Mandatory vs. Voluntary ESG Disclosure, Efficiency, and Real Effects

46 Pages Posted: 6 Dec 2021 Last revised: 20 Jul 2023

See all articles by Cyrus Aghamolla

Cyrus Aghamolla

Rice University

Byeong-Je An

San Diego State University - Finance Department

Date Written: April 8, 2023


In this study, we examine the equilibrium effects of ESG quality disclosure in both voluntary and mandatory regimes. A firm manager makes a private investment decision in an environmentally friendly or unfriendly project that affects future cash flows and the social externalities produced by the firm. We build from Shin (2003) and allow an informed manager to make potentially disparate disclosure decisions on multiple interdependent outcomes---future financial performance and ESG quality. We find that mandating ESG quality disclosure results in over-investment in the sustainable technology. That is, the manager often implements sustainable investment even though this is overall less preferred by shareholders. Moreover, a voluntary disclosure regime can be more efficient for investment than a mandatory regime, from the perspective of shareholders. The results also show that mandating ESG disclosure leads to a greater prevalence of sustainable investing. The results provide insights that can be relevant for public policy considerations regarding mandatory ESG disclosure as well as implications that can help to guide empirical research.

Keywords: ESG disclosure, voluntary disclosure, mandatory disclosure, ESG score, project choice, investment, real effects, efficiency.

JEL Classification: C72, D82, G11, G23, M41.

Suggested Citation

Aghamolla, Cyrus and An, Byeong-Je, Mandatory vs. Voluntary ESG Disclosure, Efficiency, and Real Effects (April 8, 2023). Nanyang Business School Research Paper No. 22-41, Available at SSRN: or

Cyrus Aghamolla (Contact Author)

Rice University

6100 South Main Street
Houston, TX 77005-1892
United States

Byeong-Je An

San Diego State University - Finance Department ( email )

5500 Campanile Drive
San Diego, CA 92182-8236
United States

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