ESG Disclosure, Market Forces, and Investment Efficiency
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2025-04-01
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<jats:title>ABSTRACT</jats:title> <jats:p>This paper examines the impact of environmental, social, and governance (ESG) disclosure on firm investment. The analysis characterizes the optimal precision of ESG disclosure that channels investors’ tastes for ESG into firm investment. Although it is tempting to think that the optimal ESG disclosure becomes more precise when investors care more about ESG, I show this intuition is incomplete because it overlooks the fact that stronger tastes for ESG change how investors use information. Applying the analysis to a large economy, I show that mandating more precise climate disclosure than would be voluntarily provided motivates self-interested firms to act on common interests in reducing emissions. That is, a regulator can leverage market forces and a disclosure mandate to achieve a similar result as a Pigovian tax in motivating firms to internalize the externalities created by their climate-related investments.</jats:p> <jats:p>JEL Classifications: D82; G14; M41.</jats:p>
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Xue, Hao (2025). ESG Disclosure, Market Forces, and Investment Efficiency. The Accounting Review. pp. 1–29. 10.2308/tar-2023-0707 Retrieved from https://hdl.handle.net/10161/32342.
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Hao Xue
Hao Xue is an Associate Professor of Accounting. Prior to joining Fuqua, Professor Xue was an Assistant Professor at New York University, Stern School of Business. Professor Xue's research applies analytical models to accounting practices and institutions that conventional thinkings may have difficulties explaining. In a recent work, he studies the effect of investors' private word-of-mouth communications on firms' information environment and how firms adjust their disclosures in response. Professor Xue teaches Managerial Accounting.
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