Abstract: The purpose of this paper is to examine the effect of the role of environmental, social, and governance (ESG) disclosures on firms’ risk-taking. The paper further investigates whether female chief executive officers (CEOs) and various dimensions of CEO power could explain the ESG risk-taking relationship. Using a sample of Fortune 500 firms from 2003 to 2020, this study has applied fixed effect, IV-2SLS, system generalised method of moments estimation to examine the impact of ESG disclosure on firm risk-taking. This study has used two measures of firm risk – systematic risk and performance hazard risk. First, our results show that firms’ ESG disclosures positively affect risk-taking for all the four pillars of ESG- combined score, environmental score, social score, and governance score. These results are consistent across both accounting and market-based measures. Second, we find that this risk-taking incentive weakens in the presence of female CEOs and CEO informal power. Third, the results suggest that the positive relationship between ESG disclosures and risk-taking is more pronounced in the presence of CEO formal power. These results indicate that CEO power could act as a double-edged sword in determining the relationship between ESG disclosures and firm risk-taking. We control for endogeneity concerns, and the results are robust when alternative measures are used for risk and ESG.
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