Decoding the impact of firm‐level ESG performance on financial disclosure quality

Abstract

This study examines the impact of environmental, social, and governance (ESG) performance on financial disclosure quality as measured by disaggregated financial statements (FSDQ), using data from US-listed companies between 2002 and 2021. We find a positive association between ESG performance and FSDQ quality, suggesting that improved ESG performance is linked to enhanced disclosure quality and accountability and that managerial competence and strong organizational culture accentuate this relationship. Further analysis shows a stronger link between firms with high-quality accounting practices and good financial reporting readability, whereas complex financial reporting weakens this relationship. Our findings remain valid when alternative measures of key variables are used, and under propensity score analysis, Heckman's two-stage estimation, and cross-lagged and entropy balancing techniques, ensuring the analysis is robust and reliable. Overall, our findings provide important new insights into ESG performance, suggesting it fosters enhanced disclosure and accountability to stakeholders.