The Financially Material Effects of Mandatory Nonfinancial Disclosure

ABSTRACT Complaints from institutional investors suggest that principles‐based disclosure regimes that rely on financial materiality standards produce inadequate nonfinancial environmental and social (E&S) information. Using the staggered introduction of 40 country‐level regulations that mandate...

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Bibliographic Details
Published in:Journal of accounting research 2024-12, Vol.62 (5), p.1711-1754
Main Author: GIBBONS, BRIAN
Format: Article
Language:English
Subjects:
Complaints
Decision making
environmental disclosure
Equity capital
ESG disclosure
innovation
Institutional investments
institutional investors
Owners
real effects
Regulation
social disclosure
sustainability
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Summary:ABSTRACT Complaints from institutional investors suggest that principles‐based disclosure regimes that rely on financial materiality standards produce inadequate nonfinancial environmental and social (E&S) information. Using the staggered introduction of 40 country‐level regulations that mandate disclosure, I document that reporting E&S information relates to increased investment from institutional owners and has material effects on firms’ investment and financing decisions. Firms mandated to disclose E&S information allocate more investment toward long‐term, innovative projects and raise more equity capital. Evidence indicates that disclosure attracts long‐term–oriented institutional clientele with E&S preferences, which then feeds back on firm decision making. Although the effects of nonfinancial disclosure are similar to those of improved financial disclosure, this clientele mechanism is unique. Taken together, these results suggest that jurisdictions that rely solely on financial materiality disclosure standards create nonfinancial information frictions with material effects on investors and firm decision making.
ISSN:0021-8456
1475-679X
DOI:10.1111/1475-679X.12499