Market Reaction to Mandatory Nonfinancial Disclosure

Abstract

This paper examines the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure, which affected firms listed on EU exchanges or having significant operations in the EU. The mandated disclosures relate to firms' environmental, social, and governance performance. Using a crosscountry sample, we first document an on average negative market reaction to events increasing the likelihood of passage for this regulation, consistent with equity investors anticipating net costs with the directive's passage for most firms. Exploiting cross-sectional variation, we then predict and document a more negative market reaction for firms having: (i) low pre-directive nonfinancial disclosure levels, consistent with investors anticipating these future disclosures to reveal worse-than-expected news; (ii) weaker performance on nonfinancial issues, consistent with expectations for these firms to incur future costs to internalize current externalities; and (iii) lower ownership by institutional asset owners, consistent with such investors demanding further disclosures than mandated by the directive. The average market reaction for firms with superior nonfinancial performance and disclosure in our sample is positive, suggesting that investors expect net benefits from the passage of the directive for these firms.

Sustainability Reporting Quality of Peruvian Listed Companies and the Impact of Regulatory Requirements of Sustainability Disclosures

“…Empirical evidence about the effects of introducing mandatory requirements for sustainability reporting is manifold. Some studies focus on the analysis and financial consequences of mandatoriness [71,72], for example, the results of the study of Ioannou and Serafeim [72] show that in the framework of mandatory sustainability reporting, companies improve their valuation. Another study by Jackson and colleagues demonstrates that after the implementation of regulatory requirements on sustainability reporting, there is an increment of CSR activities performed by companies to address social and environmental issues.…”

Mandatory Nonfinancial Disclosure and Its Consequences on the Sustainability Reporting Quality of Italian and German Companies

“…Along with the evolution of markets and stakeholders' expectations of companies' performance, some countries have introduced laws to make NFD mandatory, and the debate on SRQ has expanded because of the unavoidable differences between voluntary and mandatory disclosure. Different experiences with legislation worldwide have not clarified whether mandatory NFD improves the quality of nonfinancial statements [5][6][7][8][9]. In addition, the introduction of mandatory reporting has further stimulated the debate on the measurement and metrics of SRQ.…”

Eu Non-Financial Reporting Research – Insights, Gaps, Patterns and Future Agenda

“…Moreover, the CPY analysis reveals that there are several papers which loosed their leading position (e.g. Kristofik et al, 2016) leaving room for more recent papers (Grewal et al 2018;Carini et al, 2018). This mainly indicates that there is an increasingly strong interest among authors in citing the latest EUD research results, but also that most papers have been performed in recent years.…”