Environment, Social, and Governance Performance and Managerial Opportunism

This thesis investigates whether Environmental, Social, and Governance (ESG) practices are used opportunistically by chief executive officers (CEOs) in US-listed firms between 2010 and 2020. Drawing on upper echelons theory, it argues that observable CEO characteristics critically shape manager behaviour. Because CEOs exercise significant discretion over financial reporting and strategic decisions, they may use ESG initiatives as self-serving practices to divert attention from misconduct. Such opportunism increases risk of stock price crashes, encourages lenient trade credit policies, and impedes leverage adjustments. The thesis aims to examine how CEO traits, such as power, age, and tenure, affect the likelihood of ESG being used opportunistically, and how this, in turn, influences firm-level outcomes. It explores whether these effects vary across different stages of a CEO’s career. While younger, early-tenure, or less powerful CEOs might be more responsive to governance mechanisms, they could face career concerns that prompt opportunism. Conversely, the influence of governance may diminish for CEOs later in their careers. Hence, the impact of ESG on crash risk, trade credit provision, and leverage adjustments is contingent upon the CEO's specific career stage and traits. To address this objective, this thesis addresses three key research questions. Research Question 1 examines the role of CEO power in the relationship between ESG and stock price crash risk. Defining CEO power primarily as structural power (distinct from age or tenure), the findings show that ESG engagement increases crash risk, particularly driven by the social pillar. However, this effect is attenuated when CEOs hold greater structural power, a result explained by incentive-based compensation. Further analysis identifies real earnings management, specifically through abnormal discretionary advertising expenses, as a complementary mechanism linking ESG to increased crash risk. Research Question 2 ascertains the role of CEO age in the relationship between ESG and leverage adjustments. Given that CEO age is associated with risk aversion and conservative financial preferences, the findings indicate that ESG accelerates leverage adjustments, an effect driven by the environmental pillar. However, this effect is attenuated among older CEOs. Furthermore, under incentive-based compensation, older female CEOs appear less opportunistically motivated than their male counterparts. Channel tests reveal that ESG increases the cost of both equity and debt, though this effect weakens with older CEOs. The higher cost of equity accelerates leverage adjustment by incentivizing strategies to reduce financial distress among over-levered firms. The cost of debt, on the other hand, constrains leverage adjustments because it restricts debt servicing ability among over-levered firms as a form of competitive mediation. Overall, ESG initiatives appear to encourage a shift towards internal financing strategies.Research Question 3 investigates the role of CEO tenure in the relationship between ESG and trade credit provision. CEO tenure reflects the depth of accumulated business relationships and institutional knowledge. These relational assets are vital in shaping trade credit decisions and are grounded in trust and long-term partnerships. The findings indicate that ESG engagement enables firms to extend more trade credit, but this is attenuated among longer-tenured CEOs. Early-tenure CEOs appear to use ESG signals to justify lenient credit policies. Longer-tenured CEOs, aware of the associated risks, refrain from such behaviour. Critically, trade credit provision itself serves as a channel linking ESG to increased stock price crash risk, extending the agency perspective on ESG. Overall, the thesis demonstrates that whether ESG reflects managerial opportunism or stewardship is contingent on certain observable CEO characteristics, specifically, power, age and tenure, selected for their conceptual clarity and empirical relevance to financial reporting, crash risk, capital structure, and trade credit. To safeguard shareholder wealth, the board of directors must consider these CEO traits. Social initiatives may not harm shareholders under powerful or longer-tenured CEOs, while environmental initiatives appear more opportunistically motivated among older CEOs. Although older female CEOs exhibit reduced opportunism under incentive-based pay, they reinforce the positive effect of ESG on trade credit provision, thereby increasing crash risk. The findings reveal that managerial opportunism and stewardship in ESG coexist, fundamentally determined by these observable CEO characteristics.