The nexus between policy uncertainty, sustainability disclosure and firm performance

ABSTRACT

Policy uncertainty (PU), and sustainability disclosure, influence the performance of the firms. We use European data to extend the nascent literature on sustainability disclosure, and economic policy uncertainty by investigating the moderating impact of sustainability disclosure on the relationship between economic policy uncertainty and firm performance. We find overwhelming evidence that policy uncertainty reduces firm performance; however, sustainability disclosure moderates this destructing impact of policy uncertainty on firm performance. Our results show that environmental and social disclosure by the European firms enhances their reputation and help these firms in reducing the policy-induced uncertainty. A higher governance disclosure representing efficient corporate governance also help European firms to moderate the negative effect of policy uncertainty on their performance. Our results are robust to alternate proxies of firm performance as well as endogeneity issues.

KEYWORDS:

• Economic policy uncertainty
• sustainability disclosure
• firm performance
• Europe
• panel data

JEL CLASSIFICATION:

• C23
• G30
• P34

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ News based Economic Policy Uncertainty index developed by Baker, Bloom, and Davis (2016).

² The news based economic policy uncertainty index is only available for these 9 European countries.

³ https://www.policyuncertainty.com/index.html