The value relevance of mandatory sustainability reporting assurance

Abstract

Sustainability reporting assurance (SRA) ensures the credibility of sustainability information disclosed by companies. This practice has continued to evolve, particularly within regulatory frameworks. The SRA is widespread among the largest French and South African companies because of the requirements of GRENELLE II and KING III laws. The increased regulation of SRA and the increased rate of obtaining assurance motivated us to conduct our study. This study examines the impact of mandatory SRA on firm value. We run a fixed-effects ordinary least squares (OLS) panel model to test our hypothesis for the 2007–2018 period on a sample of 88 South African listed companies on the Johannesburg Stock Exchange (JSE) and 83 French listed companies on the SBF120 index. We use Tobin’s Q to measure firm value. Our results show a significant positive association between mandatory SRA and firm value. This finding implies that SRA regulations positively affect investors’ perceptions of firm performance, particularly firm value, for two reasons. First, mandatory SRA may strengthen firm legitimacy and establish a good reputation. Second, the adoption of SRA regulations plays an important role in reducing asymmetric information between various actors and solving agency problems between managers and shareholders. Regulators may be interested in the findings when considering current and future assurance requirements for sustainability reporting, and shareholders when considering SRA as an investment choice criterion.

Keywords:

• mandatory sustainability reporting assurance (SRA)
• South African KING III code
• French GRENELLE II law
• contractual theory of agency
• neo-institutional theory
• firm value

Introduction

Over time, awareness of the social and environmental responsibilities of economic actors has emerged, encouraging companies to consider new requirements for carrying out more human, ethical, and responsible economic activities. The desire to combine stakes related to sustainable development with the performance objectives of economic actors has emerged gradually. Among the privileged tools to achieve this, several states have encouraged or even forced companies to implement sustainability reporting (hereafter SR), particularly companies with economic activities that have a potentially strong societal and environmental impact. SR is important for organisations to establish transparent communication with stakeholders (Clarkson et al., 2011). Moreover, it is seen as a real lever of economic performance as it can be a useful basis for deciding whether to invest (Brooks and Oikonomou, 2018).

Sustainability reporting has also been a subject of criticism regarding the reliability of information contained in reports (Dando and Swift, 2003). Some unethical companies have produced circuitous reports that have attempted to misrepresent sustainability statements by camouflaging their real sustainability performance to take advantage of the benefits associated with strong sustainability performance (Jeriji and Louhichi, 2021). Consequently, companies have voluntarily started using an independent third party's sustainability assurance to improve the credibility of their reports (Cheng et al., 2015). Sustainability reporting assurance (hereafter SRA) strengthens the reliability of the information communicated, increases stakeholders’ confidence, and enhances the credibility of the company's message (Fuhrmann et al., 2017; Boiral et al., 2019).

Debates on the potential positive effect of SRA on company economic performance are still open. Most existing studies have shed light on the voluntary practice of SRA and its impact on firm financial performance (Cho et al., 2014; Casey and Grenier 2015; Fazzini and Dal Maso 2016; Harymawan et al., 2020). Empirical results are mixed. However, to our knowledge, no study has investigated the value relevance of mandatory SRA. We therefore attempt to fill this gap.

This study investigates the value relevance of mandatory SRA using multi-theoretical optics based on economic motivations, public pressures, and institutional theory.

The neo-institutional theory posits that an organisation aims to build legitimacy via institutional and market pressures within its business environment (DiMaggio and Powell, 1983). According to this theory, companies are part of a social system that interacts with society, seek to mitigate uncertainty, and ensure survival and growth (Chen and Roberts, 2010). Regulative legitimacy is achieved when firms comply with such regulations. Thus, to be perceived as socially legitimate, corporate managers are challenged to report sustainability, as legislation requires. In doing so, they signal that they adhere to existing institutional rationales. These institutional restrictions or forces, and their interactive nature, determine “the potential wealth-maximizing opportunities of entrepreneurs” (North, 1990, p. 73). Furthermore, in pursuing wealth maximisation goals, organisations incrementally shape the existing institutional context (North 1990). Therefore, the interplay between these corporate goals (such as environmental, social, and financial performance; legitimacy; and sound governance) and established institutions will eventually shape a firm's value creation.

In addition, according to the contractual theory of agency, managers’ adoption of SRA can be considered a strategic decision to improve the transparency and credibility of disclosed information (Cheng et al., 2015), which reduces information asymmetry. Thus, SRA adoption is considered a disciplinary mechanism that makes sustainability reports more reliable, thereby creating firm value.

Our study aims to identify the potential impacts of mandatory SRA on firm value in South African and French contexts because of the specificities of assurance regulations in these countries. They are the first two countries to have implemented binding legislation on SRA by an independent third-party (South Africa, in 2009, by promulgating the new Corporate Governance Code (the KING III code) and, France, by promulgating the GRENELLE II law of 12 July 2010).

This empirical study was conducted on a sample of French companies belonging to the SBF120 index and South African companies belonging to the Johannesburg Stock Exchange from 2007 to 2018. The results of the main analysis support our expectation of a positive relationship between SRA and firm value. Our findings may be of primary interest to regulators in other countries when reviewing current SRA regulations, shareholders when considering investment choices, and managers who consider cost–benefit criteria to provide assurance on sustainability information.

This paper is organised as follows: Section 1 is devoted to the institutional framework of SRA in the South African and French contexts and the literature review and hypothesis development. Section 2 presents the research methodology. Section 3 describes the data and provides a preliminary analysis. Section 4 details and discusses the main results. Section 5 concludes.

1. Institutional and theoretical framework and hypothesis development

1.1. French and South African institutional settings

The governments of France and South Africa have implemented measures and procedures to put into practice sustainability disclosure and assurance. For example, regulations indicate that companies must verify their societal information through independent third-party organisations. The GRENELLE II law in France and the governance code KING III in South Africa have mandated the assurance of sustainability information for listed companies.

The GRENELLE II law was adopted on 29 June 2010 and published on 12 July 2010. It is known as the “Law of the State's commitment to the environment”. It addresses the technical aspects related to applying GRENELLE I principles. This includes new provisions on how companies are held accountable for the social and environmental consequences of their activities. The decree specifies, in list form, the relevant sustainability information required and details of its presentation to allow for comparison. Furthermore, Article 225 of the GRENELLE II law requires that sustainability information must be verified by an independent third party for all listed companies, as well as companies whose balance sheet totals or turnover and number of employees exceed the prescribed threshold, in order to enhance credibility. An assurance provider should express an opinion that can be communicated to general shareholders’ meetings.

The report of an independent third party must include a certificate attesting to the presence of all mandatory sustainability information, an opinion on its relevance and credibility, and explanations relating to unpublished information. Furthermore, listed companies have applied the new provisions of GRENELLE II law since the financial year closed on 31 December 2011. The decree relating to the transparency obligations of companies in social and environmental aspects was published on 24 April 2012. It introduced mandatory assurance for some unlisted companies from the financial year that closed on 31 December 2016. Finally, to realise the mission of assurance, the decree of 2012 stated that the “assurance providers must be certified by the French Accreditation Committee ‘COFRAC’ or by any other accreditation organisation signatory to the multilateral recognition agreement established by the ‘European coordination of accreditation’”.

In South Africa, the first governance code, promulgated in 1994, provided initiatives for corporate governance that expanded the financial and regulatory dimensions traditionally associated with corporate governance. The second governance code, KING II, promulgated in 2002, incorporates principles of ethics, and social and environmental practices, extending this shift to inclusive corporate governance.

In 2009, the governance code of South Africa, KING III, further emphasised corporate responsibility by asserting that the earth, people, and profits are inseparable. While pursuing economic success, environmental friendliness, and social equality, firms should not only be evaluated on their financial performance, but also on the benefits or cost of operations on sustainability and the economy as a whole. The KING III code is a voluntary attempt by South African organisations to improve the transparency and reliability of sustainability information and increase stakeholder confidence. Among its recommendations, organisations provide independent assurance of social and environmental information. Although it is a voluntary governance code, the Johannesburg Stock Exchange regulations require all listed companies to apply KING III, in accordance with the “apply or explain” principle. This regulatory requirement of the governance code (KING III) has made South Africa one of the first countries to require firms to communicate sustainability information and provide an external third party to check and confirm societal information.

1.2. Theoretical framework and related literature

According to Cormier et al. (2005), disclosing sustainability information depends on a multi-theoretical approach, which relies on firms’ incentives to indicate their responsiveness to various levels of influence. In the same way, we believe that the assurance given to sustainability information should be part of this same multi-theoretical framework since it is a component of sustainability reporting. Therefore, similar to sustainability disclosure, SRA is a multifaceted concept that cannot be explained by a single theory (Ortas et al., 2014).

Two broad theoretical frameworks are used to explain sustainability practices: economic theory (the agency or positive accounting theory, signalling theory) and socio-political theory (neo-institutional theory, legitimacy theory) (Brammer and Pavelin, 2006; Deegan, 2002; Michelon, 2011; Nekhili et al., 2017; Herbert and Graham, 2022). Instead of relying on a single theoretical context, our study assumes that economics-based and institutional theory-based perspectives are complementary in explaining SRA (Reverte, 2009).

According to the neo-institutional theory, isomorphic processes -coercive, mimetic, and normative- lead managers to adopt organisational arrangements in conformity with agreed-upon institutional models (DiMaggio and Powell, 1983), which constitute socially constructed systems of values, norms, beliefs, and definitions (Suchman, 1995). While it may be challenging for managers to satisfy the information requirements of all stakeholders (Williamson and Lynch-Wood 2008), managers may conceive SRA legislation (a coercive model) as a properly balanced portrayal of stakeholders’ subjective expectations (Chelli et al., 2014). As a result, compliance with legislation conveys high-quality sustainability disclosures (Deegan, 2002) and indicates compliance with accepted institutional logic (Meyer and Rowan, 1977).

The evolution of the normative framework, i.e., the emergence of various standards (e.g., AA1000AS and ISAE 3000) and regulations, plays a vital role in sustainability practices. The introduction of SRA rules in countries has the effect of exerting regulatory pressure on companies. The external restrictions mainly come from regulators, organisations in leadership positions, or society. Companyies strive to respond to these institutional pressures to access required resources, including legitimacy and reputation. Although overlapping with legitimacy theory, the institutional theory focuses more on the process of acquiring legitimacy through compliance with other similar social institutions (Chen and Roberts, 2010), i.e., institutional legitimacy. Institutional theorists rely on regulative legitimacy (Meyer and Scott, 1983), which is achieved through compliance or consistency with regulations (Zimmerman and Zeitz, 2002), otherwise, the company may have a negative effect on its economic performance or even disappear (Davis, 1960). Adopting regulations practices such as GRENELLE II and KING III is important to reinforce a company's legitimacy with its stakeholders by promoting a favourable image, and enhancing corporate reputation and rentability (Herbert and Graham, 2022). Institutional factors are drivers of SRA and therefore act as coercive mechanisms and regulatory pressures to push companies to adopt the practice of SRA, which affects the behaviour and structure of the organisation (Perego and Kolk 2012).

Adopting SRA regulations is vital in reducing asymmetric information between various actors and solving agency problems between managers and shareholders. According to the contractual theory of agency, managers’ adoption of SRA can be considered a strategic decision to improve the transparency and credibility of disclosed information (Cheng et al., 2015), Shareholders need to find out whether the company’s performance is in their best interests. To equalise knowledge of both sides, managers disclose the company's performance in a sustainability report. However, these reports may still contain biased performance information due to a managerial incentive (greenwashing). To solve this credibility problem, companies adopt SRA regulations by an independent third party to ensure the sincerity of sustainability information. This reduces the chance of accidental calculation errors (by checking the ESG indicators presented by the company) and deliberate misrepresentation due to greenwashing. Therefore, SRA is beneficial for decision-making in terms of investment. As stated in SRA regulations, assured information provided by an independent third-party is considered more credible because it has less noise and less bias, reflecting investor concerns. Shareholders provide feedback by showing increased investment confidence, which is positively and significantly associated with financial performance.

SRA offers investors information that is not commonly available and allows them to appreciate potential strategic opportunities (de Klerk et al., 2015). In addition, sustainability assurance regulations can provide additional information regarding company risks, future performance, and their business strategies. Thus, SRA adoption is considered a disciplinary mechanism that makes sustainability reports more reliable, thereby creating firm value.

While much research has focused on the SRA field, the literature provides little evidence of its economic consequences. There is little empirical analysis of the impact of SRA on a company’s financial performance, and the results are mixed.

Clarkson et al. (2019) examine the association between inclusion in the Dow Jones Sustainability Index, market valuations, and SRA. The results show that SRA increases the probability of inclusion in the DJSI, and capital market participants seemed to value sustainability reports only when Big Four accounting firms assured them. Based on a sample of several emerging countries, Garzón-Jiménez and Zorio-Grima. (2021) show that capital providers penalise highly polluting firms. However, sanctions are less pronounced if firms disclose environmental information and are verified by independent third parties. Harymawan et al. (2020) show a positive and significant relationship between external assurance on the sustainability report disclosure of Indonesian and Malaysian listed companies and their market value measured by Tobin's Q during the period 2010–2016. Casey and Grenier (2015) find that companies that experience a sustainability audit have a lower cost of equity, lower analyst forecasting errors, and less forecast dispersion. Finally, Kim et al. (2019) show that societal verification significantly affects the relationship between sustainability performance and financial performance.

On the other hand, Cho et al. (2014) show that there is no association between the assurance of sustainability reports and firm value through a sample of US public companies included in the Fortune 500, which suggests that investors do not perceive assurance as value-added. Since all the reports analysed were verified by non-accounting organisations, financial analysts may consider that SRA by non-accountants contributes less to sustainability report credibility. Fazzini and Dal Maso (2016), in the Italian context, found that the disclosure of environmental information is positively correlated with firm market value; however, their assurance does not provide additional relevance. Phang and Hoang (2021) find that compared to SRA, combined assurance has a more significant impact on investors’ decisions to invest when the company has negative performance, while perceived reliability and willingness to invest do not change when the performance of companies is positive. Martinez and Gillet (2014) found no significant relationship between SRA and financial markets on a sample of French companies from 2007 to 2010. Abnormal stock returns show no stock price reactions around the signature dates of SRA reports. In the South African context, Horn et al. (2018) show a negative and significant association between societal verification and firm value in 2008, 2011, and 2013. Their results suggest that managers should apply assurance to enhance sustainability reporting credibility. Finally, Larrinaga et al. (2020) studied the institutionalisation of SRA services through a comparative analysis of Italy and the United States. Their results show that in the Italian and the US contexts “the diffusion of sustainability assurance and the creation of sustainability assurance disclosure norms are not without its cost: information quality does not increase with patterned practice” (p. 67).

In light of the rationales above, which raise questions regarding the economic effects of new SRA regulations, we examine whether mandatory SRA is value relevant. This leads us to formulate the following hypothesis:

H1: Mandatory sustainability reporting assurance is positively associated with firm value.

2. Research Method

Our empirical analysis investigates the impact of mandatory SRA on firm value. Accordingly, we regress our SRA proxy on firm value. We run a fixed-effects ordinary least squares (OLS) panel model: $\begin{array}{rl}& QTO{B}_{i,t}=\text{β}\mathit{0}\mathit{+}\text{β}\mathit{1}\mathit{A}\mathit{S}\mathit{S}\mathit{U}{\mathit{R}}_{\mathit{i}\mathit{,}\mathit{t}}\mathit{+}\text{β}\mathit{2}\mathit{P}\mathit{O}\mathit{S}{\mathit{T}}_{\mathit{i}\mathit{,}\mathit{t}}\mathit{+}\text{β}\mathit{3}\mathit{A}\mathit{S}\mathit{S}\mathit{U}\mathit{R}\ast \mathit{P}\mathit{O}\mathit{S}{\mathit{T}}_{\mathit{i}\mathit{,}\mathit{t}}\mathit{+}\text{β}\mathit{4}\mathit{R}\mathit{O}{\mathit{A}}_{\mathit{i}\mathit{,}\mathit{t}}\mathit{+}\\ & \text{β}\mathit{5}\mathit{L}\mathit{E}{\mathit{V}}_{\mathit{i}\mathit{,}\mathit{t}}{\mathit{+}}_{}\text{β}\mathit{6}\mathit{S}\mathit{\_}\mathit{G}\mathit{r}\mathit{o}{\mathit{w}}_{\mathit{i}\mathit{,}\mathit{t}}\mathit{+}\text{β}\mathit{7}\mathit{E}\mathit{S}\mathit{G}\mathit{\_}\mathit{s}\mathit{c}\mathit{o}\mathit{r}\mathit{e}{}_{\mathit{i}\mathit{,}\mathit{t}}{\mathit{+}}_{}\text{β}\mathit{8}\mathit{R}\mathit{\&}{\mathit{D}}_{\mathit{i}\mathit{,}\mathit{t}}\mathit{+}\\ & \text{β}\mathit{9}\mathit{S}\mathit{I}\mathit{Z}{\mathit{E}}_{\mathit{i}\mathit{,}\mathit{t}}\mathit{+}\text{β}\mathit{10}\mathit{B}\mathit{E}\mathit{T}{\mathit{A}}_{\mathit{i}\mathit{,}\mathit{t}}{\mathit{+}}_{}\mathit{(}\mathit{F}\mathit{i}\mathit{r}\mathit{m}\mathit{I}\mathit{n}\mathit{d}\mathit{i}\mathit{c}\mathit{a}\mathit{t}\mathit{o}\mathit{r}\mathit{s}{\mathit{)}}_{\mathit{i}\mathit{,}\mathit{t}}\mathit{+}\mathit{(}\mathit{Y}\mathit{e}\mathit{a}\mathit{r}\mathit{I}\mathit{n}\mathit{d}\mathit{i}\mathit{c}\mathit{a}\mathit{t}\mathit{o}\mathit{r}\mathit{s}{\mathit{)}}_{\mathit{i}\mathit{,}\mathit{t}}\mathit{+}{ϵ}_{\mathit{i}\mathit{,}\mathit{t}}\end{array}$where i indexes firms, and t indexes years. QTOB (Tobin's Q) measures the firm value (Cahan et al., 2016; Ding et al., 2016; Jiao 2011). It is considered a measure of companies’ long-term expected value. It is calculated as the ratio of the market value of equity plus the book value of debts to the book value of total assets. ASSUR is a binary variable that scores 1 if companies verify their sustainability information by an independent third-party organisation and 0 otherwise.

POST is an indicator variable that takes the value of 1 for the fiscal periods after the law year. The interaction term coefficient, β3, captures the effect of mandatory SRA on firm value. Without control variables, β3 can be interpreted as a firm's market value change after adopting assurance. ϵ_i,t is the error term.

Following previous studies (Apaydin et al., 2021; Cahan et al., 2016; Ding et al., 2016; Ghoul et al., 2017; Fatemi et al., 2018; Nekhili et al., 2017), we include a set of firm-level control variables in our analysis as provided by the Worldscope and DataStream databases: Economic performance (ROA) is the net result divided by the total net assets; leverage (LEV) is measured as total debt deflated by total assets; growth opportunities (S_Grow) is measured by the total net sales growth rate for one year; research and development expenditures (R&D) is the ratio of research and development expenditure to total sales; sustainability performance is measured by the variable ESG_score as provided by Refinitiv ESG Global database; the company size (SIZE) is calculated as the natural logarithm of total assets; finally, systematic risk (BETA) is the market risk as measured by beta. Definitions and measurements of all variables are reported in Table 1.

Table 1. Definition of variables and data sources.

Variable	Description and measurement	Data source	References
Dependent variable
QTOB	Tobin’s Q is a measure of the firm value and is calculated as (market capitalisation + total long-term debt + total current liabilities) / total assets	Refinitiv Datastream	Cahan et al., 2016; Jiao 2011; Jeriji et al., in press.
Explanatory variable
ASSUR	Assurance is a binary variable that takes 1 if firm verify its sustainability information by an independent third-party and 0 otherwise.	Refinitiv ESG Global	Dhaliwal et al., 2012; Fazzini and Dal Maso, 2016; Fuhrmann et al., 2016; Martínez-Ferrero and García-Sánchez, 2017; Simnett et al., 2009.
POST	POST is an indicator variable that takes 1 for the fiscal years after the promulgation of SA law and 0 otherwise.
POST* ASSUR	Interaction variable that captures the effect of mandatory sustainability assurance.
Control variables
BETA	Systematic risk is the market risk as measured by Beta.	Refinitiv Datastream	Nekhili et al., 2017; Jeriji et al., in press.
SIZE	Firm size is measured as the natural logarithm of total assets.	Refinitiv Datastream	Apaydin et al., 2021; Ghoul et al., 2017; Nekhili et al., 2017.
R&D	Research and development expenditures (R&D) is the ratio of R&D expenditure to total sales.	Refinitiv Datastream	Fatemi et al., 2017; Ghoul et al., 2017; Nekhili et al., 2017.
ESG_score	Sustainability performance is measured by ESG score, which is the relative sum of 10 category weights (resource use, emissions, innovation, workforce, human rights, community, product responsibility, management, shareholders, CSR strategy), and normalised to percentages ranging between 0 and 100.	Refinitiv ESG Global	Ghoul et al., 2017; Jeriji and Louhichi, 2021; Jeriji et al., in press.
S_Grow	Growth opportunities is measured by the total net sales growth rate for one year.	Refinitiv Datastream	Ding et al., 2016; Ghoul et al., 2017.
LEV	Financial leverage is measured by total debt / total assets.	Refinitiv Datastream	Apaydin et al., 2021; Ghoul et al., 2017; Nekhili et al., 2017.
ROA	Return on assets.	Refinitiv Datastream	Cahan et al., 2016; Ghoul et al., 2017.

Notes: This table reports the definition and the data source for each variable in the model. We also provide some references that have used the same proxy to measure each variable.

To overcome endogeneity concerns resulting from omitted variables correlated with sustainability reporting assurance and firm value, we follow Byun and Oh (2018) by including firm-fixed effects in the model to control for time-unobservable factors known to drive a significant association. In addition, modelling the relationship between SRA and firm value may suffer from endogenous correlations resulting from simultaneity biases and reverse causality. To alleviate these two concerns, we extend our baseline model to a dynamic model specification and use a two-step system GMM (Arellano and Bover 1995; Blundell and Bond 1998).

We also include a set of temporal (year) dummies in Model (1) to control for additional heterogeneity related to temporal trends (Ghoul et al., 2017).

3. Data and preliminary analysis

3.1 Data

As mentioned earlier, the KING III law of 2009 and the GRENELLE II law of 2010 amended the legislation imposed on companies by forcing them to provide independent assurance on sustainability disclosure. This study aims to determine whether mandatory SRA increases company value. In order to appreciate the repercussions of this new legislation on the value of listed companies, a relevant sample was drawn up.

The choice was made to retain France and South Africa as the spatial field of this study because they are the first two countries in the world that oblige some companies to report their sustainability performance publicly and provide third-party assurance.

Our initial sample consisted of 119 French companies belonging to the stock market index SBF120 based on the 120 most actively traded stocks listed on the Paris Stock Exchange and all South African companies listed on the Johannesburg Stock Exchange (JSE), which numbered 256 companies. However, 36 French and 168 South African companies were excluded because of the lack of public data on external SRA in the Refinitiv ESG Global database. Subsequently, our panel consists of 171 companies listed on SBF120 (83 companies) and the JSE (88 companies) from 2007 to 2018. The choice of this period allows us to assess the effect of mandatory SRA on firm value, since the date of legislation application was 1 January 2011 for KING III and 1 January 2012 for GRENELLE II.

3.2 Descriptive statistics

Table 2 presents descriptive statistics for all the variables used in our empirical analysis and for all the firms in the sample: 88 South African companies listed on the JSE and 84 French companies listed on the SBF120.

Table 2. Descriptive statistics for regression model.

Variables	Obs.	Mean	Median	SD	Min	Max
QTOB	3,857	0.684	0.649	0.422	0.039	3.374
ASSUR	1,512	0.724	1.000	0.446	0.000	1.000
ROA	3,775	5.975	5.98	10.532	−44.25	38.35
LEV	3,777	21.623	18.47	18.683	0.000	82.77
S_Grow	3,501	17.135	8.1	5.574	−50.55	340.48
ESG_score	1,600	54.699	55.55	19.448	1.36	94.46
R&D	1,160	2.865	0.25	8.409	0.000	70.37
SIZE	3,894	13.974	14.128	2.744	7.918	20.751
BETA	3,713	0.700	0.67	0.604	-0.93	2.462

Note: Variables are defined and measured as described in Table 1.

As indicated in Table 2, the mean Tobin's Q during the period 2007–2018 for companies is 0.6, with a maximum of 3.3. The variable ROA measures company economic performance. On average, the companies in our sample are profitable, with a mean ROA of 6%. The results indicate that the mean size of the companies is 13.9, which shows that the firms in our sample are relatively large because our sample coverage belongs to SBF120 and the JSE. Regarding the debt level LEV, we note that the share of total debt in relation to total assets varies between 0% and 82.77%, which shows a difference in debt levels between companies. This indicates that some companies rely mainly on debt as a source of financing (high level of debt), while others are primarily financed by their funds (low level of debt). Finally, we note that the ESG_score varies between 1.36 and 94.5, which means that there is a significant difference in sustainability performance among companies in our sample.

Table 3 shows the correlations among the variables. The results show that all Pearson correlation coefficients were low for interpreting the relationships obtained. These values are less than 0.8. This is the limit Kennedy (2008) set from which we generally encounter multicollinearity problems. In addition, the results indicate no predictor for a VIF greater than 2, which confirms the absence of multicollinearity between the variables in our study.

Table 3. Pearson correlation matrix.

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	VIF
(1) QTOB	1.000
(2) ASSUR	0.056**	1.000								1.15
(3) ROA	−0.412***	−0.119***	1.000							1.26
(4) LEV	0.226***	0.038	−0.089***	1.000						1.25
(5) S_Grow	0.011	−0.071***	0.067***	0.030*	1.000					1.15
(6) ESG_score	−0.076***	0.034***	−0.115***	0.011	−0.241***	1.000				1.38
(7) R&D	−0.097***	0.04	−0.361***	−0.153***	0.144***	0.01	1.000			1.07
(8) SIZE	−0.080***	0.251***	0.013	0.115***	−0.139***	0.553***	−0.036	1.000		1.50
(9) BETA	−0.010	0.171***	−0.0150***	0.051***	−0.105***	0.320***	0.041	0.413***	1.000	1.16

Notes: Variables are defined and measured as described in Table 1. ***, **, * denote that the correlation is significant at the 1%, 5%, 10% levels, respectively.

According to the results, assurance ASSUR is positively correlated with QTOB. We also find a positive association between the debt level LEV and firm value. Sustainability performance ESG_score and the QTOB indicate a negative and significant relationship. However, the relationship between sustainability performance and firm value remains inconclusive in the preliminary statistics.

4. Results and discussion

We run a fixed-effects ordinary least squares (OLS) panel model to test our hypothesis. Table 4 provides the results of the main test for hypothesis 1. The coefficient of the interaction term POST*ASSUR is positive (0.092) and significant at the 1% level. This indicates that mandatory sustainability reporting assurance is positively associated with firm value, thus supporting our hypothesis. These results imply that investors can fully reflect on mandatory SRA when valuing a company.

Table 4. Regression results.

	MCO with fixed effects		Two-step system GMM
	Coeff.	Robust Std. Err	Coeff.	Robust Std. Err
QTOB t−1			0.649***	0.008
ASSUR	0.028***	0.009	0.015***	0.008
POST	−0.128***	0.033	−0.053***	0.005
POST* ASSUR	0.092***	0.031	0.0564***	0.004
ROA	−0.001***	0.001	−0.002***	0.001
LEV	0.006***	0.001	0.004***	0.000
S_Grow	0.001***	0.001	0.001***	0.000
ESG_score	−0.001*	0.001	−0.001***	0.000
R&D	0.001	0.001	−0.001***	0.000
SIZE	−0.026*	0.015	0.001	0.002
BETA	0.034***	0.010	−0.054***	0.002
Intercept	0.839***	0.268	0.233***	0.033
Firm effect	Yes		Yes	Yes
Year effect	Yes		Yes	Yes
Obs.	667		639
R²	0.914
Wald chi^2 p-value			0.000
No. of instruments			76
Arellano-Bond test for AR (2) p-value			0.9054
Sargan test p-value			0.5065

Notes: Variables are defined and measured as described in Table 1. ***, **, * denote that the correlation is significant at the 1%, 5%, 10% levels, respectively.

Furthermore, the results show that the variable ASSUR is positively associated with firm value (0.028), meaning that voluntary SRA reflects investor concerns and increases firm value, even before it becomes mandatory. This result indicates that since the voluntary practice of assuring sustainability information benefits companies and the country's economy, its generalisation by making it mandatory will be valuable for all stakeholders, particularly investors. Finally, we found a negative and significant relationship between the variable POST and company value of companies (−0.128). This result supports our hypothesis because it indicates that in the years following the enactment of the GRENELLE II and KING III laws, companies that do not comply by refusing to verify sustainability information are more likely to have a lower market value. Therefore, investors penalise companies that violate this law. Our results are consistent with previous studies showing a positive correlation between SRA and financial performance. For example, in the context of Germany, Reimsbach et al. (2018) found that assurance positively impacts investor evaluation of company sustainability performance, which may positively affect investment decisions. From a different perspective, Kim et al.'s (2019) study in the American context show a significant moderating effect of SRA on the relationship between sustainability performance and firm financial performance.

Regarding the control variables, the results show that the systematic risk BETA and the LEV have a significant positive relationship with firm value. The positive association between leverage and firm value can be explained by a high level of debt, which translates into better tax protection, increasing cash flow, and subsequently company value. Finally, we find that the variable SIZE of the company is significant and has a negative relationship with firm value.

The debate on the nexus between sustainability performance and firm value is ongoing, and many contemporary studies have argued that no consensus has been reached (de Klerk and de Villiers, 2012; Brooks and Oikonomou, 2018). Our results show that the coefficient related to sustainability performance (ESG_score) is significant and negative which implies that sustainability commitment is observed as a net cost factor and investors penalise companies by depricing their market value. This view is consistent with the agency theory-based overinvestment hypothesis, which implies that sustainability commitments are costly activities that waste scarce resources and, therefore, have a harmful effect on firm value. However, this negative effect is mitigated for transparent companies in disclosing audited information about sustainability actions. Being a sustainability performer is not enough, no one will hear about it. The company must not only communicate this performance, but also ensure its accuracy, in order to benefit from it.

As mentioned above, we use the two-step system GMM to verify further the robustness of our results and overcome endogeneity concerns. Instruments used in the first-difference equations are lagged dependent and independent variables for one period. Findings of the two-step system GMM estimation in Table 4 corroborate the main results under the panel OLS fixed effects regressions, suggesting that our baseline model is sufficient to estimate the mandatory SRA-firm value relationship. It also confirms the robustness of our results to potential endogeneity issues.

In light of the global rise of sustainability reporting and its assurance, this study adds to the existing research by investigating whether investors’ assessment of firm performance is affected by mandatory SRA in France and South Africa. We find that SRA has a significant positive relationship with company value. This result can be explained by the fact that investors perceive mandatory SRA as a mark of commercial disclosure that increases a company's value, because it obliges companies to respect and comply with regulations. This finding implies that new rules and laws that require societal verification positively affect investor concerns, particularly related to company value. We find a positive correlation between mandatory SRA and firm value, while Martinez and Gillet's (2014) study in the French context shows no reaction of stock prices around the date of the signature of voluntary SRA from 2007 to 2010. It must be noted that the SRA process during this period had not yet been regulated by law. Thus, the difference in the findings may be explained by the fact that the introduction of regulations and the use of an accredited independent third-party play a very important role in the field of SRA, particularly regarding investor judgment. According to the regulations, companies have limited freedom of choice but must choose an independent third party from a list of those accredited by the accreditation organisation COFRAC. This process positively affects investors’ concerns. Our study also differs from that of Horn et al. (2018) in the South African context, which shows a significant negative association between sustainability assurance and firm value in 2008, 2011, and 2013. Their study showed that firms with negative sustainability issues are more likely to gain assurance of their sustainability disclosure, which increases greenwashing and affects the relevance of SRA. The absence of a regulatory framework in this period can be considered a factor that influenced companies to hide their weaknesses in sustainability by adopting voluntary SRA.

A possible explanation for the positive and significant relationship between mandatory SRA and firm market value could be that investors may perceive that firms use assurance to add credibility and reliability to the information presented and that assurance signals high-quality sustainability information, which positively influences investors’ judgments. These results contradict some studies (Birkey et al., 2016; Michelon et al., 2015; Boiral, et al., 2019; Martinez et al., 2021), which have developed a critical view of SRA and considered the practice as a symbol of legitimacy and compliance activity and align with studies that show the existence of the signalling effect of SRA (Casey and Grenier, 2015; Ballou et al., 2018). Our findings differ from those of Martinez et al. (2021). They indicate that companies required to verify sustainability information in France do not improve the effectiveness of SRA as they argue that the adoption of mandatory SRA is a vehicle for companies to create the impression of transparency by conforming to reporting requirements.

This study supports the conclusion of Ioannou and Serrafeim (2017), based on countries that mandate sustainability reporting, who found evidence that disclosure regulations generate positive economic returns for shareholders, decrease corruption, and improve managerial credibility. Investors are becoming increasingly aware of mandatory SRA and its effect on a company’s financial performance. French and South African markets promote companies that verify sustainability information. We show that investors perceive mandatory SRA to be a positive signal. This is reflected by the fact that the regulatory frameworks in these two countries allow for the creation of a stable SRA process, which makes it possible to improve the confidence of users of societal information and decrease investors’ concerns.

5. Conclusion

Sustainability reporting assurance plays a decisive role in accounting and financial fields, given its importance in proving the credibility of social and environmental information. Over time, the practice of SRA has continued to develop, particularly in normative and regulatory contexts. However, only a few studies have investigated its mandatory dimension, despite the increasing number of companies using SRA since the regulatory framework's evolution (Gillet-Monjarret, 2018).

To our knowledge, this is the first empirical study that examines the relationship between mandatory SRA and firm value by testing predictions based on agency and neo-institutional theories. We are interested in the mandatory SRA of French and South African companies, given the emergence of the GRENELLE II law (France) and KING III code (South Africa). They changed the legislation imposed on companies by requiring them to provide independent assurance of sustainability disclosures.

The results show that mandatory SRA has a significant positive relationship with company value. This allows us to deduce that mandatory SRA adoption is positively associated with firm value, confirming our initial hypothesis.

This study contributes to the literature in two ways. First, our results are consistent with agency theory that address SRA as a channel to maximise shareholder value. Second, our results show that companies under regulatory pressure related to verifying sustainability information respond to these institutional pressures to access resources, including legitimacy and reputation, which play an important role in enhancing financial performance.

The results of our study may be of primary interest to regulators when considering existing and future SRA policies, to stockholders when assessing investment options, and to managers when examining benefit-cost approaches to provide sustainability reporting assurance. These results may also be of interest to legislators planning to make SRA mandatory.

It is also interesting to examine whether the effect of mandatory SRA on firm value is related to assurance level. Some studies have shown that the effect of societal assurance may differ depending on the assurance level (reasonable or limited). In other words, it is necessary to consider the level of verification on the relevance of SRA. It is also interesting to consider the choice of assurance providers in future research because the type of assurance provider varies by country and affects the relevance of SRA. The choice of assurance providers reflects investors’ concerns and influences their investment judgments.

Our study has some limitations. First, the spatial field of this study consisted of only two countries: France and South Africa. This may have limited the validity of our results. This remains dependent on the willingness of other countries to make this practice mandatory. Second, this study was conducted on a set of listed companies. However, the French GRENELLE II law introduced mandatory SRA for some unlisted companies on 31 December 2016, which constitutes a future avenue for research to better understand the association between SRA and company value.

Disclosure statement

No potential conflict of interest was reported by the authors.