Are ESG Disclosures Value Relevant? A Panel-Corrected Standard Error (PCSE) Approach

Abstract

Due to rising sustainability concerns across the globe, corporations are now offering voluntary environment, social, and governance (ESG) information to serve stakeholders’ interests. These voluntary ESG disclosures aid investors in making investment decisions by evaluating the firms’ sustainability. However, ESG reporting is still in its infancy and there are no regulatory standards; consequently, it is crucial to understanding the value relevance of ESG disclosures. Using panel corrected standard errors (PCSEs), the study investigates the impact of ESG disclosures on cost of capital. The sample of the study covers listed firms from NSE 500 from 2011 to 2020, that is, 10 years. The present analysis offers the value relevance of enhanced ESG disclosure in the form of reduced cost of capital through reduced information asymmetry. In this study, we employed voluntary disclosure theory and legitimacy theory to investigate disclosure level in emerging market. The study found a negative association between ESG disclosures and cost of capital, following the notion that non-financial disclosures reduce information asymmetry and ultimately cost of capital ( Chauhan & Kumar, 2018 ; Francis et al., 2008 ). However, individual E, S and G disclosure scores were not found significant.

How do board characteristics influence the ESG disclosure in Indonesia?

“…Board characteristics play a crucial role in influencing ESG disclosure practices. Research has shown that board diversity, including gender diversity, is positively associated with ESG disclosure (Manita et al, 2018;Masi et al, 2021;Nicolò et al, 2021;Wasiuzzaman & Subramaniam, 2023) According to legitimacy theory, firms with poor sustainability performance may strategically use additional sustainability disclosures to influence the perception of market participants and maintain their legitimacy (Abd-Elmageed, 2021;Kumawat & Patel, 2022). This aligns with the notion that organizations engage in ESG disclosure to mitigate concerns and maintain their legitimacy (Abd-Elmageed, 2021).…”

Do Tax Rates Encourage Profit Shifts By Multinational Companies In Indonesia?

“…However, based on the results of the Wooldridge Test to detect autocorrelation and the Modified Wald Test to detect heteroscedasticity in the estimated regression model, it was found that there were problems of autocorrelation and heteroscedasticity. Therefore, panel corrected standard error (PCSE) was conducted to address the autocorrelation and heteroscedasticity issues (Kumawat & Patel, 2022;Minh Ha et al, 2021;Neves et al, 2019).…”

The moderating role of sector risk in the relationship between ESG and financial performance: Evidence from top companies in Malaysia

“…PCSEs were preferred over separate OLS due to their superior performance when the error terms in the equations are correlated, known as contemporaneous correlation. This method has been proven effective by Kumawat and Patel [54] and Wang, et al [55]. STATA software was used for data analysis to take advantage of its consistency, detailed output documentation, and advanced research methodology.…”