The Impact of ESG and Board Gender Diversity on
Company Performance
Bachelor Thesis in Finance 15 credits
Authors:
Axel Östklint | Tilde Sjögren
Supervisor:
Aineas Mallios
Spring 2024
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Abstract
This study explores the impact of ESG scores and board gender diversity on the financial
performance of companies listed on the OMX Stockholm Stock Exchange. To measure
company performance, annualized stock return was used as a proxy. Panel data regression
was conducted on a dataset spanning ten years to determine how these factors, both
individually and together, influence our dependent variable. The findings reveal a significant
positive effect when ESG scores and board gender diversity are both high, despite each factor
alone tending to correlate negatively with stock performance. This indicates that combining
ESG practices with diverse leadership can reduce their individual negative impacts. The
study also shows that larger companies face a less positive impact compared to smaller
companies, likely due to adjustment difficulties and compliance costs. These insights are
valuable for policymakers and corporate leaders aiming to balance profit and sustainability.
While the research provides important findings, it has limitations such as data constraints and
variability in ESG reporting. Future research with more comprehensive data and advanced
methods could further clarify these relationships.
Acknowledgement
We would like to express our deepest gratitude to our supervisor Aineas Mallios. His
insightful guidance and support were essential in completing this thesis. The provided
recommendations were invaluable in helping us navigate challenges and stay on the right
path. We also want to thank our classmates for their constructive feedback and suggestions
for improvement.
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Table of Contents
1. Introduction 4
1.1 Background 4
1.2 Problem Statement 6
1.3 Purpose 7
2. Theoretical Framework 8
2.1 Stakeholder Theory 8
2.2 Agency Theory 9
2.3 Efficient Market Hypothesis 10
3. Previous Research 12
3.1 Overview of Previous Research 12
3.2 Hypotheses 14
4. Method and Data 16
4.1 Approach Overview 16
4.2 Variable Selection 17
4.3 Model Specification 18
4.4. Data Collection 18
4.5 Data Cleaning 19
4.6 Descriptive Statistics 20
5. Empirical Results 23
5.1 Impact of Board Gender Diversity 23
5.2 Impact of Company Size 26
6. Discussion 30
6.1 Impact of Board Gender Diversity 30
6.2 Impact of Company Size 31
6.3 Limitations 33
7. Conclusion 35
Bibliography 36
Appendix A 39
Appendix B 41
Appendix C 42
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1. Introduction
The introduction provides the reader with a background on corporate governance, focusing
on ESG criteria and board gender diversity. We then narrow our scope to present a problem
description specific to the impact of these factors on company performance. We discuss
theoretical perspectives and structure our research question within these frameworks. The
motivation and rationale for our study are described, emphasizing the relevance and
timeliness of our investigation. Finally, we define the purpose of our study, clearly stating our
goals and the contribution we aim to make.
1.1 Background
In recent years, the importance of Environmental, Social, and Governance (ESG) criteria in
assessing sustainability and ethical impact has grown exponentially. As investors have begun
to prioritize not only financial returns but also social and environmental impact, the ESG
scores of companies have become critical indicators (Bell 2021). These scores reflect a
company’s commitment to environmental protection, social responsibility, and ethical
governance practices. Understanding the specifics of ESG is essential due to its three core
areas: Environmental, Social and Governance. The Environmental dimension evaluates a
company’s impact on the earth, focusing on practices such as pollution reduction and
sustainable resource use. Social criteria assess how a company manages relationships with
employees, communities, and other stakeholders, emphasizing human rights and labor
standards. Governance addresses a company’s leadership, audits, internal controls, and
shareholder rights to ensure accountability and transparency. Each area is crucial for
measuring a company’s dedication to ethical and sustainable practices. Collectively, they
offer a framework for analyzing the societal and environmental impact of corporate actions
(Deloitte 2024).
The extent to which ESG criteria contribute to a company’s financial performance remains a
topic of ongoing research and debate. According to Edmans (2022), ESG factors are integral
to assessing long-term company value, similar to other intangible assets. He criticizes the
current approach to ESG metrics for potentially oversimplifying complex sustainability and
ethical practices. Edmans (2022) suggests that real investment analysis should naturally
integrate ESG considerations, emphasizing their role in long-term financial performance
rather than treating them as a separate category. This has led to a growing interest in
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incorporating these metrics into firm performance to more precisely capture their impact.
Such integration will point out the relationship between ESG and financial success. In that
way, reflecting Edmans’ (2022) advocacy for a deeper understanding of sustainability and its
impact.
In the ongoing debate about the financial impact of ESG, the article by Whelan & Fink
(2016) stands out for presenting compelling evidence of a positive correlation between ESG
and financial performance. They highlight a shift from the belief that sustainability reduces
profitability, noting significant cost savings and competitive advantages from environmental
efficiencies. Their evidence further underlines that strong ESG performance is increasingly
associated with higher returns on investments in sustainability initiatives. This new
perspective indicates that profitability and sustainability are complementary objectives, not
conflicting ones. Along with the increased focus on ESG, the importance of gender diversity
on company boards is also gaining recognition. It is considered that board gender diversity is
crucial for promoting sound decision-making and enhancing financial health. A diverse
approach such as that can potentially improve effective management and corporate success,
reflecting similar benefits to those observed with strong ESG practices. However, the
significance of women’s representation on boards in certain European countries has often
been overlooked. The European Commission in 2019 highlighted a persistent shortfall in
female participation in decision-making roles within the European Union (Kabir et al. 2022).
A gap often connected to prevailing stereotypes about women’s confidence, risk tolerance,
and psychological capability (Maxfield et al. 2010).
Despite the significant attention to both ESG performance and board gender diversity
independently, a notable gap remains in the literature concerning their combined impact on
company performance. This gap offers a unique opportunity to explore how their interaction
influences a firm’s financial outcomes and, ultimately, its stock returns. Such integration also
aligns with societal values, promoting sustainable development and social well-being. By
adopting these principles, corporations can serve as agents of social change, ensuring that
corporate success supports broader sustainability and equity goals (Eccles et al. 2014).
Over the decades, several countries have improved their ESG criteria, with Sweden notably
achieving top ranks in the 2020 Sustainable Development Goal (SDG) Index. This index
assesses countries based on their performance against the 17 SDGs, using indicators to
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identify areas requiring further action (ESG investing 2020). Established by the United
Nations Member States in 2015, the SDGs aim to achieve a better and more sustainable
future for all by the year 2030. Even with Sweden’s advancements in sustainable
development, the country still faces challenges in addressing economic and social inequalities
(Government Offices of Sweden 2021). This situation positions Sweden as a particularly
interesting case for our study. Our bachelor thesis will therefore concentrate on the Swedish
market with a focus on companies listed on the OMX Stockholm Stock Exchange. By
exploring the impact of ESG and board gender diversity on these companies, the thesis has
the potential to improve sustainable practices and governance models. Hopefully, these
insights will be adopted in various ways, contributing to a more equitable and prosperous
future.
1.2 Problem Statement
The corporate landscape is increasingly scrutinized from a sustainability and social
responsibility perspective, leading to a heightened focus on ESG criteria. These criteria are
considered crucial for assessing a company’s long-term viability and ethical position.
Alongside ESG considerations, gender diversity on company boards has become a key factor
in promoting inclusive decision-making. Although research on these variables independently
often shows a positive impact on company performance, studies by Esmail & Mattsson
(2022) suggest the opposite. In their article, they noted that ESG scores may not significantly
affect stock returns of Swedish companies, and that the impact varies by performance metric
analyzed. Similarly, the effects associated with board gender diversity show comparable
variability. Increased female representation on company boards may reduce manipulative
practices in sustainability reporting (García-Sánchez et al. 2019). On the other hand, it can
also introduce challenges like communication difficulties in diverse settings, potentially
risking operational efficiency and lowering company performance (Pletzer et al. 2015).
There is a wealth of literature on the individual effects of ESG performance and board gender
diversity. Despite this fact, a notable gap remains in understanding how their interaction
influences financial performance in a Swedish context. Post et al. (2011) have highlighted the
importance of board diversity in enhancing corporate social responsibility and ESG metrics.
They suggest a potential interaction between diverse leadership and ESG outcomes.
Theoretically, if board gender diversity leads to stronger sustainability practices, this could
boost financial performance through enhanced stakeholder trust and reduced risk (Bear et al.
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2010). However, concrete evidence linking these improved ESG scores, driven by board
diversity, to specific financial outcomes is lacking. Joecks et al. (2013) found a correlation
between board gender diversity and market value, but noted the relationship’s complexity,
affected by company size and sector. This situation shows the fragmented understanding
among researchers about the collective impact of ESG performance and board diversity on
financial outcomes. Yet, the question of how the interaction between these two variables
affects financial performance remains unanswered.
We have decided to limit our analysis to companies listed on the OMX Stockholm Stock
Exchange, focusing on the interaction between ESG scores and board gender diversity. We
hypothesize that this relationship significantly affects company performance. Our goal is to
provide meaningful insights into their collective impact on financial outcomes, potentially
guiding policy or legislative changes for Swedish companies. Building on the preceding
information, the research question the study seeks to answer is:
Do Swedish companies with higher ESG scores and board gender diversity outperform others
in financial terms?
1.3 Purpose
The study aims to investigate the combined impact of ESG and board gender diversity on the
financial performance of companies listed on the OMX Stockholm Stock Exchange. The
research addresses the increasing demand for sustainability and ethical practices as well as
inclusive leadership. The collective impact of high ESG scores and board gender diversity on
firm performance will be examined through the chosen proxy of annualized stock return. We
intend to carefully study the interaction between these factors and their direct relationship
with financial performance, aiming to fill the gap in existing literature. The study will clarify
how ESG performance and board gender diversity contribute to economic success. It will also
offer insights into corporate governance, sustainability initiatives, and modern business
approaches.
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2. Theoretical framework
This chapter provides the reader with a theoretical foundation that guides our exploration of
how ESG criteria and board gender diversity affect companies’ financial performance.
Central to our analysis are key theories such as stakeholder theory, agency theory and the
efficient market hypothesis. These frameworks will not only increase the reader’s
understanding of our study but also clarify the relationship of ESG performance, gender
diversity, and financial success. Our thesis will therefore focus on their specific contributions
and impacts within the scope of sustainable and inclusive corporate leadership.
2.1 Stakeholder Theory
The stakeholder theory, developed by Freeman in 1984, broadened the way businesses view
their roles within society. Freeman (1984) argues that companies have responsibilities to a
range of stakeholders beyond just shareholders, meaning balancing the needs for employees,
customers and communities alike. By recognizing these varied interests, companies can
create a more sustainable and ethical business approach. The theory suggests that long-term
success and value creation are achieved by strategies that consider all stakeholders’ diverse
needs. Consequently, this theory motivates businesses to adopt practices that are not only
financially beneficial but also socially and environmentally sustainable.
The applicability of stakeholder theory to ESG and board gender diversity is evident in the
way these factors influence corporate reputation, employee satisfaction, and customer loyalty.
By prioritizing sustainability and social responsibility, companies can build stronger
relationships with their stakeholders. This, in turn, supports a more collaborative and
sustainable business model that aligns with broader societal values and expectations. The
stakeholder theory thus supports the notion that ethical and inclusive practices are not at odds
with business success but are, in fact, fundamental to achieving it. According to Eccles et al.
(2014), firms with strong sustainability scores show better operational performance and stock
value over time. Also gender diversity on corporate boards is increasingly recognized as
beneficial in improving ESG and stakeholder engagement. According to Banahan (2018),
companies with diverse boards achieve higher ESG ratings compared to those with less
diversity. Around half of the S&P 500 companies have at least three women on their boards.
This indicates a positive trend towards gender diversity and its beneficial impact on
sustainability standards. A diverse board is also associated with greater insights into
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stakeholder behavior and preferences. This equips the company with qualitative
decision-making tools, which are essential for its continued success.
The stakeholder theory provides a theoretical foundation for exploring the impacts of ESG
criteria and board gender diversity on financial performance. It aligns with modern
governance trends that prioritize sustainability, ethical practices, and inclusivity. It also
promotes a model of corporate success that is robust, equitable, and grounded in the broader
social and environmental context. It underscores the significance of prioritizing the interests
of all stakeholders in decision-making processes, creating a more comprehensive approach to
business management (Simon 2023).
2.2 Agency Theory
The agency theory, initially developed by Jensen and Meckling in 1976, describes the
relationship between the principal and the agent within a company. The principals, typically
shareholders, delegate responsibilities to the agents, who are the company executives tasked
to perform these duties. The theory discusses the potential conflicts of interest between these
two parties, especially in the pursuit of personal gain over shareholder value. Such conflicts
often arise when agents act in their own interests, potentially threatening the firm’s value. To
mitigate these conflicts, the theory suggests mechanisms that can match the interests of both
parties more closely. For example, performance-based incentives directly link agents
compensation to company success, motivating actions that align with the shareholders
interests. Similarly, enhanced oversight aims to prevent any deviation from maximizing
shareholder value.
Conflicts of interest are often associated with a so-called agency cost. These costs arise
simultaneously as the principal’s welfare reduces due to their divergence of interests (Jensen
& Meckling 1976). Addressing this conflict can further be achieved through the
implementation of diverse boards, thereby improving company performance. Diverse boards,
with a range of perspectives, offer more effective oversight of management and reduce the
misalignment of interests. Research by Carter et al. (2003) supports this, showing that
companies with more diverse boards have better financial performance that conform with the
theory. Similarly, Adams & Ferreira (2009) find that boards gender diversity are more likely
to hold management accountable through increased monitoring, thereby reducing the agency
costs.
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In regard to the increased focus on ESG criteria, a significant shift in perspective is observed.
Traditional agency theory might suggest these initiatives diverge from the primary goal of
maximizing shareholder wealth, but recent research tells a compelling story. For instance,
Yaseen et al. (2019) show that firms with strong commitments to gender diversity and ESG
criteria enhance financial performance. This coordinates with the shareholder interests,
implying ESG and diversity boards as strategic assets rather than a cost.
2.3 Efficient Market Hypothesis (EMH)
The Efficient Market Hypothesis was formulated by Fama in the 1970s. It claims that
financial markets are “informationally efficient”, meaning that the prices of traded assets
should, in theory, reflect all known information. According to Fama (1970), the extent to
which information is incorporated into asset prices can be categorized into three segments.
These segments are weak, semi-strong and strong. The first form builds on the idea that the
market efficiently incorporates historical prices and volumes. The second form, in addition to
the information included in the weak form, also reflects all publicly known information, such
as financial reports. The strong form goes even further, implying that even with insider
information, one cannot consistently outperform the market in the long run. Given the scope
and methodology of the research, the semi-strong form is of particular interest to consider in
the examination of ESG and board gender diversity. If the market is perfectly efficient to the
extent of a semi-strong form, any abnormal return derived from the two variables investigated
would be quickly eroded.
On the other hand, there is empirical research that challenges this straightforward conclusion
of the EMH to ESG and diversity factors. For instance, the study conducted by Edman (2011)
investigates the relationship between stock return and employee satisfaction. His main
finding was that companies with higher employee satisfaction, on average, perform better in
the long run in terms of stock price. This suggests that the market may not take into account
the long-term benefits connected to social governance in the short-run, which is an important
leg of the ESG metric. In contrast to Edmans (2011) findings who could be said to some
extent challenge the fundamentals of the EMH there is also empirical research that supports
the applicability of the hypothesis in the context of modern financial markets. Malkiel (2003)
provides an intuitive argument in defense of the EMH. Malkiel (2003) argues that markets are
extremely efficient in reflecting all available information. His study was published in the
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aftermath of the Dotcom-bubble where stock prices plummeted after a period of aggressive
increases in stock prices. He acknowledges that price momentum in the short-run might be
backed by psychological factors rather than rational analysis. Malkiel’s (2003) study also
provides empirical support that technical analysis in some cases has predictive capabilities.
He later concludes that the existence of stock-bubbles do not make the EMH irrelevant since
asset prices in the long-run reverts to their intrinsic value. One of his most prominent pieces
of evidence to support that the market is indeed efficient is the fact that very few active fund
managers have consistently outperformed it. This is despite having strong incentives to do so.
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3. Previous Research
In this section, the reader will be provided an overview of previous research of ESG criteria
and board gender diversity on company performance. A summary of key findings from
existing studies will be outlined, followed by our hypothesis and expected results.
3.1 Overview of Previous Research
As mentioned earlier, there is a significant gap in the literature regarding the impact of ESG
criteria and board gender diversity on company performance. For example, Sutiono (2020)
argues that adding more women to the board can address multiple stakeholders’ interests by
diversifying the board’s skills and experience. She further suggests that this could enhance
governance and ESG performance, potentially improving overall company performance.
However, evidence that higher board gender diversity directly leads to better ESG outcomes
remains inconclusive. While there is a positive correlation with operational performance,
there is no evidence of an impact on market performance or the relationship between ESG
and corporate performance. This suggests that board gender diversity alone may not directly
improve ESG or corporate performance, emphasizing the need for further research to unravel
this complex relationship.
In contrast to Sutiono’s (2020) study, other research has provided valuable and diverse
insights, though not within a Swedish context. At the forefront of positive findings,
substantial research supports that strong ESG scores and board gender diversity correlate with
improved financial performance. Ouni et al. (2020) conducted a broad research in which data
from over one hundred Canadian companies was collected over 18 years. Their findings
suggest that gender diversity positively impacts company performance, showing that the
majority of performance variance could be linked to the degree of board diversity. The
authors also suggest that part of the positive impact of female representation is an indirect
effect on ESG practices. Their findings align to those by Eccles et al. (2014), where higher
ESG scores were associated with better operational performance. However, these positive
correlations are countered by numerous studies suggesting neutral or negative outcomes.
Classical economic perspectives argue that resources directed towards ESG scores and board
diversity could detract from a firm’s profit focus, potentially diluting shareholder value.
Meta-analyses by Pletzer et al. (2015) reinforce this view, showing a weak and statistically
insignificant correlation between board gender diversity and financial performance. Their
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study proposes that the presumed financial benefits of board diversity might be overestimated
or specific to certain contexts. The discrepancies in previous research can often be explained
by differences in methodology. For example, the measurement of ESG varies widely, from
proprietary ratings in established databases to self-reported company data. Such variability in
methodologies not only impacts the outcomes of individual studies but also complicates
comparisons across different research works. This may contribute to the mixed findings in the
field (Dorfleitner 2015).
A particularly interesting study, founding a robust correlation between board gender diversity
and ESG disclosures, was conducted by Alkhawaja et al. (2023). They collected data from
various countries with different financial cultures and legal systems, discovering several
important conclusions. Firstly, the impact of diverse boards was more pronounced in nations
with questionable stakeholder regimes and less transparent data accessibility. Secondly,
female representation provided higher marginal utility in regions with underdeveloped stock
and credit markets. Thirdly, the research noted a significant improvement in ESG disclosure
in countries with imposed gender quota rules.
It is important to note the current absence of Swedish legislative reforms mandating female
representation on corporate boards. While the 2022 EU quota law directive requires 40
percent of all board members to be female, it will not significantly impact Swedish
companies, as their female representation is already near this threshold (SvD Näringsliv
2022). In contrast to Sweden, Norway took a groundbreaking approach by becoming the first
in the world to adopt gender quota laws. According to Sjåfjell (2015), these laws were
primarily introduced to encourage public companies to recruit based on merit rather than
making the easy choice to recruit their male friends. By doing so, it was believed that
companies would obtain better corporate governance. However, Sjåfjell (2015) later noted
that assessing the impact of the rule is very complex, with results varying depending on the
approach and data selected. Critics of the law highlight that the number of public companies
halved within nine years after its introduction. Despite concerns about its impact on
shareholder returns, which appear to be neutral or slightly positive, the law has clearly
yielded beneficial social and cultural outcomes. The study concludes by recommending that
other countries consider adopting similar legislative measures, tailored to each region’s
cultural context. Given the many cultural and technical similarities, we propose considering
new legislative reforms in Sweden that closely mirror Norway’s quota obligations.
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Looking ahead, the rapidly changing regulatory and societal contexts present significant
opportunities for expanded research into corporate governance. As governments worldwide
implement stricter environmental and social regulations, public awareness and expectations
are also rising. Understanding the impact of these changes on corporate strategies and
practices is crucial. These developments highlight the need for both academic and practical
research to adapt quickly. Such adaptation will ensure that corporate governance models
remain responsive and effective in addressing the emerging challenges and opportunities in a
changing global marketplace.
3.2 Hypotheses
Given the varied findings from previous research on higher ESG scores and board gender
diversity and their combined impact on firm performance, our study anticipates identifying a
positive significant correlation. We hypothesize that companies scoring high in both ESG and
gender diversity may show a compounded positive effect on their financial outcomes,
reflecting the benefits of environmental and social responsibility. However, we acknowledge
the potential for diverse interactions, where the benefits of one aspect may not necessarily
enhance the other. Such variability is likely influenced by the specific context and
implementation strategies of the ESG and diversity initiatives. This is supported by previous
studies like those by Esmail & Mattsson (2022), which demonstrate variable impacts of ESG
on firm performance in Sweden, a country with high SDG rankings but ongoing social and
economic challenges. This shows the need to explore how different strategies and contextual
factors impact the effectiveness of ESG scores and board gender diversity in improving
corporate performance. Consequently, our study has the potential to shape and support
government practices, aiming to boost the performance of Swedish companies.
Building on our investigation, we extend our analysis to explore another dimension of
corporate sustainability: whether the interaction between ESG and board gender diversity
differs based on company size. This exploration targets the unique pressures faced by large
corporations, particularly those with potentially negative environmental or social impacts.
Under intense scrutiny from regulators, activists, and the public, these companies are often
driven to exceed regulatory standards in their sustainability practices. Such pressures force
them to leverage their resources to implement effective ESG strategies, enhancing operational
efficiency and strengthening stakeholder trust. Schrauf (2023) reported that the
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best-performing segment in terms of sustainability consisted mainly of companies with
revenues exceeding $3 billion. He also noted that many smaller companies have held back
from investing in sustainability due to budget constraints, but will likely need to make these
investments to remain competitive in the future. In this context, we hypothesize that the
interaction between ESG and board gender diversity has a more positive impact on company
performance for larger companies. Accordingly, our hypotheses are formulated as follows:
H1: Firms with high ESG score and board gender diversity perform better than other firms.
H2: Large firms with high ESG scores and board gender diversity perform better than smaller
firms with high ESG scores and board gender diversity.
The primary goal of testing these hypotheses is to validate or challenge the effectiveness of
ESG and board gender diversity within the context of Swedish firms. By rejecting their
associated null hypotheses, our research aims to provide empirical evidence that could
influence both corporate strategy and policy-making. Identifying the drivers behind these
impacts will deepen the understanding of how to effectively implement sustainable and
inclusive practices for tangible financial returns. This harmonization is crucial as companies
and regulators strive to integrate corporate strategies with broader societal and environmental
goals. It ensures that the pursuit of sustainability and diversity translates into substantial
economic benefits and not just theoretical advantages.
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4. Method and Data
In this chapter, the reader will be provided the methodology for our study, which includes the
general model framework, considerations regarding variable selection, and a model
specification. We will offer a breakdown of how each variable is quantified and the rationale
behind our model’s structure. This chapter will also introduce the methodologies used for
data collection, cleaning, and the application of descriptive statistics. The sources from
which the data was gathered are outlined, and the steps taken to ensure its accuracy and
relevance are detailed. Additionally, the statistical methods employed to analyze and present
the findings will be carefully described.
4.1 Approach Overview
A quantitative research methodology utilizing panel data regression analysis was employed.
This method was chosen for its ability to control for both time-invariant and observable
heterogeneity among companies listed on the OMX Stockholm Stock Exchange. Data was
collected from the Reuters Eikon database, which contained a broad collection of market and
firm-specific metrics. Relevant metrics were thoroughly screened, downloaded, and inserted
into Stata. The dataset comprised financial and governance information spanning ten years,
focusing on firms with above-average ESG scores. The dependent variable, company
performance, was measured using the annual stock return of each firm as a proxy. The
independent variables included ESG metrics, board gender diversity, and a set of control
variables such as industry fixed effects, market capitalization, financial leverage and
volatility. The interaction term, ESG x board gender diversity, was included to examine their
combined effect on company performance. The second regression output also contained a
dummy variable, lMKTC, taking the value of 1 for companies with above-mean market
capitalizations.
To decide between a random effect model and a fixed effect model, a Hausman test is
typically used. However, since all companies remained in their respective industries
throughout the ten years, a fixed effect regression would omit the industry dummies due to
multicollinearity. Therefore, a Hausman test was deemed unnecessary, and a random effect
model was naturally chosen. Clustered standard errors at the company level were employed
to account for within-firm correlation over time and enhance robustness. A correlation matrix
was created in Stata to ensure that the independent variables were not too highly correlated.
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The details are provided in Appendix B. To handle the pronounced right skewness in the
distribution of market capitalization and net sales values, a logarithmic transformation was
applied. This transformation rendered the data more suitable for the assumptions underlying
our model, as it could substantially reduce skewness and approximate a normal distribution
(Feng et al. 2014). The validity of the two hypotheses was based primarily on whether the
interaction terms were statistically significant.
4.2 Variable Selection
The model was inspired by the one employed by Wu (2022), yet it incorporates a different
proxy for company performance along with other control variables. In our model, subscript i
denotes cross-sectional variables, and t indicates the time period. Since the dependent
variable, company performance, was challenging to quantify, we used annualized stock return
as a proxy. The variables ESG score and board gender diversity, along with their interaction
term, were included to align with the purpose of our research.
The selection of control variables such as market capitalization and net sales was carefully
executed, with both variables logarithmized to adjust for scale effects. These adjustments
ensured that variations in company size or financial scale did not obscure the real effects of
ESG and board gender diversity on company performance. By controlling for these factors,
we facilitated a more accurate interpretation of how ESG scores and board diversity
collectively influence company performance. Additional controls, including BETA, the
current ratio, asset turnover, and the debt-to-assets ratio, were essential for isolating the
specific effects of our variables of interest by accounting for other factors that could influence
company performance. For instance, high leverage or poor liquidity can independently affect
a company’s performance and risk perception, potentially skewing the observed effects. By
including these controls, we could more precisely identify the distinct contributions of ESG
and board gender gender diversity on corporate performance. Complete definitions of each
variable are detailed in Appendix A.
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4.3 Model Specification
To assess the impact of ESG and board diversity on firms’ annual stock returns, the following
regression model was used:
The dependent variable of interest is company performance, which is measured using the
annualized stock return, YTDit. The independent variables include the ESG metric (ESG),
board gender diversity (BGD), and the interaction term between these variables (ESGxBGD).
Additional independent variables are included to capture any potentially significant impacts
on the results.
To assess the impact of ESG and board diversity on annual stock returns for firms of different
sizes, the following regression model was used:
This model builds on the first by introducing a dummy variable, lMKTC, which differentiates
companies based on their market capitalization. We transform the variable MKTC into a
binary dummy where lMKTC equals 1 if MKTC is above the 50th percentile and 0 if it is at
or below the 50th percentile. This adjustment allows us to test our secondary hypothesis,
exploring whether there is a size effect associated with ESG and board gender diversity on
company performance.
4.4 Data collection
The empirical analysis of this study is based on a large dataset collected from Refinitiv
Eikon. It contains a comprehensive extent of financial metrics and ESG scores for companies
listed on the OMX Stockholm stock exchange. The dataset includes nearly 1,000 firms and
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spans the last ten fiscal years, from the end of 2014 through the conclusion of 2023. This time
frame was selected to capture a decade’s financial evolution, ensuring a substantial dataset for
robust statistical examination. Each company’s financial key numbers and ESG scores reflect
the fiscal year’s performance, offering a year-end snapshot of corporate health and
sustainability engagement. To control for systemic shocks, we retrieved the overall return of
the Stockholm Stock Exchange (OMXSPI) from Yahoo Finance. This control variable was
critical in our model as it accounts for exogenous economic influences, such as the
COVID-19 pandemic, that occurred during our study period.
4.5 Data Cleaning
To ensure the integrity of our data, an extensive data cleaning process was essential. The first
step involved identifying and handling missing values. Given the scale and scope of our
dataset, it was crucial to determine whether data points were randomly missing or indicative
of broader issues within the entry process. We started by reviewing the extent of missing
values using the misstable command in Stata. The graphical output revealed that a significant
majority of the companies in the dataset had missing values for at least one variable across all
ten years. Naturally these companies were irrelevant to our research and were subsequently
removed, reducing the number of companies from 997 to 305.
To ensure the accuracy of our statistical analysis, it was essential to address outliers,
particularly those arising from illogical or unnatural events. A commonly employed method
for identifying outliers is the Interquartile Range (IQR) method. This method effectively
distinguishes between typical data points and potential outliers by focusing on the middle
fifty percent of the data. Once outliers are identified using the IQR method, it is practical to
apply winsorization to limit their influence. Winsorization modifies extreme data points if
they fall beyond chosen percentiles, thereby reducing the impact of these points without
entirely removing them from the dataset (Maronna et al. 2006). We applied winsorization at
the first and ninety-ninth percentiles for all variables except Net Sales, aiming to neutralize
extreme values while preserving the data as much as possible. Net Sales was winsorized at
the tenth and ninetieth percentiles due to significant skewness.
As discussed by Johnson and Wichern (2007), ensuring consistency in data formats and
scales is fundamental for accurate inter-variable comparisons. Following their guidance, we
have harmonized all financial figures in our dataset to a uniform, or at least comparable,
19
scale. This alignment was crucial for maintaining data consistency, which was important for
accurate analysis. By standardizing our data, we prevent misinterpretations caused by varying
data formats and enhance the reliability of our findings. In practice, this meant that all ratios
were converted to decimal values, and all monetary amounts were reported in the local
currency, SEK.
4.6 Descriptive Statistics
After cleaning the data, the dataset comprises 305 companies divided into 26 different
industries, ranging from 1 to 34 companies per sector. Table 1 provides a detailed summary
of key variables, including percentiles, mean, number of observations, and standard
deviation, both before and after winsorization. This offers a complete picture of the data, with
winsorization reducing the impact of extreme values for a more accurate analysis. Figure 1
shows the number of observations per industry sector through a clear bar chart. It shows the
distribution of data across various sectors, based on the Thomson Reuters Business
Classification system. This visualization helps understand the representation and frequency of
observations within each industry category. It shows a diverse distribution, with sectors like
Machinery and Software & IT being the most frequently represented, each having 34 and 35
companies, respectively. Together, they provide a broad overview, ensuring a robust
foundation for the study.
20
Table 1: Descriptive statistics of key variables with winsorized variables marked by *.
Table 1 provides a summary of statistics for the key variables used in this study, including
measures such as mean, median, and standard deviation. The table highlights the distribution
and variability of variables like ESG scores, board gender diversity, and their interaction
among the sampled companies. Variables marked with an asterisk (*) have undergone
winsorization to mitigate the influence of extreme values.
21
Figure 1: Number of observations per industry sector.
Figure 1 illustrates the number of observations for each industry sector included in the study.
The chart highlights the distribution of data across various sectors, providing insight into the
representation and frequency of observations within each industry category. The industry
names and codes are based on the Thomson Reuters Business Classification (TRBC) system.
22
5. Empirical Results
In this chapter, the reader will be introduced to the outcomes of our research. This structured
approach enables us to trace the development and refinement of our findings at each analysis
step. It further provides a comprehensive understanding of the underlying relationships.
5.1 Impact of Board Gender Diversity
Panel A presents the regression outputs from the model designed to test whether firms with
high ESG scores and gender-diverse boards differ in performance compared to their
counterparts. The first column shows results when only the primary variables of interest are
included. The second column adds several control variables to the regression, and the third
column includes industry fixed effects. An expanded regression output, including significant
industries, is provided in Appendix C. The numbers in parentheses represent robust standard
errors for the corresponding variables.
23
*** indicates p < 0.01, ** indicates p < 0.05, and * indicates p < 0.1.
The baseline model, Model 1, includes the primary variables ESG, BGD, and their interaction
(ESG x BGD) without control variables. None of these variables are statistically significant,
suggesting that these variables alone do not explain much of the variation in stock returns.
24
In Model 2, several control variables are added. These include market capitalization
(MKTC), beta (BETA), current ratio (CR), asset turnover (AT), debt to total assets (DTA),
total assets reported (TAR), net sales (NSALES), and the OMX Stockholm Price Index
(OMXSPI). The addition of these controls significantly improves the model’s explanatory
power, as evidenced by an increase in the R-squared value to 0.2277. MKTC is positive and
significant at the 1% level, with a coefficient of 0.160, indicating that a 1% increase in
market capitalization is associated with a 0.16 percentage point increase in annual stock
returns. ESG is negative and significant at the 1% level, with a coefficient of -0.00785,
meaning that a 1-unit increase in the ESG score is associated with a 0.00785 percentage point
decrease in annual stock returns. BGD is negative and significant at the 5% level, with a
coefficient of -0.00498, indicating that a 1-unit increase in board gender diversity is
associated with a 0.00498 percentage point decrease in annual stock returns.
The interaction term (ESG x BGD) is positive but weakly significant at the 10% level, with a
coefficient of 0.0000814. This suggests that for firms with higher levels of both ESG scores
and board gender diversity, the negative impacts on stock returns are mitigated. Holding all
else equal, a 1 percentage point increase in both ESG score and board gender diversity is
associated with an additional 0.00814 percentage points in annual stock returns compared to
firms with lower ESG scores and board gender diversity. This indicates a synergistic effect
where the combined increase in ESG initiatives and board gender diversity can reduce the
negative impact typically associated with each factor individually. AT is positive and
significant at the 1% level, with a coefficient of 0.119, indicating that a 1-unit increase in
asset turnover is associated with an 11.9 percentage point increase in annual stock returns.
NSALES is negative and significant at the 1% level, with a coefficient of -0.0162, meaning
that a 1% increase in net sales is associated with a 1.62 percentage point decrease in annual
stock returns. OMXSPI is positive and significant at the 1% level, with a coefficient of 1.009,
indicating that a 1 unit increase in the OMX Stockholm Price Index is associated with a 1.009
percentage point increase in annual stock returns.
In Model 3, which included industry fixed effects, the R-squared value improves further to
0.2477. The signs of the coefficients remain consistent, but there are both upgrades and
downgrades in significance levels. Notably, the significance of ESG x BGD improves from
10% to 5%. Overall, the interaction between ESG scores and board gender diversity plays a
crucial role in moderating their individual negative effects on stock returns. Firms that excel
25
in both areas experience on average a positive effect, suggesting a potential strategy for
balancing investments in ESG initiatives and promoting board diversity. We thus reject the
null hypothesis that there is no difference in performance between high ESG firms with board
gender diversity and other firms.
5.2 Impact of Company Size
Panel B presents the regression outputs from the model designed to test whether there is a
size effect associated with ESG and board gender diversity on stock performance. The first
column shows results when only the primary variables of interest are included. The second
column adds several control variables to the regression, and the third column includes
industry fixed effects. An expanded regression output, including significant industries, is
provided in Appendix C. The numbers in parentheses represent robust standard errors for the
corresponding variables.
26
*** indicates p < 0.01, ** indicates p < 0.05, and * indicates p < 0.1.
The baseline model, Model 1, includes the primary variables IMKTC, ESG, BGD, and their
interaction (ESG x BGD x MKTC). IMKTC is positive and significant at the 1% level, with a
coefficient of 0.316, indicating that being above the mean, market capitalization is associated
with a 31.6 percentage point increase in annual stock returns. ESG is negative and significant
at the 1% level, with a coefficient of -0.00695, meaning that a 1-unit increase in ESG score is
associated with a 0.695 percentage point decrease in annual stock returns. BGD is negative
and significant at the 5% level, with a coefficient of -0.00479, indicating that a 1-unit
increase in board gender diversity is associated with a 0.479 percentage point decrease in
annual stock returns. The interaction term for smaller companies (lMKTC = 0) is positive and
27
weakly significant at the 10% level, with a coefficient of 0.000115, suggesting that smaller
firms experience a slight positive interaction effect when both ESG scores and board gender
diversity increase.
In Model 2, several control variables are added, including beta (BETA), current ratio (CR),
asset turnover (AT), debt to total assets (DTA), total assets reported (TAR), net sales
(NSALES), and the OMX Stockholm Price Index (OMXSPI). The addition of these controls
significantly improves the model’s explanatory power, as evidenced by an increase in the
R-squared value to 0.1774. IMKTC remains positive and significant at the 1% level, with a
coefficient of 0.360, indicating that being above the mean market capitalization is associated
with a 36.0 percentage point increase in annual stock returns. ESG remains negative and
significant at the 1% level, with a coefficient of -0.00639, meaning that a 1-unit increase in
ESG score is associated with a 0.639 percentage point decrease in annual stock returns. BGD
remains negative and significant at the 5% level, with a coefficient of -0.00475, indicating
that a 1-unit increase in board gender diversity is associated with a 0.475 percentage point
decrease in annual stock returns. The interaction term for smaller companies is positive and
significant at the 5% level, with a coefficient of 0.000133, suggesting a positive interaction
effect when both ESG scores and board gender diversity increase. AT is positive and
significant at the 1% level, with a coefficient of 0.113, indicating that a 1-unit increase in
asset turnover is associated with an 11.3 percentage point increase in annual stock returns.
DTA is negative and significant at the 1% level, with a coefficient of -0.267, indicating that a
1-unit increase in the debt to total assets ratio is associated with a 26.7 percentage point
decrease in annual stock returns. OMXSPI is positive and significant at the 1% level, with a
coefficient of 1.085, indicating that a 1-unit increase in the OMX Stockholm Price Index is
associated with a 1.085 percentage point increase in annual stock returns.
In Model 3, which includes industry fixed effects, the R-squared value improves further to
0.1930, indicating an increase in the model’s explanatory power. The addition of industry
fixed effects maintains the significance and signs of the key coefficients, though some
significance levels change. Notably, BGD becomes more significant, moving from the 10%
to the 5% level. The interaction term for smaller companies remains positive and significant
at the 5% level, with a coefficient of 0.000145. This means that for smaller firms, each
percentage point increase in both ESG score and board gender diversity is associated with an
additional 0.0145 percentage point increase in annual stock returns. In this model, the
28
interaction term for larger companies (lMKTC = 1) becomes positive and weakly significant
at the 10% level, with a coefficient of 0.0000748. This indicates that for larger firms, each
percentage point increase in both ESG score and board gender diversity is associated with an
additional 0.00748 percentage point increase in annual stock returns. Overall, the interaction
between ESG scores, board gender diversity, and firm size significantly affects stock returns.
Our findings indicate that while larger firms generally have higher stock returns, smaller
firms gain more from improvements in both ESG scores and board diversity collectively.
29
6. Discussion
In this segment, the reader will be provided with a detailed discussion of our results and an
analysis of the study’s limitations. We will explore how the findings contribute to the existing
body of knowledge, and address potential biases and constraints that may affect the
applicability of our conclusions.
6.1 Impact of ESG and Board Gender Diversity
The initial results in Panel A, Model 1, show no significant impact of board gender diversity
(BGD) and ESG factors. This suggests that companies may face short-term costs and
challenges when integrating these factors or that there might be omitted variables. However,
the main findings emerge in Models 2 and 3. When control variables and industry fixed
effects are included, a positive and significant interaction between ESG scores and BGD
appears. This means that the negative impacts on stock returns from high ESG scores and
BGD are mitigated by additional factors, allowing us to reject the first null hypothesis at 5%
significance level. Including these controls also improves both the significance of the
variables and the R-squared value, highlighting their importance in explaining the varied
findings in this field, as noted by Joecks et al. (2013).
The positive interaction supports theories proposed by Post et al. (2011) and Bear et al.
(2010), who suggested that diverse leadership can enhance ESG outcomes and governance
practices. This synergy could originate from diverse boards’ ability to address a broader
range of interests and improve decision-making processes, aligning with Stakeholder Theory
(Freeman, 1984). Additionally, diverse boards seem to manage ESG-related risks and
opportunities more effectively. Thus, while ESG and BGD might present initial costs
individually, their combined effect appears to create a strategic asset for firms. Our findings
also support the mixed evidence in the literature. Studies like García-Sánchez et al. (2019)
noted the potential of female directors to reduce impression management in sustainability
reporting. This supports our results, which indicate that gender-diverse boards can create
more transparent and genuine ESG practices. The positive interaction effect shows that the
short-term challenges are outweighed by long-term benefits when both ESG and BGD are
present. This may result from improved governance practices, effective risk management, and
enhanced stakeholder relations.
30
Furthermore, our results align with Eccles et al. (2014), who found that firms with strong
sustainability scores show better operational performance over time. The positive interaction
between ESG and BGD in our study suggests that integrating these practices can lead to
synergistic benefits, characterized by better financial outcomes. This supports the idea that
ESG and board diversity are not just ethical imperatives but also strategic assets that drive
long-term value creation. Initial negative stock returns might originate from market
participants not recognizing the value of ESG and diversity initiatives. As the benefits of
these practices become more apparent, companies might experience improved financial
outcomes. From a theoretical perspective, our findings contribute to Agency Theory by
demonstrating how diverse boards can enhance managerial accountability and reduce agency
costs. Adams and Ferreira (2009) argue that gender-diverse boards lead to improved
oversight and governance. Their findings align with our observations, which may be a result
of the positive interaction between good governance and green initiatives. Our findings can
also, to some extent, be argued to align with the Efficient Market Hypothesis (Fama, 1970).
While markets may not fully appreciate the short-term costs associated with ESG and
diversity initiatives, they later adapt and recognize the long-term benefits when these
practices are combined. This is consistent with Edmans’ (2011) observation that markets
often undervalue intangibles such as employee satisfaction, which can be considered part of
the broader ESG framework.
Regarding our first hypothesis, we conclude at a 5% significance level that ESG firms along
with board gender diversity outperform others in terms of financial performance. This
suggests that board gender diversity, coupled with strong ESG practices, plays a critical role
in enhancing the financial performance of Swedish firms. Our study contributes to filling the
literature gap by showing that companies adopting such a strategy are better positioned to
achieve financial success. This insight can be used to enhance overall company performance,
providing a valuable perspective for both researchers and practitioners alike.
6.2 Impact of Company Size
Our initial results in Panel B, Model 1, reveal a significant positive impact of company size
(IMKTC) and a significant negative impact of ESG scores and BGD individually. However,
the main findings were observed in Models 2 and 3, which include control variables and
industry fixed effects. In these models, the explanatory power improves significantly, as
shown by increased R-squared values.
31
Up until Model 3, the interaction term was significant only for smaller companies (lMKTC =
0). However, after incorporating the industry fixed effects, we observed significance in the
interaction term for larger companies (lMKTC = 1) as well. This indicates that the combined
effect of ESG and board gender diversity positively influences stock performance regardless
of company size. An interesting aspect in Model 3 is that smaller firms tend to benefit more
from this interaction compared to larger firms, as indicated by the higher positive coefficient
when lMKTC = 0. The logical explanations for why our results appear as they do can be seen
as complex. There is reason to believe that in the long run, larger companies will perform
better as they overcome the initial costs and challenges of implementing ESG initiatives. This
suggests that smaller companies, despite their current outperformance, should still invest in
ESG to remain competitive in the future, as Schrauf (2023) recommends. The stronger
performance of smaller firms may be partly due to their “doped bottom line”, as they have so
far avoided the largest and most costly ESG investments. According to Schrauf (2023), larger
firms have already invested in ESG, whereas smaller firms have not yet made these
substantial investments. This difference in investment levels likely influences our results,
with the costs associated with ESG investments affecting larger firms’ returns and giving the
appearance that smaller firms benefit more. Therefore, our findings suggest that while smaller
firms currently see immediate benefits, larger firms are likely to realize greater long-term
gains as their ESG investments begin to pay off. It is crucial for smaller companies to start
making sustainable investments now to ensure their future competitiveness and performance.
An important consideration to address is the interests of all stakeholders for long-term
success. According to Freeman’s Stakeholder Theory (1984), companies can positively
impact their performance due to long-term stakeholder trust. Although larger companies may
face challenges in ESG and BGD implementation, they might achieve better financial
performance through enhanced stakeholder relationships. This relationship may be reflected
in the significant positive impact of IMKTC on company performance itself, likely due to
greater resources and market influence.
In accordance with our results, it would be interesting and perhaps more relevant to study a
longer time horizon in future research, potentially spanning twenty years. This is especially
significant considering that ESG has gained greater focus in recent years, making it
challenging for larger companies to implement these practices effectively due to the evolving
32
nature of ESG itself. The continuous development of ESG standards and practices makes it
difficult for larger firms to establish the right tools to apply the most effective strategies for
maximizing ESG’s benefits for financial performance. We suspect that larger firms in the
near future will have relatively better conditions to benefit from ESG. Additionally, our study
period was marked by external factors such as the COVID-19 pandemic, which further
complicates the analysis. Studying a longer period would provide a clearer picture of whether
larger companies can outperform smaller firms in terms of financial performance through
ESG and board gender diversity. It would also offer insights into how these practices evolve
and impact performance over time.
The significant positive impact of IMKTC on company performance highlights the inherent
advantages of larger firms. However, the positive interaction between ESG and board gender
diversity reveals a distinct size effect, with smaller firms benefiting more from these factors
than larger ones. Consequently, our results do not support the second hypothesis that larger
firms would benefit more from these initiatives. On the other hand, as we discussed earlier,
there may come a time in the future when our second hypothesis proves valid.
6.3 Limitations
The biggest limitation of our study could be argued to be the lack of relevant data. The
pressure and need to report quantified information regarding diversity and sustainability
performance have evidently intensified in the later span of the time series we studied. As a
result, approximately two-thirds of the companies we sampled were dropped because they
had no recorded values for either ESG or BGD in the last ten fiscal years. This implies that
the findings of the thesis may not be entirely representative of the whole Swedish stock
market, even though the sample size was statistically large enough to be interpreted. We are
confident that in the near future, there will be an opportunity to analyze the research question
with a much larger base of companies.
Dorfleitner et al. (2015) discussed in their study that the way ESG metrics are reported can
vary widely, making comparisons of results difficult. With that in mind, it would be
reasonable to focus on companies from one industry to ensure that the numbers are fully
comparable. However, this approach would be difficult for us to conduct as it would lead to a
diminished sample size. We tried to counteract this partly by controlling for industry fixed
33
effects. The significance of this inclusion would probably have been greater if the division of
industries from Refinitiv Eikon had been executed with less granularity.
Other limitations are also mostly related to the models we constructed. The explanatory
power might have been greater if hypothetical polynomial connections were tested. The
squared age of each company was initially planned to be included as a control variable but
was eventually left out due to insufficient data. Lastly, it would have been beneficial to
conduct additional robustness tests in the regression analysis to further reinforce the quality
of the results.
34
7. Conclusion
Our study indicates a clear positive compounding effect of ESG scores and board gender
diversity on stock returns, despite each factor alone being negatively correlated with
performance. This finding reinforces the importance of analyzing the complex processes
within corporate governance rather than merely scratching the surface. The interaction
between ESG and board diversity indicates that companies, strong in both areas, can
significantly mitigate negative impacts on their stock returns. This insight is valuable for
policymakers and corporate leaders aiming to balance sustainability with financial
performance. Our research also shows that larger companies experience a less pronounced
positive impact from combined ESG and diversity practices, likely due to the high costs in
the early phase of adopting green initiatives. The current size effect could be due to
differences in the extent to which costly green investments have been implemented. Although
smaller companies in our study seem to benefit more, we remain cautious about predicting
future outcomes.
Overall, our research emphasizes that ESG and board gender diversity should not be viewed
in isolation but rather as complementary strategies that can enhance governance and
long-term value creation. These insights can inform future policies and discussions aimed at
encouraging sustainable and inclusive business practices. The study suggests a potential
strategy for balancing investments in ESG initiatives and promoting board gender diversity.
Such an approach could lead to better financial outcomes for companies while bringing value
to society and a wider range of stakeholders. However, our study has some limitations. The
lack of data from earlier years in our time series may have influenced the results. Future
research with comprehensive data and refined methods could further clarify our observed
relationships and perhaps expand the diversity element beyond gender.
35
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38
Appendix A
Below, you will find detailed descriptions of the main variables used in the analysis.
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Variable Definition
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Company Performance Measured by the proxy annualized stock return of the
companies in the dataset.
Custom ESG Score A company-specific ESG score, crafted based on the
firm’s environmental, social, and governance
performance.
Board Gender Diversity Measured as the percentage of female members on the
board, reflecting the company’s commitment to
diversity.
Custom ESG Score x Board Gender Diversity To explore whether companies with both high ESG
scores and diverse boards perform differently than
others.
OMX Annual Return Reflects the overall market condition in each year.
Controls for macroeconomic and market trends that
affect all companies’ returns
Current Ratio A liquidity measure, indicating the company’s ability to
meet short-term obligations. Controls for financial
health and operational risk.
Asset Turnover Ratio Efficiency with which a company uses assets to
generate revenue. Reflects operational efficiency.
Debt Ratio Level of a company’s debt relative to its assets.
Controls for financial structure’s impact on risk and
return.
Dividend Yield Reflects the company’s approach to distributing
earnings to shareholders. Controls for investor return
preferences and potential impact on stock performance.
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Net Sales The total revenue generated by a business after
deducting the cost of goods sold, taxes, and other
expenses.
Volatility Variability in the company’s stock price. Controls for
the risk profile of the company as perceived by the
market.
Market Capitalization Size of the company, which can influence its market
behavior and performance dynamics. Controls for size
effects. Logarithmized before regression analysis
Industry Fixed Effects Dummy variables for each industry to account for
industry-specific factors that could influence financial
performance.
Error Term 𝜀 The error term captures all other factors affecting the
company’s annualized return that are not included in the
model
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Appendix B
Below, you will find Table 2 and 3, showcasing the correlation between our variables.
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Tables 2 and 3 present the correlation matrices for the impact of board gender diversity and
company size, respectively. These matrices indicate no dramatic collinearity between the
independent variables, which is essential for reliable regression analyses. This ensures that
each variable contributes independently without redundancy. The correlation values range
from -1 to 1, illustrating the relationships between variables without revealing any
problematic multicollinearity. Values closer to 1 indicate a strong positive correlation, values
closer to -1 indicate a strong negative correlation, and values around 0 indicate no correlation.
Table 2: Correlation matrix of independent variables for board gender diversity.
Table 3: Correlation matrix of independent variables for company size.
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Appendix C
Below, you will find an extended section of Panel A and B, containing the industries that
were significant in their respective Model 3.
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The table below showcases information corresponding to the industries in Panel A, where a
statistical significant effect could be detected in the third regression model.
The table below showcases information corresponding to the industries in Panel B, where a
statistical significant effect could be detected in the third regression model.
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