The Effect of Expected Shareholder Litigation on Corporate ESG Reporting: Evidence from a Quasi-Natural Experiment

Abstract

This study examines the relation between expected shareholder litigation and the tone and issuance of ESG reports. We do so by exploiting a U.S. Supreme Court ruling (Morrison v. National Australia Bank Ltd) that exogenously reduced expected litigation costs for non-U.S. firms that trade on both U.S. and non-U.S. exchanges (i.e., U.S.-cross-listed foreign firms). We find that after Morrison, U.S.-cross-listed foreign firms increased the optimistic tone in their ESG reports. This result is consistent with firms perceiving less litigation risk tied to their optimistic ESG statements. We also document that the relative likelihood of issuing an ESG report, engaging in external assurance, or adopting the Global Reporting Initiative (GRI) guidelines decreases following Morrison. As stakeholders' demand for high-quality ESG reporting continues to grow, our study provides important evidence to regulators and standard setters who seek to understand the effects of litigation risk on the quality of ESG reporting.