The Effect of ESG Disclosure on Corporate Investment Efficiency

76 Pages Posted: 10 Apr 2021 Last revised: 31 Oct 2022

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: October 31, 2022

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 exposed to the Directive. 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. Underinvesting firms exposed to the shock raise more debt ex-post and
the additional debt is used to reduce underinvestment. These results suggest that non-financial
disclosure can play a role in mitigating information asymmetry in debt markets.

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 (October 31, 2022). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, 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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