The Impact of Corruption on the Cost of Equity: The Role of ESG

Abstract

This study examines whether Environmental, Social, and Governance (ESG) performance mitigates the increase in the cost of equity associated with corporate corruption and whether this effect is further enhanced by board gender diversity. Using a panel dataset of publicly listed firms in the United States and Canada from 2013 to 2022, the analysis reveals that corruption is significantly and positively associated with the cost of equity, while ESG performance - both overall and across its environmental, social, and governance pillars - is negatively associated with it. The interaction terms between ESG and corruption are consistently negative and statistically significant, suggesting that ESG serves as an effective risk-mitigating mechanism in the presence of reputational and operational risk. The moderating role of ESG is more pronounced in firms with greater board gender diversity. These results are robust to various empirical strategies, including instrumental variable regression, theme-level decomposition, and propensity score matching based on anti-corruption policy disclosure. This study contributes to the literature by integrating ESG and corruption into a unified framework, highlighting the financial relevance of ESG practices and inclusive governance. The findings offer practical implications for investors, managers, and policymakers seeking to reduce financing costs and promote long-term value creation in corruption-prone environments.