Open AccessCorporate governance performance ratings with machine learning
Author(s) -
Svanberg Jan,
Ardeshiri Tohid,
Samsten Isak,
Öhman Peter,
Neidermeyer Presha E.,
Rana Tarek,
Semenova Natalia,
Danielson Mats
Publication year - 2022
Publication title -
intelligent systems in accounting, finance and management
Language(s) - English
Resource type - Journals
eISSN - 1099-1174
pISSN - 1055-615X
DOI - 10.1002/isaf.1505
Subject(s) - corporate governance , sustainability , accounting , business , compliance (psychology) , project governance , psychology , finance , social psychology , ecology , biology
Summary 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.