GREEN GOVERNANCE: THE IMPACT OF ENVIRONMENTAL POLICIES AND BOARD INDEPENDENCE ON FIRM FINANCIAL RISK

Abstract

This study examines the relationship between firm-level environmental performance and stock price crash risk. Employing a quantitative research design with a sample of 740 firm-years, our analysis uses the statistical software Stata. Firm-specific financial data were gathered from conventional databases, while environmental performance data, specifically on Carbon Emission Reporting and Energy Efficiency Policies, were meticulously collected from annual reports, LinkedIn profiles, and company websites.

Research findings reveal a significant negative correlation between environmental performance and stock price crash risk, as measured by NCSKEW and DUVOL. Specifically, we demonstrate that both Carbon Emission Reporting and Energy Efficiency Policies significantly reduce crash risk. Furthermore, the results indicate that Board Independence, a key governance factor, is a significant moderator, amplifying the risk-reducing effect of environmental practices. The analysis also confirms that larger, more profitable, and older firms face a lower crash risk, while higher leverage is associated with increased risk. These findings suggest that robust environmental practices serve as a critical mechanism for mitigating information asymmetry and enhancing reputational capital, providing a compelling business case for their role in supporting financial stability.