Articlehybrid2025

The effect of ESG disclosure on firm value in the European context

Asad Mehmood · Simone Terzani · Francesco De Luca · Hadrian Geri Djajadikerta

27 citations0/0 files storedManagement Decision

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Corporate Social Responsibility Reporting Auditing, Earnings Management, Governance Corporate Governance and Financial Management

Abstract

Purpose The environmental, social and governance (ESG) topic has recently received increasing attention from scholars due to increasing regulations for firms’ non-financial disclosure with respect to environmental and social issues. For instance, the European Union (EU) recently issued the Corporate Sustainability Reporting Directive (CSRD) in December 2022 and implemented it starting in 2024 in member states. Non-financial disclosure is relevant for various stakeholders and could affect firm value. Therefore, this study aims to examine the effect of ESG disclosure on firm value in the EU context. Design/methodology/approach This study uses panel data on listed EU firms extracted from the Bloomberg database from 2014 to 2024. The final sample comprises 11,003 firm-year observations. The ordinary least squares method is used as a baseline regression. This study addresses the endogeneity issues by applying instrumental variable and two-step system dynamic panel generalised method of moments approaches. Findings The results of the univariate tests, including the mean-difference comparison test based on pre-CSRD and CSRD issuance periods, reveal a significant decrease in the average ESG disclosure score in the CSRD issuance period. These results are similar for individual ESG pillars. Further, the results show a significant reduction in average firm value in the CSRD issuance period. The regression results report a significant and positive effect of ESG disclosure on firm value. Practical implications This study provides practical implications for policymakers, firms and stakeholders. Based on the findings and the contexts of signalling and institutional theories, regulatory requirements for non-financial reporting on environmental and social issues affect a firm’s sustainable behaviour. This directly impacts various stakeholders, including market participants, and eventually affects market value. Originality/value This study contributes to the literature on the relationship between ESG disclosure and firm value in the context of the transition from the non-financial reporting directive to CSRD.

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References

1973Job Market Signaling 2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 2010Signaling Theory: A Review and Assessment 2010Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting 1973The Economic Theory of Agency: The Principal's Problem.2007Revisiting the relation between environmental performance and environmental disclosure: An empirical analysis 2012Endogeneity and the dynamics of internal corporate governance 2021Firms and social responsibility: A review of ESG and CSR research in corporate finance

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