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korean management review - Vol. 53 , No. 1
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korean management review - Vol. 53, No. 1, pp. 83-111
Abbreviation: kmr
ISSN: 1226-1874 (Print)
Print publication date 28 Feb 2024
Received 30 Aug 2023 Revised 26 Oct 2023 Accepted 21 Nov 2023
DOI: https://doi.org/10.17287/kmr.2024.53.1.83

Negative ESG Reputation and Financial Reporting Quality: The Effect of the Introduction of Stewardship Code in Korea
Hyorim Lee ; Wooseok Choi
(First Author) Korea University Business School (hyorim17@korea.ac.kr)
(Corresponding Author) Korea University Business School (choiw@korea.ac.kr)

부정적인 ESG 평판과 재무보고 성향: 스튜어드십 코드 도입의 영향

Copyright 2024 THE KOREAN ACADEMIC SOCIETY OF BUSINESS ADMINISTRATION
This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted, distribution, and reproduction in any medium, provided the original work is properly cited.
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Abstract

This study examines whether negative ESG (Environment, Social, and Governance) reputation affects corporate financial reporting quality after the introduction of stewardship code and how institutional investors’ monitoring influences the relationship. Since the stewardship code focuses on improving long-term shareholder value by considering non-financial factors, we predict that the monitoring role of institutional investors is strengthened in companies with increased ESG risks after the introduction of the code. To measure the ESG risks, we select 18 keywords related to MSCI ESG key issues and collect negative ESG news using these keywords. Utilizing the news and C-score(Khan and Watts 2009), we find that conditional conservatism in corporate financial reporting of companies with negative ESG reputation has weakened, while the negative correlation between conditional conservatism in financial reporting and tainted ESG reputation was alleviated after the introduction of the stewardship code. This suggests that the potential losses that may be caused by negative ESG news are conservatively reflected in financial reporting because the stewardship code aims at long-term sustainable growth. Moreover, the higher the stake of institutional investors, the stronger demand for conservative financial reporting, indicating that institutional investors pay more attention to ESG risks after the introduction of the stewardship code.

Keywords: ESG reputation, stewardship code, conditional conservatism, financial reporting quality, institutional investor
Acknowledgments

This research is supported by Korea Univerisy Business School Research Fund

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∙ The author Hyorim Lee is a Ph.D. candidate in accounting at Korea University. She received her M.A. in economics from Yonsei University. She worked for Samil PwC as a CPA(KICPA) and the Export-Import Bank of Korea as a credit analyst. Her current research focuses on auditing, disclosure, and ESG.

∙ The author Wooseok Choi is a Professor of Accounting at Korea University. He Graduated from Korea University Business School, and obtained a master’s degree in accounting from the University of Texas at Austin and a Doctorate in Business Administration from Michigan State University. Areas of interest include financial reporting and corporate governance.

 
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