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2022 (English)In: International Journal of Intelligent Systems in Accounting, Finance & Management, ISSN 1055-615X, E-ISSN 1099-1174, Vol. 29, no 1, p. 50-68Article in journal (Refereed) Published
Abstract [en]
We use machine learning with a cross-sectional research design to predict governance controversies and to develop a measure of the governance component of the environmental, social, governance (ESG) metrics. Based on comprehensive governance data from 2,517 companies over a period of 10 years and investigating nine machine-learning algorithms, we find that governance controversies can be predicted with high predictive performance. Our proposed governance rating methodology has two unique advantages compared with traditional ESG ratings: it rates companies' compliance with governance responsibilities and it has predictive validity. Our study demonstrates a solution to what is likely the greatest challenge for the finance industry today: how to assess a company's sustainability with validity and accuracy. Prior to this study, the ESG rating industry and the literature have not provided evidence that widely adopted governance ratings are valid. This study describes the only methodology for developing governance performance ratings based on companies' compliance with governance responsibilities and for which there is evidence of predictive validity.
Place, publisher, year, edition, pages
John Wiley & Sons, 2022
Keywords
artificial intelligence, ESG, governance controversies, machine learning, performance of ESGratings, prediction, socially responsible investment
National Category
Business Administration
Research subject
Economy, Business administration
Identifiers
urn:nbn:se:lnu:diva-110907 (URN)10.1002/isaf.1505 (DOI)000770351100001 ()2-s2.0-85126475278 (Scopus ID)
2022-03-212022-03-212022-12-16Bibliographically approved