The Association between Mandated Environmental Liability Recognition and Voluntary ESG Disclosure Quality

52 Pages Posted: 6 Apr 2022

Date Written: March 24, 2022

Abstract

We examine the association between mandated Asset Retirement Obligations (ARO), i.e., environmental clean-up costs of normal operations estimated on the balance sheet, and the quality of voluntary ESG disclosures. We hypothesize that when firms recognize larger AROs with higher accuracy that this effort will spillover into enhanced voluntary disclosure of a broad range of ESG outcomes. Empirical evidence supports this hypothesis. In a sample of environmentally sensitive industries, we find that firms with larger and more accurate AROs exhibit higher ESG disclosure quality. In a changes analysis we find that increases in AROs map into increases in ESG disclosure quality. Further, we document predictable cross-sectional variation in the relation as a function of plausible mechanism variables. We provide DiD evidence as well as an instrumental variable analysis to address endogeneity. Our evidence suggests that accounting resources used to estimate mandatory ARO liabilities induce spillovers into improved voluntary ESG disclosure quality.

Keywords: Asset Retirement Obligations, Voluntary Disclosure, ESG, Environmental Accounting

JEL Classification: M41, M48, Q51

Suggested Citation

Bens, Daniel A. and Chen, Cai and Joos, Peter R., The Association between Mandated Environmental Liability Recognition and Voluntary ESG Disclosure Quality (March 24, 2022). Available at SSRN: https://ssrn.com/abstract=4065940 or http://dx.doi.org/10.2139/ssrn.4065940

Daniel A. Bens (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Cai Chen

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Peter R. Joos

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore

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