IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v61y2024ics1544612324000473.html
   My bibliography  Save this article

ESG regulation and financial reporting quality: Friends or foes?

Author

Listed:
  • Gafni, Dalit
  • Palas, Rimona
  • Baum, Ido
  • Solomon, Dov

Abstract

The growing focus on ESG policies has sparked discussions about whether companies should be required to make ESG disclosures. A major concern is that companies use high ESG ratings to divert attention from poor performance, which is hidden by their low financial reporting quality (FRQ). Looking at U.S.-listed companies from 2012 to 2022, we find that high ESG ratings do not come at the expense of FRQ. Furthermore, the heightened focus on ESG performance following the 2019 Business Roundtable statement had a positive impact on FRQ. Our findings suggest that regulation mandating ESG disclosures is likely to improve FRQ.

Suggested Citation

  • Gafni, Dalit & Palas, Rimona & Baum, Ido & Solomon, Dov, 2024. "ESG regulation and financial reporting quality: Friends or foes?," Finance Research Letters, Elsevier, vol. 61(C).
  • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000473
    DOI: 10.1016/j.frl.2024.105017
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612324000473
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.frl.2024.105017?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    2. Samuel Drempetic & Christian Klein & Bernhard Zwergel, 2020. "The Influence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review," Journal of Business Ethics, Springer, vol. 167(2), pages 333-360, November.
    3. Palas, Rimona & Solomon, Dov & Gafni, Dalit & Baum, Ido, 2023. "Does wedge size matter? Financial reporting quality and effective regulation of dual-class firms," Finance Research Letters, Elsevier, vol. 54(C).
    4. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    5. Jing Jia & Zhongtian Li, 2022. "Corporate sustainability, earnings persistence and the association between earnings and future cash flows," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 299-336, March.
    6. Cherkasova, Victoria & Nenuzhenko, Irina, 2022. "Investment in ESG Projects and Corporate Performance of Multinational Companies," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 37(1), pages 54-92.
    7. Lorenzo Dal Maso & Gerald J. Lobo & Francesco Mazzi & Luc Paugam, 2020. "Implications of the Joint Provision of CSR Assurance and Financial Audit for Auditors' Assessment of Going‐Concern Risk†," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 1248-1289, June.
    8. Ilze Zumente & Nataļja Lāce, 2021. "ESG Rating—Necessity for the Investor or the Company?," Sustainability, MDPI, vol. 13(16), pages 1-14, August.
    9. Tsang, Albert & Frost, Tracie & Cao, Huijuan, 2023. "Environmental, Social, and Governance (ESG) disclosure: A literature review," The British Accounting Review, Elsevier, vol. 55(1).
    10. Busco, Cristiano & Malafronte, Irma & Pereira, John & Starita, Maria Grazia, 2019. "The determinants of companies’ levels of integration: Does one size fit all?," The British Accounting Review, Elsevier, vol. 51(3), pages 277-298.
    11. Stephan Fuhrmann & Christian Ott & Elisabeth Looks & Thomas W. Guenther, 2017. "The contents of assurance statements for sustainability reports and information asymmetry," Accounting and Business Research, Taylor & Francis Journals, vol. 47(4), pages 369-400, June.
    12. Florian Berg & Julian F Kölbel & Roberto Rigobon, 2022. "Aggregate Confusion: The Divergence of ESG Ratings [Corporate social responsibility and firm risk: theory and empirical evidence]," Review of Finance, European Finance Association, vol. 26(6), pages 1315-1344.
    13. Rimona Palas & Dov Solomon, 2022. "The Quality of Earnings Information in Dual-Class Firms: Persistence and Predictability," Journal of Law, Finance, and Accounting, now publishers, vol. 7(1), pages 127-164, April.
    14. Lorenzo Dal Maso & Gerald J. Lobo & Francesco Mazzi & Luc Paugam, 2020. "Implications of the Joint Provision of CSR Assurance and Financial Audit for Auditors’ Assessment of Going Concern Risk," Working Papers hal-02896476, HAL.
    15. Wong, Woei Chyuan & Batten, Jonathan A. & Ahmad, Abd Halim & Mohamed-Arshad, Shamsul Bahrain & Nordin, Sabariah & Adzis, Azira Abdul, 2021. "Does ESG certification add firm value?," Finance Research Letters, Elsevier, vol. 39(C).
    16. Abarbanell, JS & Bushee, BJ, 1997. "Fundamental analysis, future earnings, and stock prices," Journal of Accounting Research, Wiley Blackwell, vol. 35(1), pages 1-24.
    17. Silvia Carnini Pulino & Mirella Ciaburri & Barbara Sveva Magnanelli & Luigi Nasta, 2022. "Does ESG Disclosure Influence Firm Performance?," Sustainability, MDPI, vol. 14(13), pages 1-18, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. An, Hui & Ran, Chenyang & Gao, Ya, 2025. "Does ESG information disclosure increase firm value? The mediation role of financing constraints in China," Research in International Business and Finance, Elsevier, vol. 73(PA).
    2. Tsang, Albert & Frost, Tracie & Cao, Huijuan, 2023. "Environmental, Social, and Governance (ESG) disclosure: A literature review," The British Accounting Review, Elsevier, vol. 55(1).
    3. Ojala, Hannu & Malo, Pekka & Penttinen, Esko, 2023. "Private firms’ tax aggressiveness and lightweight pre-tax-audit interventions by the tax administration," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 51(C).
    4. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    5. Palas, Rimona & Solomon, Dov & Gafni, Dalit & Baum, Ido, 2023. "Does wedge size matter? Financial reporting quality and effective regulation of dual-class firms," Finance Research Letters, Elsevier, vol. 54(C).
    6. Michele Rubino & Ilaria Mastrorocco & Giovanni Maria Garegnani, 2024. "The influence of market and institutional factors on ESG rating disagreement," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(5), pages 3916-3926, September.
    7. Staněk Gyönyör, Lucie & Horváth, Matúš, 2024. "Does ESG affect stock market dependence? An empirical exploration of S&P 1200 companies shows the divergent nature of E–S–G pillars," Research in International Business and Finance, Elsevier, vol. 69(C).
    8. Luo, Runmei & Ye, Yong, 2024. "Do firms listen to the ESG voices of minority investors? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    9. Spira, Robin, 2024. "How does ESG rating disagreement influence analyst forecast dispersion?," Junior Management Science (JUMS), Junior Management Science e. V., vol. 9(3), pages 1769-1804.
    10. Scholz, Robert, 2023. "Unternehmensmitbestimmung und die sozialökologische Transformation: Zusammenhang zwischen Mitbestimmungsindex und ESG-Kriterien in börsennotierten Unternehmen," Mitbestimmungsreport 79, Hans-Böckler-Stiftung, Düsseldorf.
    11. Vu, Thanh Nam & Junttila, Juha-Pekka & Lehkonen, Heikki, 2024. "ESG news and long-run stock returns," Finance Research Letters, Elsevier, vol. 60(C).
    12. Fiorillo, Paolo & Santilli, Gianluca, 2024. "The influence of shareholder ESG performance on corporate sustainability: Exploring the role of ownership structure," Finance Research Letters, Elsevier, vol. 67(PA).
    13. Ren, Xiaohang & Zeng, Gudian & Zhao, Yang, 2023. "Digital finance and corporate ESG performance: Empirical evidence from listed companies in China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    14. Yu, Haixu & Liang, Chuanyu & Liu, Zhaohua & Wang, He, 2023. "News-based ESG sentiment and stock price crash risk," International Review of Financial Analysis, Elsevier, vol. 88(C).
    15. Muck, Matthias & Schmidl, Thomas, 2024. "Comparing ESG score weighting approaches and stock performance differentiation," Finance Research Letters, Elsevier, vol. 67(PB).
    16. Chen, Zhixiong & Sugiyama, Kohei & Tasaka, Kazuyuki & Kito, Tomomi & Yasuda, Yukihiro, 2024. "Impact of environmental, social and governance initiatives on firm value: Analysis using AI-based ESG scores for Japanese listed firms," Research in International Business and Finance, Elsevier, vol. 70(PA).
    17. Sirimon Treepongkaruna & Hue Hwa Au Yong & Steen Thomsen & Khine Kyaw, 2024. "Greenwashing, carbon emission, and ESG," Business Strategy and the Environment, Wiley Blackwell, vol. 33(8), pages 8526-8539, December.
    18. Andrieș, Alin Marius & Sprincean, Nicu, 2023. "ESG performance and banks’ funding costs," Finance Research Letters, Elsevier, vol. 54(C).
    19. Diana Elena VASIU, 2024. "Esg Rates Divergence On The Emerging Markets In The European Union," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 19(2), pages 274-289, August.
    20. Liyuan Meng & Yuchen Zhang, 2023. "Impact of Tax Administration on ESG Performance—A Quasi-Natural Experiment Based on China’s Golden Tax Project III," Sustainability, MDPI, vol. 15(14), pages 1-23, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000473. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.