The Financially Material Effects of Mandatory Non-Financial Disclosure

Abstract

Complaints from institutional investors suggest that principles-based disclosure regimes that rely on financial materiality standards produce inadequate non-financial environmental and social (E&S) information. Using the staggered introduction of 40 country-level regulations that mandate disclosure, I document that reporting E&S information relates to increased investment from institutional owners and has material effects on firms’ investment and financing decisions. Firms mandated to disclose E&S information allocate more investment towards long-term, innovative projects and raise more equity capital. Evidence indicates that disclosure attracts long-term-oriented institutional clientele with E&S preferences, which then feeds back on firm decision-making. While the effects of non-financial disclosure are similar to those of improved financial disclosure, this clientele mechanism is unique. Taken together, these results suggest that jurisdictions that rely solely on financial materiality disclosure standards create non-financial information frictions with material effects on investors and firm decision-making.

Keywords: Innovation, R&D, CSR, ESG, Sustainability, Disclosure, Information asymmetry

JEL Classification: D82, G32, G38, O32, Q56