Culture and mixed signal: does ESG reduce risk everywhere?

Signaling theorists have paid abundant attention to the signalers and the quality of signals. However, limited research has been dedicated to the signaling environment and the question of how receivers may interpret the same signal in different institutional environments. We examine the effect of cultural contexts, as part of an institutional environment, on corporate (unsystematic) risk resultant from firms’ signals on Environmental, Social, and Governance (ESG) scope. We define ESG scope as the extent to which the focal firm performs evenly in all ESG dimensions (broad scope) or selectively focuses on a few (narrow scope). Drawing on signalling theory, we argue that the incongruence between ESG scope and stakeholders’ cultural values can create signaling noise, which can lead to receivers having differing perceptions of ESG signals. We gauge how such noise affects corporate risk. Using a sample of 1,543 firms in 35 countries in a multilevel linear modeling design throughout 16 years (2002–2017) and drawing on GLOBE data, we find empirical support for our argument. Our study contributes to signalling theory by incorporating the cultural environment into the signaling framework.