Corporate ESG engagement and information asymmetry: the moderating role of country-level institutional differences

ABSTRACT

The purpose of this study is to examine: (i) the impact of corporate environmental, social, and governance (ESG) performance on asymmetric information and (ii) whether this relationship differs for countries with different legal and governance systems. Employing an extensive sample (covering 21 countries from Europe) for an extended time frame (2002-2019), we present evidence that overall corporate ESG performance reduces information asymmetry. Moreover, environmental, social, and governance pillars separately contribute to this significant relationship. Within the ten subcategories of the ESG score, only the emissions, workforce, human rights, product responsibility, and management scores significantly and negatively affect asymmetric information. We also present novel evidence that the inverse relationship between corporate ESG performance and information asymmetry is more pronounced in civil law and stakeholder-oriented countries, but not in common law and shareholder-oriented countries. Our findings demonstrate that firms’ country-level institutional context moderates the association between ESG performance and information asymmetry.

KEYWORDS:

• ESG performance
• asymmetric information
• analyst forecast dispersion
• country-level institutional factors

JEL Classification:

• G30
• Q01

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Dhaliwal et al. (2012) employ the issuance of standalone CSR reports, and Martínez-Ferrero, Ruiz-Cano, and García-Sánchez (2016) employ the degree of voluntary CSR disclosure as their main variable of interest.

2 ADRI is originally developed by La Porta et al. (1998) and revised by Djankov et al. (2008). We use revised ADRI in our baseline regressions.

3 The definitions of the subcategories are provided in Table A1 in Supplemental File.

4 To rule out the fact that our findings regarding common law countries is not driven primarily by UK specific factors, we run additional tests. We insert several country-level control factors (GDP per capita growth, inflation rate, population growth, trade openness index, and rule of law index) into our estimations. Our finding regarding the significant impact of ESG performance on information asymmetry only in civil law countries versus insignificant impact in common law countries remains robust in all additional estimations (findings are displayed in Tables A4 and A5 in the Supplemental File).

5 We report the results with the subsamples constructed based on revised ADRI scores obtained from Djankov et al. (2008). We re-estimate our model employing ADRI developed by La Porta et al. (1998). The untabulated findings remain the same.

6 Proxies used for the additional control variables: Firm age (natural logarithm of 1 plus the number of years that has passed since incorporation), profitability (Return on assets – ROA: net income / total assets); R&D intensity (Research and development expenses to total assets); Capital expenditure ratio (capex to net sales).