments perform better on governance disclosure.
Table 4 presents the mean values for the respective depen-
dent, explanatory, and control variables for the 22 European coun-
tries. The table also explains that the United Kingdom has the
most firms (266) and firm-year observations (1,862) in our sample
data set. It also explains that French firms have the highest envi-
ronmental disclosure score (77.39), and a firm from Cyprus has the
highest social (84.45) and governance (57.14) disclosure scores.
Further, the table shows that Norwegian firms have the highest
ratio of female directors on their boards (40.84), and the firms
operating in different European countries are almost the same size
on average.
4.2 | The impact of sustainability (ESG) disclosure
on firm value
Table 5 presents the results of the regression analysis for Equation (1).
In this analysis, we include different dimensions of sustainability (ESG)
disclosure one by one and then combined score of the three dimen-
sions in addition to the financial variables (BVPSit and EPSit) to exam-
ine the value relevance of ESG disclosure. In Table 5, both β1 and β2
are statistically significant at the 1% level in all the models (1–5),
supporting that increases in current financial performance (EPSit) and
cumulative past financial performance (BVPSit) increase the market
value of European firms. The coefficients of BVPSit and EPSit imply
that the price is more sensitive to changes in earnings than changes in
the book value per share. Further, we observe a positive association
of environmental (Eit), social (Sit), and combined ESGit disclosures with
stock prices (Models 2, 3, and 5), explaining that increased environ-
mental, social, and sustainability (ESGit) disclosures increase the mar-
ket value of European firms. These results support our Hypothesis 1;
that is, there is a positive association between sustainability (ESG) dis-
closure and the market value of European firms. Further, we observe
a positive but insignificant association between governance (Git) dis-
closure and the stock price (Model 4), explaining that the governance
disclosures by European firms do not have a significant impact on the
value of European firms. These results potentially indicate that the
governance frameworks that operate in the European corporate arena
are already stringent enough that these firms are otherwise expected
to be compliant with those requirements; thus, a disclosure (to that
effect) may not provide any additional information for the market to
have an effect on the price. Our argument is further supported by
Table 4, which shows that governance (Git) disclosure is clustered
around 50 with a quite low variation observed for different countries.
Further, these results support our Hypothesis 2; that is, environmental
and social disclosures are more value relevant for European firms than
governance disclosures.

TABLE 7 The impact sustainability (ESG) disclosure on firm value (robustness test—controlled for firm-level factors)

(1) (2) (3) (4) (5)

Variables Pit Pit Pit Pit Pit

*** *** *** ***
EPSit 5.635 (0.352) 5.584 (0.350) 5.501 (0.342) 5.615 (0.352) 5.518*** (0.348)
*** *** *** ***
BVPSit 0.815 (0.043) 0.822 (0.043) 0.841 (0.042) 0.818 (0.043) 0.836*** (0.042)
SZit −10.516*** (1.794) −15.505*** (2.059) −19.029*** (1.970) −11.390*** (1.819) −18.349*** (2.049)
LVit 1.315 (3.782) 2.026 (3.767) 4.578 (3.740) 1.795 (3.800) 3.909 (3.776)
***
Eit 0.994 (0.180)
Sit 1.816*** (0.170)
Git 0.272** (0.127)
ESGit 1.825*** (0.224)
Constant 212.906*** (44.197) 277.615*** (46.675) 315.492*** (45.192) 219.633*** (44.188) 300.915*** (45.736)
Observations 4312 4312 4312 4312 4312
No. of firms 616 616 616 616 616
R2 .771 .773 .778 .771 .775
F statistics 216.689*** 214.716*** 222.203*** 214.256*** 218.727***
Year effect Yes Yes Yes Yes Yes
Country effect Yes Yes Yes Yes Yes

Note. The table represents the results of regression analysis controlled for year- and country-fixed effects. Dependent variable (Pit) is market share price.
EPSit is earnings per share, BVPSit is book value per share, SZit is natural logarithm of total assets, LVit is the ratio of long-term debt to equity, Eit is Thomson
Reuters score for environmental disclosure, Sit is Thomson Reuters score for social disclosure, Git is Thomson Reuters score for governance disclosure,
ESGit is Thomson Reuters combined score for environmental, social, and governance disclosure. Standard errors are in parentheses.
Abbreviation: ESG, environmental, social, and governance.
***
p < .01.**p < .05.*p < .1.
12 QURESHI ET AL.

4.3 | Sustainability (ESG) disclosure and industry
sensitivity
Table 6 presents the results of the regression analysis for Equation (2).
In this analysis, we add a dummy interaction for environmentally sen-
sitive industries with three ESG dimensions and a combined ESG dis-
closure score. Model 1 includes earnings per share (EPSit), book value
per share (BVPSit), environmental disclosure (Eit), and the dummy inter-
action of environmental disclosure with sensitive industries (Eit × Sensi-
tive industries). We observe a positive association of environmental
disclosure (Eit) with firm value at the 5% significance level, and intro-
ducing the dummy interaction of environmental disclosure with sensi-
tive industries (Eit × Sensitive industries) increases the significance
level to 1%. These relationships support Hypothesis 3; that is, the
association between sustainability (ESG) disclosure and market value
is stronger among the European firms operating within sensitive
industries. Model 2 includes earnings per share (EPSit), book value per
share (BVPSit), social disclosure (Sit), and the dummy interaction of
social disclosure with sensitive industries (Sit × Sensitive industries).
We observe a positive association of social disclosure (Sit) with firm
value at the 1% significance level, and the significance level remains
the same after introducing the dummy interaction of social disclosure
with sensitive industries (Sit × Sensitive industries). Model 3 includes
earnings per share (EPSit), book value per share (BVPSit), governance
disclosure (Git), and the dummy interaction of governance disclosure
with sensitive industries (Git × Sensitive industries). We observe a
negative association of governance disclosure (Git) with firm value at
the 10% significance level, and introducing dummy interaction of gov-
ernance disclosure with sensitive industries (Git × Sensitive industries)
changes the association to positive and highly significant (supporting
Hypothesis 3). Model 4 includes earnings per share (EPSit), book value
per share (BVPSit), social disclosure (Sit), and the dummy interaction of
combined ESGit disclosure with sensitive industries (ESGit × Sensitive
industries). We observe a positive association of combined ESGit dis-
closure with firm value at the 1% significance level, and the signifi-
cance level remains the same after introducing dummy interaction of
ESGit disclosure with sensitive industries (ESGit × Sensitive industries);
however, the value of coefficient increases. These results also support
Hypothesis 3; that is, the association between sustainability (ESGit)
disclosure and market value is stronger among the European firms
operating within sensitive industries.
4.4 | Controlling for firm size and leverage
Table 7 presents the results of the regression analysis for Equation (3).
In this analysis, we add firm size and leverage as firm-level control var-
iables because larger firms are more visible, have a larger operational

TABLE 8 The impact of sustainability (ESG) disclosure on firm value (robustness test—controlled for firm-level and country-level economic
factors)

(1) (2) (3) (4) (5)

Variables Pit Pit Pit Pit Pit

*** *** *** ***
EPSit 5.870 (0.359) 5.806 (0.358) 5.712 (0.349) 5.847 (0.360) 5.727*** (0.355)
*** *** *** ***
BVPSit 0.895 (0.039) 0.905 (0.039) 0.923 (0.038) 0.899 (0.039) 0.919*** (0.039)
SZit −8.345*** (1.783) −14.061*** (2.024) −17.836*** (1.961) −9.175*** (1.813) −17.039*** (2.042)
LVit −1.081 (3.662) −0.484 (3.639) 1.114 (3.587) −0.663 (3.682) 0.990 (3.636)
INFjt −18.799 ***
(3.482) −18.700 ***
(3.448) −19.576 ***
(3.398) −19.008 ***
(3.487) −19.579*** (3.426)
**
GDPjt 2.617* (1.562) 3.054 (1.558) 2.983* (1.527) 2.631* (1.567) 3.054* (1.562)
***
Eit 1.106 (0.174)
Sit 1.904*** (0.163)
Git 0.280** (0.131)
ESGit 1.986*** (0.221)
Constant 247.911*** (44.197) 316.060*** (46.248) 364.129*** (45.314) 254.024*** (44.288) 343.326*** (45.889)
Observations 4,312 4,312 4,312 4,312 4,312
No. of firms 616 616 616 616 616
R2 .752 .755 .761 .752 .758
*** *** *** ***
F statistics 384.135 365.700 383.621 367.632 377.214***
Year effect Yes Yes Yes Yes Yes

Note. The table represents the results of regression analysis controlled for year-fixed effects. Dependent variable (Pit) is market share price. EPSit is
earnings per share, BVPSit is book value per share, SZit is natural logarithm of total assets, LVit is the ratio of long-term debt to equity, INFjt is annual
inflation rate, GDPjt is annual per capita GDP growth, Eit is Thomson Reuters score for environmental disclosure, Sit is Thomson Reuters score for social
disclosure, Git is Thomson Reuters score for governance disclosure, ESGit is Thomson Reuters combined score for environmental, social, and governance
disclosure. Standard errors are in parentheses.
Abbreviation: ESG, environmental, social, and governance.
***
p < .01.**p < .05.*p < .1.
QURESHI ET AL. 13

impact, have more borrowing options, and therefore, may have the
ability to spend more on sustainability or ESG activities to receive a
higher score (Barnea & Rubin, 2010; Miralles-Quirós et al., 2018).
After including the control variables for firm size and leverage, we
observe that the results are consistent with the results that were
reported in Table 5 (without firm-level control variables). We notice
one interesting change in the results: The association between gover-
nance (Git) disclosures and firm value becomes significant positive,
which supports our Hypothesis 1. The relationship of firm size (SZit)
and firm value is significantly negative, and the relationship of lever-
age (LVit) and firm value is insignificant for all the models based on
Equation (3).
4.5 | Controlling for firm size, leverage, and
economic factors
Table 8 presents the results of the regression analysis for Equation (4).
In this analysis, we add firm size (SZit) and leverage (LVit) as firm-level
control variables and inflation (INFjt) and economic growth (GDPjt) as
country-level control variables. After introducing the country-level
economic control variables, we observe that the results are still con-
sistent with the results that were reported in Table 7 (with firm-level
control variables). Further, we observe a significant negative associa-
tion between the inflation rate (INFjt) and firm value and a positive but
weakly significant association between GDP growth (GDPjt) and firm
value. These results explain that an increase in the inflation rate
decreases firm value; however, an increase in GDP growth increases
firm value. Overall, these results suggest that good economic condi-
tions help to increase firm value.
4.6 | Controlling for firm size, leverage, and
institutional factors
Table 9 presents the results of the regression analysis for Equation (4).
In this analysis, we add firm size (SZit) and leverage (LVit) as firm-level
control variables and banking development (BDjt) and stock market
development (SMDjt) as country-level control variables. After intro-
ducing country-level institutional control variables, we observe that
the results are still consistent with the results that were reported in
Table 7 (with firm-level control variables). Further, we observe an
insignificant association between banking development (BDjt) and firm
value and a positive but weakly significant association between stock
market development (SMDjt) and firm value. These results explain that
a developed stock market helps firms to perform better and increase
value.

TABLE 9 The impact of sustainability (ESG) disclosure on firm value (robustness test—controlled for firm-level and country-level institutional
factors)

(1) (2) (3) (4) (5)

Variables Pit Pit Pit Pit Pit

*** *** *** ***
EPSit 5.976 (0.385) 5.903 (0.383) 5.820 (0.375) 5.959 (0.385) 5.838*** (0.381)
*** *** *** ***
BVPSit 0.908 (0.041) 0.915 (0.040) 0.933 (0.039) 0.911 (0.041) 0.929*** (0.040)
SZit −6.908*** (1.852) −13.088*** (2.147) −16.688*** (2.053) −7.669*** (1.882) −15.866*** (2.157)
LVit 0.472 (3.980) 0.914 (3.966) 1.859 (3.915) 0.952 (4.020) 2.473 (3.966)
BDjt −0.160 (0.192) −0.229 (0.191) −0.279 (0.187) −0.169 (0.192) −0.269 (0.190)
SMDjt 0.339* (0.196) 0.377* (0.195) 0.418** (0.192) 0.336* (0.196) 0.386** (0.195)
Eit 1.127*** (0.195)
Sit 1.901*** (0.182)
Git 0.237 (0.150)
ESGit 1.942*** (0.248)
Constant 156.968*** (45.953) 243.535*** (49.049) 289.446*** (47.275) 164.396*** (45.856) 271.559*** (48.113)
Observations 3,752 3,752 3,752 3,752 3,752
No. of firms 536 536 536 536 536
R2 .754 .757 .762 .754 .759
*** *** *** ***
F statistics 359.627 345.665 363.810 351.226 359.603***
Year effect Yes Yes Yes Yes Yes

Note. The table represents the results of regression analysis controlled for year-fixed effects. Dependent variable (Pit) is market share price. EPSit is
earnings per share, BVPSit is book value per share, SZit is natural logarithm of total assets, LVit is the ratio of long-term debt to equity, BDjt is banking
development, SMDjt is stock market development, Eit is Thomson Reuters score for environmental disclosure, Sit is Thomson Reuters score for social
disclosure, Git is Thomson Reuters score for governance disclosure, ESGit is Thomson Reuters combined score for environmental, social, and governance
disclosure. Standard errors are in parentheses.
Abbreviation: ESG, environmental, social, and governance.
***
p < .01.**p < .05.*p < .1.
14 QURESHI ET AL.

TABLE 10 The impact of board gender diversity on firm value

(1) (2) (3) (4)

Variables Pit Pit Pit Pit

BGDit 1.037*** (0.247) 1.443*** (0.266) 1.448*** (0.265) 1.517*** (0.301)
EPSit 5.735*** (0.360) 5.552*** (0.354) 5.564*** (0.355) 5.593*** (0.375)
BVPSit 0.749*** (0.042) 0.823*** (0.043) 0.821*** (0.043) 0.823*** (0.045)
SZit −12.399 ***
(1.799) −12.366 ***
(1.798) −12.260*** (1.894)
LVit 1.035 (3.776) 0.897 (3.789) 3.963 (4.176)
INFjt 11.567*** (4.217)
GDPjt −1.981 (2.060)
BDjt 1.274*** (0.337)
SMDjt 0.402 (0.299)
Constant −37.602*** (14.568) 241.552*** (44.301) 204.338*** (46.988) 98.058* (56.168)
Observations 5,684 4,312 4,312 3,752
No. of firms 812 616 616 536
R2 .716 .772 .773 .777
F statistics 237.201*** 224.929*** 211.952*** 225.682***
Year effect Yes Yes Yes Yes
Country effect Yes Yes Yes Yes

Note. The table represents the results of regression analysis controlled for year- and country-fixed effects. Dependent variable (Pit) is market share price.
BGDit is the percentage of female directors on board, EPSit is earnings per share, BVPSit is book value per share, SZit is natural logarithm of total assets, LVit
is the ratio of long-term debt to equity, INFjt is annual inflation rate, GDPjt is annual per capita GDP growth, BDjt is banking development, SMDjt is stock
market development. Standard errors are in parentheses.
***
p < .01.**p < .05.*p < .1.

TABLE 11 The impact of board gender diversity on sustainability (ESG) disclosure

(1) (2) (3) (4)

Variables Eit Sit Git ESGit

BGDit 0.288*** (0.028) 0.204*** (0.028) 0.542*** (0.031) 0.333*** (0.021)
EPSit 0.035* (0.019) 0.062*** (0.018) 0.044** (0.018) 0.045*** (0.014)
BVPSit −0.006 ***
(0.002) −0.014 ***
(0.002) −0.011 ***
(0.002) −0.010*** (0.002)
SZit 4.642*** (0.152) 4.422*** (0.166) 2.499*** (0.192) 3.857*** (0.119)
LVit −0.771 ***
(0.294) −1.837 ***
(0.308) −1.866 ***
(0.348) −1.486*** (0.224)
Constant −59.370*** (3.930) −52.452*** (4.334) −13.934*** (5.068) −41.608*** (3.090)
Observations 4312 4312 4312 4312
No of Firms 616 616 616 616
R-squared 0.306 0.283 0.139 0.337
F-Statistics 84.619*** 71.703*** 25.479*** 93.167***
Year Effect Yes Yes Yes Yes
Country Effect Yes Yes Yes Yes

Note. The table represents the results of regression analysis controlled for year- and country-fixed effects. Dependent variable is Thomson Reuters score
for environmental (Eit), social (Sit), and governance (Git) disclosure, separately and combined score for the three disclosure dimensions (ESGit). BGDit is the
percentage of female directors on board, EPSit is earnings per share, BVPSit is book value per share, SZit is natural logarithm of total assets, LVit is the ratio
of long-term debt to equity. Standard errors are in parenthesis.
Abbreviation: ESG, environmental, social, and governance.
***
p < .01.**p < .05.*p < .1.
QURESHI ET AL.
4.7 | The impact of board gender diversity on firm
value and sustainability (ESG) disclosure
Table 10 presents the results of the regression analysis for Equa-
tion (5). We observe a significant positive association between the
ratio of board gender diversity (BGDit) and firm value (Models 1–4),
supporting that increased female representation on boards increases
the market value of European firms (Hypothesis 4). The results remain
consistent even after controlling for firm-level and country-level eco-
nomic and institutional factors. This positive relationship is in line with
the previous empirical studies that female representation on boards
increases firm performance due to their better monitoring (Adams &
Ferreira, 2009), and consequently, it increases firm value. Further,
increased female representation on boards also enhances the reputa-
tions of the firms (Bear et al., 2010) and consequently firm value.
Table 11 presents the results of the regression analysis for Equa-
tion (5). We observe a significant positive association between the
ratio of board gender diversity (BGDit) and environmental (Eit), social
(Sit), governance (Git), and combined sustainability (ESGit) disclosure.
These results favor our Hypothesis 5 and explain that increased
female representation on boards increases the individual and collec-
tive levels of sustainability disclosure.
5 | CONCLUSIONS AND POLICY
IMPLICATIONS
The purpose of this study is to investigate the impacts of sustainabil-
ity (ESG) disclosure and board gender diversity on firm value. The
work is motivated by the current increasing focus on sustainability
and societal discussions such as those on gender equality. ESG is
becoming a benchmark indicator for socially responsible organizations
and female representation as directors on boards is becoming an indi-
cator for gender balance in the corporate arena. Therefore, the study
aims to provide insights regarding how sustainability (ESG) disclosure
is relevant for the managers who intend to increase their firm's market
value. It also investigates which of the individual ESG factors (environ-
mental, social, and governance) is more value relevant for European
firms. Next, we look at firms in environmentally sensitive industries to
investigate if there is a stronger association between sustainability
(ESG) disclosure and stock prices because these firms are supposed to
have a higher risk due to their relatively higher socio-environmental
impacts.
To conduct our study, we collect the data of 812 European-
listed firms from 22 European countries. Our results support stake-
holder theory that considers sustainability (ESG) activities as value
enhancing both for the firm and the stakeholders. By supporting
stakeholder theory, our results explain that sustainability (ESG) dis-
closure is value relevant and has a positive relationship with stock
prices. These results imply that it is beneficial for firms to promote
their reputations and act sustainably because this will be appreci-
ated by the broader network of other stakeholders who are equally
essential for an enterprise's success, thereby leading to more
15
beneficial contracting and opening new avenues of growth. This
dynamic and broader growth potential is consequently valued by
stock market players, resulting in relatively higher prices for the
stocks of these firms. These results also correspond to Elkington
(1994) framework of the “triple bottom line,” which denotes that
firms create value through sustainable activities: a win-win-win
strategy. The empirical results also show that board gender diver-
sity is value relevant, and the firms with a female presence on
their board have a significantly higher sustainability (ESG) disclo-
sure score compared with the firms without a female presence on
their board. Further, when we analyze the individual ESG disclo-
sure dimensions, we find that environmental and social disclosures
are more value relevant than governance disclosure. For the firms
operating in environmentally sensitive industries, the association
between sustainability (ESG) disclosure and stock prices is more
significant compared with nonsensitive industries. Overall, our find-
ings suggest that ESG factors are value relevant for the stock
prices of European firms; therefore, the firms should carry out and
disclose sustainability (ESG) activities because it will help the sus-
tainability of the environment, society, and business and also
increase the firm value.
The views on gender balance and the legislation of corporate gov-
ernance structures differ among countries. Therefore, in the future, it
would be interesting to study only Scandinavian countries to investi-
gate the value relevance of sustainability for the firms operating in
these countries because these countries are more similar and rank as
the best on sustainability, social, and moral development indexes
(Qureshi et al., 2019). Further, the firm life cycle can also be consid-
ered to assess the value relevance of sustainability during the differ-
ent stages of a firm's life cycle.
OR CID
Tanveer Ahsan https://orcid.org/0000-0002-4332-8298
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How to cite this article: Qureshi MA, Kirkerud S, Theresa K,
Ahsan T. The impact of sustainability (environmental, social,
and governance) disclosure and board diversity on firm value:
The moderating role of industry sensitivity. Bus Strat Env.
2019;1–16. https://doi.org/10.1002/bse.2427