Market Reaction to Mandatory Nonfinancial Disclosure

Management Science, Forthcoming

47 Pages Posted: 9 Sep 2015 Last revised: 21 Mar 2018

See all articles by Jyothika Grewal

Jyothika Grewal

Harvard University - Harvard Business School

Eddie Riedl

Boston University - Questrom School of Business

George Serafeim

Harvard University - Harvard Business School

Date Written: August 1, 2017

Abstract

We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance, and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an on average negative market reaction; (ii) a less negative market reaction for firms having higher pre-directive nonfinancial performance; and (iii) a less negative reaction for firms having higher pre-directive nonfinancial disclosure levels. Results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Overall, the results are consistent with the equity market perceiving that this disclosure regulation of nonfinancial information would lead to net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure.

Keywords: event study; ESG reporting; international; nonfinancial disclosure; sustainability; environmental; social responsibility; governance

JEL Classification: M4, G14, G15, G18

Suggested Citation

Grewal, Jyothika and Riedl, Edward J. and Serafeim, George, Market Reaction to Mandatory Nonfinancial Disclosure (August 1, 2017). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2657712 or http://dx.doi.org/10.2139/ssrn.2657712

Jyothika Grewal

Harvard University - Harvard Business School ( email )

Cambridge, MA
United States

Edward J. Riedl

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-2317 (Phone)

George Serafeim (Contact Author)

Harvard University - Harvard Business School ( email )

381 Morgan Hall
Boston, MA 02163
United States

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