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

46 Pages Posted: 6 Dec 2021

See all articles by Cyrus Aghamolla

Cyrus Aghamolla

University of Minnesota - Twin Cities

Byeong-Je An

Nanyang Business School, Nanyang Technological University

Date Written: December 1, 2021

Abstract

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 (December 1, 2021). Available at SSRN: https://ssrn.com/abstract=3975948 or http://dx.doi.org/10.2139/ssrn.3975948

Cyrus Aghamolla (Contact Author)

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Byeong-Je An

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

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