The Effect of ESG Disclosure on Corporate Investment Efficiency

62 Pages Posted: 10 Apr 2021 Last revised: 29 Nov 2021

See all articles by Elsa Allman

Elsa Allman

French Banking Supervisory Authority; Banque de France

Joonsung Won

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: November 28, 2021

Abstract

This paper examines the effects of environmental, social, and governance (ESG) disclosure on investment efficiency, using the adoption of Directive 2014/95/EU as a quasi-natural shock on disclosure quality. We document a significant and robust reduction of underinvestment for U.S. firms with material activities in the EU, which exposes them to the Directive, relative to U.S. firms not affected. These firms can raise additional debt after the adoption of the Directive, although there is no evidence of any impact on new capital raised in equity markets. In addition, investment efficiency gains are strongest for firms with ex-ante lower ESG disclosure levels, that are financially constrained, and for firms with more entrenched managers. These results suggest that non-financial disclosure requirements can play a role in mitigating the capital rationing problems for underinvesting firms, especially in debt markets, like that of the disclosure of financial information.

Keywords: Disclosure, Non-financial reporting quality, Corporate investment

JEL Classification: G14, G18, K20, G34, Q56

Suggested Citation

Allman, Elsa and Won, Joonsung, The Effect of ESG Disclosure on Corporate Investment Efficiency (November 28, 2021). Available at SSRN: https://ssrn.com/abstract=3816592 or http://dx.doi.org/10.2139/ssrn.3816592

Elsa Allman (Contact Author)

French Banking Supervisory Authority ( email )

Paris
France

Banque de France ( email )

Paris
France

Joonsung Won

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

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