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ESG regulation and financial reporting quality: Friends or foes?

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  • 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
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