The Effects of Mandatory ESG Disclosure on Price Discovery Efficiency Around the World

Abstract

We examine the effect of mandatory environmental, social and governance (ESG) disclosure on firms’ price discovery efficiency around the world. Using data from 40 countries between 2000 and 2019 and a difference-in-difference method, we find that ESG mandatory disclosure increases firm-level stock price nonsynchronicity and timeliness of price discovery suggesting more firm-specific information is incorporated into stock price in a more timely manner. ESG mandatory disclosure improves price discovery efficiency more in countries with strong demands on ESG information and in firms with poor disclosure incentives. It also decreases the cost of equity capital, increases institutional ownership and firm valuation.

Keywords: Mandatory ESG disclosure; Price efficiency; Governance

JEL Classification: G14, G15, G18, G28, G30