The Financially Material Effects of Mandatory Nonfinancial Disclosure

DOI: 10.1111/1475-679X.
12499
Journal of Accounting Research
Vol. No. July 2023
Printed in U.S.A.
The Financially Material Effects of

Mandatory Nonfinancial Disclosure
BRIAN GIBBONS ∗
Received 30 November 2021; accepted 27 May 2023
ABSTRACT
Complaints from institutional investors suggest that principles-based disclo-

sure regimes that rely on financial materiality standards produce inadequate
nonfinancial environmental and social (E&S) information. Using the stag-
gered introduction of 40 country-level regulations that mandate disclosure,
I document that reporting E&S information relates to increased investment
from institutional owners and has material effects on firms’ investment and
financing decisions. Firms mandated to disclose E&S information allocate
more investment toward long-term, innovative projects and raise more equity
capital. Evidence indicates that disclosure attracts long-term–oriented institu-
tional clientele with E&S preferences, which then feeds back on firm decision
making. Although the effects of nonfinancial disclosure are similar to those
of improved financial disclosure, this clientele mechanism is unique. Taken
together, these results suggest that jurisdictions that rely solely on financial
∗ Oregon State University

Accepted by Philip Berger. I would like to acknowledge that a majority of this research
was completed as part of my dissertation at Penn State University. I thank my dissertation
committee: Peter Iliev (chair), Jess Cornaggia, Kimberly Cornaggia, Matt Gustafson, Stefan
Lewellen, Karl Muller, and Tim Simin for their valuable feedback. Chaderic Ford and Mitchell
Burton provided excellent research assistance. I also thank Dan Garrett, Stephen Horan
(Discussant), Mike Roach, Lukas Roth, and seminar participants at the FMA 2021 Annual
Meeting, Oregon State University, Penn State University, and the University of Wisconsin-
Milwaukee for helpful comments. An online appendix to this paper can be downloaded at
https://www.chicagobooth.edu/jar-online-supplements.
1
© 2023 The Chookaszian Accounting Research Center at the University of Chicago Booth School of
Business.
1475679x, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/1475-679X.12499 by Yasser Eliwa - CochraneUnitedArabEmirates , Wiley Online Library on [08/09/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
2 b. gibbons
materiality disclosure standards create nonfinancial information frictions

with material effects on investors and firm decision making.
JEL codes: D82, G23, G32, G38, M14, O31, Q56

Keywords: ESG disclosure; environmental disclosure; social disclosure; in-
stitutional investors; innovation; real effects; sustainability
“Investors consider certain environmental and social information material to their

investment and voting decisions, regardless of whether their investment mandates
include an “E&S-specific” strategy… there is a lack of material, comparable, con-
sistent information [for] these decisions.”
– SEC Investor Advisory Committee [2020]
1. Introduction
The rise of socially responsible investing—constituting over 25% of pro-
fessionally invested dollars in the United States (US SIF [2018])—has cre-
ated a new focus on firms’ disclosure and implementation of environmen-
tal and social (E&S) policies. As a result, “disclosure relating to climate risk
and human capital” was at the top of the list on the Securities and Exchange
Commission’s Annual Regulatory Agenda (Securities and Exchange Com-
mission [2021]). However, the necessity and scope of E&S disclosure re-
quirements are still topics of intense debate.
Opponents of an expansion to E&S disclosure requirements assert that
the current regime in the United States, which relies exclusively on finan-
cial materiality standards, is sufficient to provide investors with all material
information relevant to a firm’s operations (Clayton [2020]). This standard
requires that if, for example, an increased risk of natural disasters was finan-
cially material to the firm’s operations, the firm would need to disclose the
details of that risk.
However, concerns raised by major institutional investors indicate that
many firms’ E&S disclosures lack the comparability and consistency re-
quired to assess E&S risk and make informed investment and voting de-
cisions (SEC Investor Advisory Committee [2020]). Regulators sympathetic
to these concerns have argued that risks in nonfinancial E&S information
are material, regardless of whether they impact near-term financial earn-
ings. Consequently, they favor more rules-based, prescriptive nonfinancial
disclosure standards (Lee [2020]).
Increases in financial accounting quality lead to more investment and
have real effects on firms by alleviating frictions from information asymme-
try (Zhong [2018], Brown and Martinsson [2019]). Mandatory standard-
ized nonfinancial disclosure may likewise alleviate information frictions
and result in material real effects on firm decision making. In this paper,
I study whether nonfinancial disclosure is material to investors and, if so,
financially material effects of mandatory nonfinancial disclosure 3
Fig 1.—E&S disclosure and capital rationing: iShare’s ESGU. This figure presents details from
the marketing materials of iShare’s ESGU ETF. The information of interest is the weighted per-
cent of the firms in the portfolio with an overall ESG rating (ESG Coverage %) and disclosure
on their CO2 emissions (carbon coverage %).
whether disclosure has material effects on firms’ investment and financing

decisions.
If nonfinancial information significantly contributes to investors’ abil-
ity to better project cash flows, assess long-term financial risks, or monitor
managers, then increased E&S disclosure would help to alleviate classic ad-
verse selection problems and the associated inefficiencies for firm financ-
ing and investment (Verrecchia [2001]). Reductions in adverse selection
costs have been shown to lower the cost of capital through a reduction in
liquidity premiums and improve investment efficiency, so a reduction in
such costs related to nonfinancial information could have real effects on
the firm. The information contained in nonfinancial disclosures, however,
differs from standard financial accounting information and may not be uti-
lized by most investors. Thus, adverse selection may not be severe enough
to be problematic in this context.
Christensen, Hail, and Leuz [2021] offer an alternative mechanism of
how disclosure could alleviate information frictions and have material ef-
fects on the firm. Disclosure of E&S information is likely to attract investors
with E&S preferences (Fama and French [2007]), regardless of whether
the information is financially material, leading to a clientele effect (i.e., a
change in the composition of the shareholder base). The resulting change
in the shareholder base could be significant due to the growth in investable
capital with such preferences. For example, iShares’ $22 billion ESG-Aware
MSCI USA ETF excludes firms that do not disclose carbon emissions inten-
sity (see figure 1; iShares [2021]).
Beyond investors with explicit E&S mandates, long-term–oriented insti-
tutional shareholders also are associated with more investment in firms
with higher E&S performance (Starks, Venkat, and Zhu [2017], Gibson,
Krueger, and Mitali [2020]), especially firms that disclose more E&S in-
formation (Serafeim [2015]). A clientele effect that shifts the shareholder
base toward either long-term shareholders or shareholders with E&S pref-
erences could feed back on firms’ decision making. For example, Aghion,
van Reenen, and Zingales [2013] show that more institutional investors in
the shareholder base, especially dedicated active investors, leads to more
4 b. gibbons
long-term investment. Likewise, managerial decision making could poten-

tially be influenced by investor clienteles with explicit E&S preferences if
such investors engage with the firm or reduce the cost of capital (Fama and
French [2007], Hart and Zingales [2017], Pastor, Stambaugh, and Taylor
[2021]). Thus, disclosure may have material real effects on the firm due to
this clientele effect, even if the information contained in the disclosures is
financially immaterial to most non-E&S investors.
To address these questions, I conduct a cross-country difference-in-
differences (D-i-D) analysis that uses the staggered adoption of regulations
that require firms to report specific environmental or social information in
jurisdictions outside the United States. I avoid self-selection issues common
to prior studies in the E&S literature by focusing on national mandatory
disclosure regulations rather than voluntary changes in firm-level E&S dis-
closure or regulations that only affect a single industry or local jurisdiction.
I identify 40 disclosure regulations from 2000−2019 that apply broadly to
publicly traded firms in 34 different countries using the Carrots & Sticks
database. The staggered adoption of these regulations, combined with a
strict set of firm and time fixed effects, helps minimize potential bias from
confounding variables that might coincide with the adoption of an individ-
ual regulation.
I begin by testing whether these shocks to disclosure affect institutional
ownership for firms required to report. Following an E&S disclosure reg-
ulation, I find that institutional ownership increases by 0.80%. Although
Ilhan et al. [2023] establish a positive association between institutional own-
ership and voluntary environmental disclosure, my finding represents the
first causal evidence that this relation also works in reverse—institutional
investors respond to increases in E&S disclosure by increasing ownership.
This pattern indicates that E&S information is considered material by a sig-
nificant group of investors.
Next, I investigate the impact of E&S disclosure on firms’ investment
policies. A reduction in information frictions could lead to a reduction in
the cost of external financing. In such a case, the firm should accept more
value-added projects. However, it is also possible that firms may decrease
investment due to the direct costs of complying with the disclosure. Fol-
lowing an E&S disclosure regulation, I find that firms increase investment
in innovation. Estimates from D-i-D regressions reveal that R&D expendi-
tures for treated firms increase by 4.8%, relative to the sample mean. I also
observe an increase in the outputs of innovation, as measured by patent ap-
plications and citations. The size of this effect of nonfinancial E&S disclo-
sure on R&D is comparable to the effects of improved financial accounting
quality following IFRS adoption (Zhong [2018]), increased insider trading
enforcement, or the EU transparency directives (Brown and Martinsson
[2019]).
Although a reduction in information frictions would suggest a lower
cost of capital for all projects, I find that the relation between E&S dis-
closure and fixed capital investment is negative, though often statistically
insignificant. Again, these findings are similar to Brown and Martinsson

[2019], who show that improved financial disclosure quality results in an
insignificant or negative change in capital spending. Additionally, there is
no change in total investment. This result shows that the direct costs of
complying with these regulations do not meaningfully reduce overall in-
vestment, as companies alter the mix of projects but not total spending.
These baseline findings are robust to alternative measures of investment in
innovation and matching firms on observable characteristics. In addition,
the causal interpretation of these results is reinforced by several tests for
omitted variable bias and reverse causality.
Given that information frictions around E&S disclosure have material
effects on institutional ownership, E&S disclosure might also affect firms’
financing decisions. The results show that firms issue 15.6% more equity
after disclosing, relative to the sample average. Although newly disclosed
E&S information is also available to debt investors, firms choose to issue
more new equity than debt following disclosure and debt levels fall, sug-
gesting that the benefits from increased E&S disclosure are primarily an
equity market phenomenon.
Finally, I explore the mechanism that links mandatory E&S disclosure
to changes in institutional investment, as well as firm-level investment and
financing decisions. I test whether these effects can be attributed to a re-
duction in adverse selection costs or if disclosure creates a materially signif-
icant clientele effect from investors with E&S preferences that then impacts
managerial decision making.
Evidence from traditional proxies that capture information asymmetry
suggests that mandatory E&S disclosure regulations do not meaningfully
reduce information asymmetry or affect firm value, on average, for this set
of disclosure rules. Thus, it does not seem that a reduction in adverse se-
lection costs is responsible for the effects of disclosure on investors and
firms. Rather, using detailed holdings data, I show that long-term–oriented
institutional investors with E&S preferences (i.e., signatories of the Princi-
ples for Responsible Investment [PRI] compact) increase investment post-
disclosure, and the effects above are primarily attributable to this change
in investor clientele. Although other studies (e.g., Krueger [2015]) show
that specific E&S regulations meaningfully reduce adverse selection, I find
that, more generally, E&S disclosure has material effects on investors and
firms through this clientele channel. The material effects persist even if
the information disclosed does not reduce adverse selection overall. The
identification of this reallocation of capital postdisclosure based on nonfi-
nancial tastes, which creates material financial effects for the firm, is the
key contribution of the study.
This study adds to the nascent literature on the real effects of E&S disclo-
sure. Most studies that analyze mandatory E&S disclosure concentrate on
the real effects targeted by the policy. Such effects include an improvement
in disclosure quality (Ioannou and Serafeim [2019]), or positive E&S out-
comes, including reduced pollution, improved worker safety, or decreased
investment in corrupt countries (Christensen et al. [2017], Chen, Hung,
6 b. gibbons
and Wang [2018], Rauter [2020], Jouvenot and Krueger [2021], Krueger
et al. [2021], Fiechter, Hitz, and Lehmann [2022], Tomar [2023]). Others
have shown that E&S disclosure has spillover effects on the E&S policies
of other firms through board connections (Iliev and Roth [2023]) and
supply chains (Schiller [2018]). My study contributes to this literature
by documenting that mandatory E&S transparency directly affects firms’
shareholder bases and their investment and financing policies.
These findings also complement studies within the E&S literature that
document an association between voluntary E&S disclosure and capital
market effects. These studies find that better E&S disclosure is related to
a lower cost of equity (El Ghoul et al. [2011], Chava [2014], Plumlee et al.
[2015]) and a more dedicated shareholder base (Serafeim [2015]). This
study adds a new dimension to this literature by testing the capital mar-
ket effects of mandatory E&S disclosure shocks on a global sample of firms
within a causal framework.
This study also contributes, more broadly, to the extensive literature on
how capital market frictions impede investments (Fazzari, Glenn Hubbard,
and Petersen [1988], Hubbard [1998], Almeida and Campello [2007], De-
nis and Sibilkov [2010], Duchin, Ozbas, and Sensoy [2010])—especially
investments in innovation (Arrow [1972], Brown, Fazzari, and Petersen
[2009], Brown and Martinsson [2019])—and how quality disclosure can
help alleviate inefficiencies (Bushman and Smith [2001], Biddle and Hi-
lary [2006], Biddle, Hilary, and Verdi [2009], Zhong [2018]). In this sense,
the closest related paper is Allman and Won [2021], who show investment
efficiency increases after E&S disclosure from EU Directive 2014/95. My
findings show how information frictions related to E&S information can
create clientele effects that have a material impact on firms, regardless of
whether the information disclosed is “financially material” or reduces ad-
verse selection. These findings add a new and vital dimension for policy
makers to consider when debating changes to E&S disclosure regimes.
2. Data and Summary Statistics

2.1 shocks to e&s disclosure
I utilize a sample of country-level regulatory shocks to E&S disclosure.1
I obtain data on these regulations from the “Carrots & Sticks” database.
Since 2006, Carrots & Sticks—a joint project between KPMG, the Global
Reporting Initiative (GRI), the United Nations Environment Programme
(UNEP), and The Centre for Corporate Governance in Africa (University
of Stellenbosch)—has conducted periodic reviews of sustainability regula-
tions across the world. The survey covers regulations from 71 countries, in-
cluding the top 60 economies by GDP (Bartels et al. [2016]). The database
1 In this study, I focus on regulations mandating the disclosure of often unobservable E&S
practices (i.e., the E&S in ESG). I do not include regulations to related corporate governance
policies.
contains regulations and requirements issued by governments, regulators,

or exchanges for mandatory and voluntary E&S disclosure guidelines.
This study uses mandatory E&S disclosure regulations from 2000 to 2016.
I utilize 40 mandatory regulations in 34 countries out of the 383 regulatory
instruments in the Carrots & Sticks database. I exclude regulations specific
to an industry or geography or those that only apply to state-run firms.
Although firms can lobby for or against such broad regulatory changes,
it is unlikely that any individual firm caused the adoption or influenced
the timing of these regulations (Leuz and Wysocki [2016]). I extend the
sample by three years to 2019 so that there are three years of postperiod
data for later disclosure shocks. See appendix B in the internet appendix
for a detailed list of these regulations.
2.2 data
I construct the sample using several data sources. First, I obtain firm-level
data from Worldscope for all firms in the database operating during this
period. I use political, economic, and environmental data at the country
level from the World Bank. Data on firms’ E&S disclosure quality are from
Bloomberg and Thomson Reuters’ Asset4.
Additionally, I use data on patents from the UVA Darden Global Corpo-
rate Patent Dataset (Bena et al. [2017]). This data set links patents from
the U.S. Patent and Trademark Office to publicly traded firms worldwide.2
The database contains 3.1 million patents and relevant citations, awarded
to approximately 9,200 firms from 1980 to 2017. Finally, I merge data on
aggregate institutional ownership from Factset’s Ownership database and
institution-level holdings data from Thomson Reuters’ Institutional Hold-
ings (13f) S34 data. Data from Bloomberg, Asset4, Thomson Reuters, and
the World Bank are only available for a limited number of firms in World-
scope. To maximize the sample size, I limit the use of these variables to
specific subsample tests.
I impose several criteria for inclusion in the sample. First, all relevant fi-
nancial data must be nonmissing for outcome and control variables at the
firm level. Second, I exclude firms with less than $10 million in total assets.
Additionally, I exclude firms operating in the financial or utility sectors,
firms with less than three observations before an E&S disclosure regulation,
or firms with less than three total observations if the firm is never treated
by an E&S disclosure regulation. Finally, I exclude observations of all firms
in jurisdictions listed on the EU’s 2020 “blacklist” of known tax havens. The
2 Bena et al. [2017] construct the data set using fuzzy-string matching techniques that link
the names of patent assignees to names of international public firms. Algorithmic queries to
search engines (i.e., Google) help identify ambiguous patent assignee names (e.g., variants
of the parent company name, company names in different languages, or subsidiary compa-
nies). The researchers match the remaining difficult cases by hand. A more detailed descrip-
tion of the construction of the data set is available at: https://patents.darden.virginia.edu/
documents/DataConstructionDetails_v01.pdf.
8 b. gibbons
TABLE 1
Sample Distribution by Country
Panel A: Distribution of treatment by country
Country N Obs. N Firms Country N Obs. N Firms Country N Obs. N Firms
Argentina 159 17 Iceland 51 8 Philippines 335 34

Australia 772 55 India 1,443 121 Poland 908 141
Austria 302 32 Indonesia 852 106 Portugal 168 14
Bahrain 23 4 Ireland 555 49 Qatar 109 15
Bangladesh 4 1 Israel 502 44 Russian Fed. 272 29
Belgium 94 7 Italy 745 62 Saudi Arabia 409 66
Bermuda 153 20 Japan 11,635 823 Singapore 1,521 152
Brazil 893 113 Jordan 76 11 Slovenia 77 11
Bulgaria 36 8 Kuwait 134 21 South Africa 1,135 84
Canada 1,902 126 Latvia 15 3 South Korea 6,415 635
Chile 395 43 Lithuania 70 11 Spain 148 12
China 1,174 124 Luxembourg 188 26 Sri Lanka 243 33
Colombia 96 12 Malaysia 2,106 214 Sweden 766 52
Croatia 125 22 Malta 18 5 Switzerland 1,333 122
Cyprus 21 4 Mauritius 33 8 Thailand 1,448 143
Denmark 235 17 Mexico 589 60 Tunisia 40 10
Egypt 297 49 Morocco 111 18 Turkey 118 12
Finland 560 43 Netherlands 569 43 U.A.E 158 24
France 586 46 New Zealand 525 53 U.K. 4,819 356
Germany 1,010 82 Norway 545 45 U.S. 26,962 2,251
Hong Kong 4,740 479 Pakistan 464 72 Vietnam 325 76
Hungary 45 3 Peru 150 18
Total 82,707 7,400
This table presents the distribution of observations and firms by country. The column N Obs. reports
the total number of firm-year observations per country. The column N firms reports the total number of
unique firms by country.
sample includes 82,707 firm-year observations from 7,400 firms in 65 coun-

tries from 2000–2019. Table 1 tabulates the distribution of observations and
the number of firms by country.
The primary variable of interest in this study is E &S Regul at ion. This
variable indicates whether a country has adopted a mandatory E&S disclo-
sure regulation. It is equal to one if the firm is headquartered in a country
that adopted such a rule in the prior year. Once a country has adopted a
regulation, this variable remains equal to one for the firm; otherwise, the
variable equals zero. Figure 2 gives the number of treated and control ob-
servations by year, including the number of firms treated by a disclosure
regulation for the first time each year.
Fig 2.—Sample composition by year. This figure presents the number of firms in the sample by
year, conditional on whether the firm is treated or is a control firm. It also shows the number
of “newly treated” firms—firms affected by a disclosure regulation adopted in their home
country in the prior year.
All specifications include time-varying firm-level and country-level con-

trols. I winsorize all continuous variables at the 1% level in both tails. See
the appendix for detailed descriptions of all variables.
2.3 summary statistics

I present summary statistics for the sample in table 2. Of the 7,400 firms
in the sample, 4,105 (55.5%) receive a shock to E&S disclosure during the
sample period. Consequently, 33,075 (40.0%) of all firm-year observations
are “treated” by a shock to E&S disclosure reporting.
The average firm in the sample is large and has $3.4 billion (USD) in
assets. Firms in the sample spend an average of 1.99% and 5.40% of assets
on investments in R&D each year and capital expenditures, respectively.
The median value of expenditures on R&D, however, is zero. Only 46.5% of
firm-years have nonzero expenditure on R&D. Conditional on nonmissing
R&D, the average value of R&D is higher, at 3.85%. The average firm in
the sample submits 10.2 patent applications in an average year and receives
98.0 citations on its existing patents. Both patent applications and citation
counts are extremely skewed. These values, however, are similar to those
reported for public firms in studies that use data from the NBER Patents
File (e.g., Acharya, Baghai, and Subramanian [2014]). Firms issue equity
equal to 2.29% of total firm assets each year, which falls to 1.23% of assets
after factoring in cash spent on share buybacks. The median firm does not
issue any new equity in a year.
The subset of firms with data available from Asset4 and Bloomberg is
much smaller than the overall sample. There are approximately 28,000
observations, depending on the measure. In the Bloomberg sample, the
firms’ ESG disclosure quality is low. The average overall ESG disclosure,
environmental disclosure, and social disclosure scores, respectively, are
10 b. gibbons
TABLE 2
Summary Statistics
Mean Median SD N
Treatment
E&S Regulation 0.40 0.00 0.49 82,707
Investment and Innovation
Capex 5.40 3.56 6.26 82,707
R&D 1.99 0.00 4.71 82,707
Investment 7.44 5.26 7.93 82,707
R&D (nonmissing only) 3.85 1.60 6.21 43,095
R&D (indicator) 46.52 0.00 49.88 82,707
Patents 10.20 0.00 61.63 70,548
Cites 98.09 0.00 478.16 69,963
Ownership and Issuance
Inst Own 47.85 44.17 32.93 82,707
Equity Issuance 2.29 0.00 12.19 82,707
Net Equity Issuance 1.20 0.00 12.17 82,707
Other Firm Characteristics
Mkt Equity ($USD millions) 3,034.70 587.54 5,856.27 82,707
LT Debt Ratio 16.60 11.09 19.46 82,707
Tangibility 32.06 26.94 24.86 82,707
Tobin’s Q 1.93 1.37 2.03 82,707
Profitability 11.60 11.07 13.22 82,707
Volatility 1.56 0.91 1.99 82,707
Return 4.17 5.56 47.79 82,707
Price 29.74 10.24 68.87 82,707
Yield 2.14 1.49 2.67 82,707
Turnover 138.69 73.96 195.60 82,707
Assets ($USD millions) 3,407.79 715.63 6,886.99 82,707
Dividend Payer 70.35 100.00 45.67 82,707
Bid-Ask 1.27 0.46 3.52 70,084
Country-Level Characteristics
GDP Per Cap. 37,594.29 39,496.48 18,147.23 82,707
% Δ GDP Per Cap. 1.82 1.70 2.31 82,707
Unemployment 5.62 4.81 3.31 82,554
Taxes % of GDP 13.65 11.31 5.52 73,697
Government HHI −4.07 1.00 70.14 66,522
Left Government 0.46 0.00 0.50 55,995
Rule of Law 1.24 1.55 0.67 81,114
Political Stability 0.47 0.54 0.65 81,114
Corruption Controls 1.18 1.38 0.77 81,114
Carbon Emission Per Cap. 11.64 9.78 5.61 58,844
% Renewable Energy 10.45 10.63 8.39 63,070
E&S Disclosure
Annual Report 51.55 100.00 49.98 25,179
ESG Disclosure 26.44 21.07 14.51 27,969
Environmental Disclosure 24.29 20.16 18.14 18,372
Social Disclosure 26.79 22.81 16.03 23,147
This table presents summary statistics for the sample. The unit of observation is a firm-year. There are
82,707 firm-year observations for 7,400 unique firms. The appendix provides definitions for all variables.
26.4, 24.2, and 26.7. These scores range from 0–100, where zero denotes
that the firm does not report on any measure collected by Bloomberg, and
a value of 100 denotes that it reports on all measures. Bloomberg tailors
relevant measures to individual industries. In all, 51.6% of firms have either
a specific section of their annual report devoted to ESG disclosure or a
stand-alone ESG report published annually. Overall, the sample’s average
size, capital structure, and profitability are comparable to other studies in
the E&S literature with a global sample of firms (e.g., Schiller [2018]).
3. Empirical Strategy
In this section, I detail the identification strategy used throughout the
study. In addition, I provide evidence that affected firms significantly
change their E&S disclosure behavior in response to regulatory shocks that
mandate E&S disclosure.
3.1 identification strategy

Establishing a causal relation between E&S disclosure and firm outcomes
is difficult due to several confounding factors. Without mandatory disclo-
sure rules, the choice to disclose E&S information is endogenous to the
firm. In this case, only firms that expect the private benefits of transparency
to exceed the costs will choose to disclose. Changes in the firm’s investment
opportunities or cost of capital may influence self-selection for disclosure.
Thus, studies that rely on voluntary disclosure can provide informative de-
tails about associations between E&S disclosure and firm-level outcomes but
do not allow for causal interpretations.
Although using regulations that mandate disclosure as a quasi-natural ex-
periment can alleviate self-selection issues, measuring the impact of a single
regulatory change does not ease endogeneity concerns, as selection prob-
lems still exist at the individual country level. For example, the country’s
overall economic or political conditions may motivate the adoption of E&S
disclosure regulation. If firms in other countries are used as untreated con-
trols, the treatment is not randomly assigned to firms. Moreover, a within-
country effect estimated along an arbitrary discontinuity may not be gen-
eralizable to similar firms in different countries or even to firms within the
same country.
To address these endogeneity concerns, I utilize a staggered D-i-D re-
search design that uses the adoption of mandatory disclosure regulations
across dozens of countries over two decades as exogenous shocks to the
level of E&S disclosure. This design, which incorporates individual firm and
time-fixed effects, generates estimates of the effect of E&S disclosure reg-
ulations on treated firms by comparing them against counterfactuals from
firms located in countries without mandatory E&S rules during the same
period. I estimate this staggered D-i-D regression model as follows:
Yi,t = α + β1 E &S Regul at ioni,t −1 + δXi,t −1 + μi + πt + εi . (1)
12 b. gibbons
In this specification, i indexes firm and t indexes year. Yi,t is an outcome

variable that measures firm-level institutional ownership, investment, or is-
suance. E &S Regul at ioni,t −1 is the key independent variable of interest.
E &S Regul at ioni,t −1 is equal to one if the country adopts an E&S disclosure
regulation in the prior year and remains equal to one after that; otherwise,
the variable equals zero. I use a set of lagged firm-level and country-level
variables, Xi,t −1 , as controls. These controls vary by specification, consis-
tent with the prior literature. Following Aghion, van Reenen, and Zingales
[2013] and Zhong [2018], I cluster standard errors, εi , by firm to account
for potential serial correlation in the error terms.
The primary advantage of the staggered D-i-D design is that I measure
the effect of treatment in different countries over many years. This setup
minimizes the potential for bias from confounding omitted variables such
as market-wide economic shocks that might coincide with the adoption of
any single regulation. I include a year fixed effect, πt , or an SIC 2-digit
industry-by-year fixed effect, π j,t , which controls for these shocks as well as
other time trends. An additional benefit of using a staggered D-i-D frame-
work is that it allows firms to be part of both the treated and control groups
at different points in time. This feature is helpful as there are significant
differences in the cultural, legal, and economic environments across bor-
ders for treated and control firms. I control for time-invariant differences
across firms with a firm-level fixed effect, μi .
One potential issue with the staggered D-i-D design is that comparisons of
treatment effects between earlier and later treated groups are inappropri-
ate when treatment effects are dynamic (Baker, Larcker, and Wang [2022]).
These comparisons can lead to bias in the average treatment effect of an
unknown sign. I confirm that this potential bias is not problematic in this
case by using stacked regressions that eliminate these types of comparisons
in the internet appendix. All results are robust to the stacked regression
method.
3.2 confirming the strength of the disclosure shock

The “causal path” implied in this setup is that E&S disclosure regulations
increase disclosure quality, alleviating information frictions between share-
holders and managers. This reduction in information frictions may have
real effects on firms’ financing and investment decisions. However, this as-
sumption may not hold if firms do not improve their disclosure due to en-
forcement issues or if the regulation does not have a binding effect on the
firm, for example, regulations with “comply or explain” clauses that allow
firms to avoid disclosure. Although this feature is not unique to E&S dis-
closure, it makes these types of regulations different from other significant
regulations meant to improve financial disclosure quality (e.g., SOX, IFRS
adoption). Due to these issues, it is not clear that mandatory nonfinancial
disclosure alleviates information frictions, as shareholders may still struggle
to compare E&S policies across firms.
As a quasi-first-stage regression for the D-i-D analysis in section 4, I in-

vestigate the relation between regulatory shocks to E&S disclosure require-
ments and measures of E&S disclosure quality. This check amounts to a
falsification test. A null result would suggest that the hypothesized causal
path is invalid in this sample.
I find evidence that firms improve their E&S disclosure quality after the
implementation of E&S disclosure regulations, as shown in table C1 in the
internet appendix. Here, I find that firms are significantly more likely to
provide detail about E&S policies in a designated section of the annual
report or through a standalone E&S report. Likewise, I document a positive
and significant increase in the quality of overall ESG, environmental, and
social disclosure, as measured by Bloomberg. Finally, in panel B of table C1,
I find that the effects of mandatory disclosure are larger for firms with low-
quality disclosure before the regulation. These results validate the strength
of the shock to disclosure standards.3
In panel C, I use a different measure to capture the adoption of country-
level policies that encourage voluntary E&S disclosure by firms. This des-
ignation also comes from the Carrots & Sticks database. I label this new
measure Voluntary E&S Regulation. There is no accompanying increase in
disclosure quality when regulations only encourage firms to voluntarily in-
crease their E&S reporting quality. This finding supports investors’ com-
plaints that voluntary reporting regimes may not result in comparable high-
quality disclosures by firms.
4. Main Results
4.1 e&s disclosure and institutional investment
Many large institutional investors have supported and lobbied for in-
creased E&S disclosure. In this section, I investigate whether improved dis-
closure impacts institutional investment. Large institutional investors who
prioritize E&S disclosure may be limiting investment in some firms due to
insufficient E&S information. A recent survey, for example, found that 78%
of investors felt climate reporting was as important, or even more impor-
tant, than financial reporting (Ilhan et al. [2023]). Likewise, many large
ESG funds’ mandates preclude investment in firms with missing ESG rat-
ings in particular categories. Disclosure of nonfinancial information poten-
tially alleviates this information-based financing friction, as firms that pub-
licly disclose E&S information are more likely to have an ESG rating from
one of the major rating providers (e.g., MSCI).
However, it is unclear, ex ante, whether more disclosure will lead to
more institutional ownership. The majority of assets under management
3 Reinforcing these findings, Ioannou and Serafeim [2019] show that E&S disclosure reg-
ulation has the intended effect of increasing the quality of E&S disclosure for affected firms
using a similar staggered adoption strategy across a smaller sample of countries.
14 b. gibbons
worldwide do not have an explicit mandate to invest with environmental

or social goals. Thus, nonfinancial disclosure may cause zero-sum rebal-
ancing among institutional investors with different preferences. Likewise,
beyond capital rationing due to investment mandates based on ESG rat-
ings, there is no theoretical reason why E&S disclosure would cause institu-
tional investors to react differently compared to retail investors. Addition-
ally, if ESG funds are greenwashing or engaging in cheap talk to bolster
their reputation, but do not really care about the information, ownership
might not change. Or if, on average, they see E&S disclosure as too costly,
institutional ownership could fall in response to mandatory reporting
requirements.
I measure this relation empirically in table 3. In this table, the fraction of
the firm’s shares owned by institutions, Inst Own, is the dependent variable.
I follow the prior literature by controlling for factors affecting institutional
investment in the cross-section (Gompers, Ishii, and Metrick [2003], Chung
and Zhang [2011]).
In column 1, I find that, following an E&S disclosure mandate, institu-
tional ownership increases by 0.66%. This estimate represents an increase
of 1.3% relative to the sample average. In column 2, I use a stricter SIC 2-
digit industry-by-year fixed effect to control for time trends in institutional
investment within industries, and the results are unchanged. Institutional
investors are not just engaging in cheap talk when advocating for more E&S
disclosure—their ownership patterns mimic their complaints. Disclosure
of E&S information has material effects on institutional investors’ decision
making.
Figure 3A shows the estimation of an average treatment effect on
the treated (ATT) using the synthetic control matching method (SCM).
Here, I pair each treated observation with a synthetic counterfactual con-
trol observation based on pretreatment values of the dependent variable
(Ben-Michael, Feller, and Rothstein [2022]). The “Separate” SCM applies
weights to individual control units to minimize the unit-specific pretreat-
ment imbalance. The “Pooled” SCM applies weights to individual control
units to minimize the average pretreatment imbalance for all treated units.
The “Partial” pooled function applies weights to individual control units to
minimize a weighted average of both imbalances. The point estimate gives
the average difference between treated units and synthetic controls each
year in event time. The ATT obtained from the synthetic control method
is more than double the point estimate from the multivariate regression in
the full sample. Trends in this chart support a causal interpretation of these
results.
4.2 investment
Recent studies have shown that increases in financial accounting quality
led to more investment, particularly in innovation, by alleviating contract-
ing and financing frictions that arise from information asymmetry (Zhong
[2018], Brown and Martinsson [2019]). I examine the same question here.
Fig 3.—E&S disclosure and firm outcomes—Synthetic control matching. These figures
present the effect of E&S Regulation on various dependent variables in the study using the
synthetic control method outlined in Ben-Michael, Feller, and Rothstein [2022]. The points
show annual estimates of the average treatment effect on the treated, including 95% confi-
dence intervals, in event-time relative to the year of adoption of the disclosure regulation.
The overall ATT and standard errors across all years are to the right of the chart. All panels
include firm-level fixed effects and balance the pretreatment observations on the dependent
variable.
16 b. gibbons
TABLE 3
E&S Disclosure and Institutional Ownership
(1) (2)
Inst Own Inst Own
E&S Regulation t −1 0.660** 0.797**
(0.312) (0.315)
Firm Controls
Log(Mkt Equity) 5.347*** 5.217***
(0.396) (0.403)
LT Debt Ratio 0.074 0.057
(0.125) (0.125)
Tangibility −0.355*** −0.325***
(0.113) (0.113)
Tobin’s Q 0.101 0.127
(0.123) (0.123)
Profitability 0.208 0.260
(0.182) (0.184)
Volatility −1.092*** −1.120***
(0.136) (0.136)
Return −1.054*** −1.075***
(0.074) (0.075)
Log(Price) 0.788** 0.978***
(0.366) (0.372)
Log(Yield) 0.183 0.269
(0.164) (0.164)
Log(Turnover) 0.802*** 0.836***
(0.139) (0.139)
Firm FE Yes Yes
Year FE Yes No
Industry × Year FE No Yes
Adj. R-squared 0.877 0.879
Observations 82,707 82,633
This table presents OLS regressions of the level of institutional ownership on changes to E&S disclosure
regulation. The dependent variable is Inst Own, which measures the fraction of the firm’s outstanding shares
held by institutional owners. The independent variable of interest is E&S Regulation, which is equal to one if
mandatory E&S disclosure rules were adopted in the country where the firm is headquartered in the prior
year and zero otherwise. All other variables are defined in the appendix. Firm-level and year-level fixed
effects are included in column 1. Column 2 has stricter industry-by-year-level fixed effects. The control
variables not reported on a logarithmic scale are standardized to have a mean of zero and unit variance.
Standard errors clustered at the firm level are reported in parentheses. Statistical significance is denoted by
*, **, and *** at the 10%, 5%, and 1% level.
However, this setting is distinct from studies that examine improvements

to financial disclosure in that the information contained in nonfinancial
disclosure may not be relevant for all users of financial statements.
More transparent E&S disclosure may not have the same impact as fi-
nancial disclosure on investments if the information is not helpful for
investors to assess risk or contract with managers. Mandating disclosure
could also result in increased compliance costs (Iliev [2010]), knowledge
spillovers to competitors (Bhattacharya and Ritter [1983], Dambra, Field,
and Gustafson [2015]), or E&S-related managerial myopia (Roychowdhury
[2006]), all of which could disincentivize managers to invest. Thus, it is
an empirical question of whether improved nonfinancial transparency will

boost firm-level investment or burden the firm with costly regulatory re-
quirements that lead to a reduction in investment.
In table 4, I test the effect of disclosure on firm-level investment, in-
cluding R&D, capital expenditures, and total investment. I include controls
shown to affect investment decisions in prior studies. Importantly, I control
for lagged values of institutional investment, as institutional owners signifi-
cantly influence both the E&S policies of the firm (Dyck et al. [2019], Chen,
Dong, and Lin [2020]) and investment choices (Aghion, van Reenen, and
Zingales [2013]). Column 1 shows that the impact of mandatory E&S dis-
closure on R&D expenditure is positive and significant. Firms increase R&D
scaled by assets by 0.096% after a shock to E&S disclosure. The magnitude
of this change in R&D is economically significant. It represents a 4.8% in-
crease in R&D relative to the sample average. SCM in figure 3B estimates
an effect size similar to table 4. Figure 3B also shows a gradual uptick in
R&D expenditures following E&S disclosure that resembles the trajectory
of institutional ownership in figure 3A.
Changes to the information environment may also relate to increases in
fixed capital investment, if, for instance, disclosure results in a lower cost
of external capital. However, recent studies have shown that improved fi-
nancial disclosure does not necessarily translate into changes in fixed capi-
tal investment, as this type of spending is less sensitive to information fric-
tions (Brown and Martinsson [2019]). Similarly, my findings indicate that
new E&S disclosure does not consistently result in significant changes in
fixed capital investment. The estimate for fixed capital investment in the
full sample is negative and statistically significant in column 2. Estimates
from the synthetic control method in figure 3C show no significant rela-
tion. Likewise, there is no significant change in total investment, as shown
in column 3. These results suggest that investment in longer term innova-
tion is sensitive to nonfinancial information frictions, whereas investment
in fixed capital is not significant or even negative.4 Additionally, these
findings indicate that complying with these disclosure regulations was
not costly enough to meaningfully affect cash spent on investment. Esti-
mates that include industry-by-year fixed effects in columns 4–6 are un-
changed. Thus, firms shift their investment mix toward longer term inno-
vative projects following E&S disclosure.
Due to differing standards across reporting regimes, investment in inno-
vation is notoriously difficult to measure. For example, R&D is not mea-
sured in the same manner under U.S. GAAP as it is using IFRS. In table C2
in the internet appendix, I measure the effect of the shock to E&S disclo-
sure using different proxies for innovation to demonstrate the robustness
of this result. Panel A gives alternate measures of R&D. Column 1 of this
4 These null results are unchanged when I scale capital expenditures by lagged property,
plant, and equipment rather than lagged assets. Likewise, the effect on total investment is
unchanged when measured as (R&D + Capex + M&A − Sale of PP&E).
18
TABLE 4
E&S Disclosure and Investment
(1) (2) (3) (4) (5) (6)
Capex/ R&D/
R&D/Assets Assets Investment/Assets Assets Capex/Assets Investment/Assets
b. gibbons
E&S Regulation t −1 0.096** −0.205** −0.114 0.093* −0.229** −0.138

(0.048) (0.089) (0.108) (0.048) (0.090) (0.108)
Firm Controls
Log(Assets) t −1 −1.391*** −3.113*** −4.798*** −1.445*** −3.203*** −4.942***
(0.121) (0.151) (0.217) (0.126) (0.151) (0.218)
LT Debt Ratio t −1 −0.135*** −0.513*** −0.691*** −0.132*** −0.442*** −0.616***
(0.034) (0.054) (0.073) (0.034) (0.052) (0.072)
Tangibility t −1 0.151*** 1.057*** 1.257*** 0.152*** 1.001*** 1.197***
(0.031) (0.091) (0.112) (0.032) (0.089) (0.110)
Tobin’s Q t −1 0.251*** 0.472*** 0.762*** 0.252*** 0.431*** 0.720***
(0.051) (0.067) (0.098) (0.051) (0.066) (0.097)
Profitability t −1 −0.042 0.636*** 0.534*** −0.036 0.568*** 0.467***
(0.040) (0.078) (0.103) (0.041) (0.076) (0.104)
Debt Issuance t −1 −0.031* 0.153*** 0.146*** −0.032* 0.120*** 0.110**
(0.018) (0.038) (0.048) (0.018) (0.036) (0.046)
Equity Issuance t −1 −0.090*** 0.082 0.020 −0.087*** 0.078 0.017
(0.028) (0.058) (0.077) (0.028) (0.057) (0.075)
Dividend Payer t − 1 0.038* 0.229*** 0.286*** 0.032 0.200*** 0.248***
(0.021) (0.043) (0.051) (0.021) (0.042) (0.050)
Cash t −1 −0.256*** 0.044 −0.211*** −0.256*** 0.052 −0.201***
(0.041) (0.052) (0.077) (0.041) (0.051) (0.077)
Inst Own t −1 −0.032 0.478*** 0.469*** −0.032 0.459*** 0.448***
(0.038) (0.072) (0.090) (0.038) (0.071) (0.090)
(Continued)
T A B L E 4—(Continued)
(1) (2) (3) (4) (5) (6)
Capex/ R&D/
R&D/Assets Assets Investment/Assets Assets Capex/Assets Investment/Assets
Country Controls
% Δ GDP Per Cap. t −1 −0.057*** 0.078* 0.013 −0.060*** 0.095** 0.028
(0.011) (0.041) (0.045) (0.011) (0.042) (0.046)
Country-Year Tobin’s Q t −1 −0.020 0.404*** 0.405*** −0.025 0.390*** 0.388***
(0.017) (0.059) (0.065) (0.017) (0.058) (0.064)
Country-Year Issuance t −1 0.048** 0.089 0.147** 0.039* 0.144** 0.196***
(0.022) (0.058) (0.066) (0.022) (0.059) (0.067)
Country-Year Investment t −1 0.023 0.343*** 0.358*** 0.024 0.260*** 0.271***
(0.019) (0.070) (0.076) (0.020) (0.070) (0.076)
Firm FE Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes No No No
Industry × Year FE No No No Yes Yes Yes
Adj. R-squared 0.826 0.525 0.578 0.826 0.541 0.590
Observations 82,707 82,707 82,707 82,633 82,633 82,633
This table presents OLS regressions of investment on changes to E&S disclosure regulation. The dependent variables are R&D (columns 1 and 4), Capex (columns 2 and 5), or
Investment measured as R&D + Capex (columns 3 and 6), all scaled by prior year total assets. Missing values of R&D are replaced with zeros when capital expenditures are nonmissing.
The independent variable of interest is E&S Regulation, which is equal to one if mandatory E&S disclosure rules were adopted in the country where the firm is headquartered in
the prior year, and zero otherwise. All other variables are defined in the appendix. Firm-level and year-level fixed effects are included in columns 1–3. Columns 4–6 have stricter
industry-by-year-level fixed effects. The control variables not reported on a logarithmic scale are standardized to have a mean of zero and unit variance. Standard errors clustered at
the firm level are in parentheses. Statistical significance is denoted by *, **, and *** at the 10%, 5%, and 1% level.
financially material effects of mandatory nonfinancial disclosure
19
20 b. gibbons
table is an indicator variable that measures R&D investment on the exten-

sive margin. The dependent variable is equal to 100 (for expositional clar-
ity) if the firm had nonzero R&D expenses during the year and is equal to
zero otherwise. In column 2, I scale R&D by prior period sales rather than
assets. In column 3, I use the first difference in R&D spending scaled by
prior period assets. In columns 4–6, I repeat the analysis in columns 2–3,
but I do not replace missing values of R&D in the data with zeroes and
instead drop all missing observations. The effects are consistently positive
and highly significant across all six of these alternative measures of R&D.
To more directly address the concern that changes or differences in
accounting regimes might improperly influence the R&D result, panel
B reestimates the results of panel A but only uses observations after the
widespread adoption of IFRS in 2005. It also excludes pre-IFRS observa-
tions from firms that adopt IFRS standards later than 2005. Several other
robustness checks in the internet appendix also demonstrate that differ-
ences between accounting regimes do not drive the R&D result.5
In panel C, I examine how E&S disclosure impacts the “outputs” of invest-
ments in innovation, measured by patent applications (Patents) and patent
citations (Cites). The UVA Darden patent data ends in 2017. Therefore, I
drop observations in 2018 and 2019. Columns 1 and 2 use the natural log-
arithm of one plus the number of patent applications or citations in the
year, respectively. Columns 3 and 4 use an inverse hyperbolic sine trans-
formation of these count measures to better account for the skewness and
zeroes in the data. I find that firms apply for significantly more patents
after improving E&S disclosure. The coefficient of 0.121 in column 1 in-
dicates that treated firms increase patent applications by approximately
− 1 = 12.9%) following a shock to E&S disclosure. In
12.9% (exp (0.121)
columns 2 and 4, I drop firms treated by a shock after 2014 to avoid trunca-
tion issues in the number of citations received from 2014 to 2017 since
the UVA Darden patent data ends in 2017. These columns also show a
positive and significant increase in annual patent citations following E&S
disclosure.6 These results demonstrate the robustness of the effect of E&S
disclosure on innovation.
4.3 financing decisions
Table 3 indicates that mandatory disclosure results in more institutional
investment in firms required to disclose. Such a result suggests that firms
might be incentivized to raise more external equity capital if the cost
of doing so is reduced due to fewer information frictions among equity
5 For example, table C6 shows that the result for R&D is unchanged when all U.S. obser-
vations are dropped. Likewise, in table C7 the result is robust when the treatment effect is
estimated within-country.
6 I use a three-year rolling window of Patents and Cites to smooth sporadic jumps in in-
novation outcomes in untabulated regressions. The results are unchanged—the quantity and
quality of innovative output improve with E&S transparency.
investors. However, all investors have access to the information contained

in the disclosures and this information could also alleviate frictions in the
debt market, incentivizing the firm to issue more debt. Accordingly, I test if
and how firms’ financing decisions change postdisclosure.
I first test if E&S disclosure results in a change in equity issuance. In col-
umn 1 of table 5, I regress Net Equity Issuance on E&S Regulation. The effect
is positive and highly significant. However, a concurrent decrease in share
buybacks at treated firms might drive the observed result in Net Equity Is-
suance. To ensure this is not the case, I measure the effect of E&S disclosure
on gross Equity Issuance in column 2. The estimate in column 2 shows an
increase in Equity Issuance of 0.390%, which is an economically meaningful
increase of 17% compared to the sample mean value of 2.29%.7 Although
this estimate appears large compared to the mean, there is substantial vari-
ance in the size of equity issuance each year. An increase of this size only
amounts to 3% of one standard deviation in equity issuance. Nonetheless,
this increase in dependence on external equity by disclosing firms suggests
a lower cost of equity capital following disclosure. There are increases in
both the flow of equity in columns 1 and 2 and the stock of equity in col-
umn 3. The larger coefficient on Net Equity Issuance implies that firms also
reduce share buybacks following disclosure. In untabulated regressions, I
find that this is the case.
I plot the synthetic control estimates for Net Equity Issuance in figure 3D.
This figure coincides with the results from the larger sample. After the
adoption of an E&S disclosure rule, treated firms issue significantly more
equity than their untreated synthetic counterfactuals.
A reduction in information frictions resulting from an increase in public
disclosure should lower the cost of all forms of external financing. However,
in columns 4 and 5, I find that debt issuance falls whereas the stock of long-
term debt remains constant. This change in the mix of sources of external
financing results in a reduction in leverage, as shown in columns 6 and 7.
Column 8 shows that firms’ cash holdings do not meaningfully change after
disclosure. Thus, any postdisclosure change in the firms’ investment expen-
ditures must be funded either through internal capital market reallocations
or by external equity issuances.
5. Potential Mechanisms: Adverse Selection and Clientele-Driven

Effects
The main objection to rules-based E&S disclosure is that the informa-
tion contained in the disclosures is not “financially material” by current
principles-based accounting standards. Thus, it would not be useful to the
7 This general result for equity issuance does not survive certain robustness checks. How-
ever, as I will show in section 5, a robust relation is present between disclosure and issuance,
conditional on the ownership patterns of E&S-focused investors.
22
TABLE 5
E&S Disclosure and Financing
(1) (2) (3) (4) (5) (6) (7) (8)
Net Equity Equity Log(Book Net Debt Log(LT
Issuance Issuance Equity) Issuance Debt) Leverage Equity Ratio Cash
b. gibbons
*** ** ** *** *** **

E&S Regulationt −1 0.690 0.390 0.018 −1.454 −0.042 −2.606 5.771 −0.119
(0.166) (0.167) (0.009) (0.294) (0.067) (0.329) (2.766) (0.253)
Firm Controls
Log(Assets) t −1 −10.162*** −10.061*** 1.378*** −5.039*** 2.251*** −4.798*** −19.777*** −13.894***
(0.566) (0.596) (0.017) (0.541) (0.091) (0.710) (4.456) (0.533)
LT Debt Ratio t −1 0.942*** 0.604*** −0.166*** −0.673*** 1.161*** −0.469***
(0.153) (0.156) (0.006) (0.191) (0.032) (0.148)
Tangibility t −1 −0.306 −0.384* 0.030*** 0.978*** 0.111*** 0.465 −7.197*** −3.109***
(0.193) (0.198) (0.006) (0.222) (0.042) (0.290) (1.333) (0.204)
Tobin’s Q t −1 2.315*** 2.397*** 0.042*** 1.209*** −0.015 0.928*** −1.239 2.619***
(0.273) (0.289) (0.005) (0.170) (0.026) (0.237) (1.856) (0.193)
Profitability t −1 −1.837*** −1.634*** 0.051*** 0.243 −0.178*** −1.185*** 6.682*** 0.325
(0.321) (0.343) (0.007) (0.154) (0.025) (0.252) (1.771) (0.224)
Debt Issuance t −1 0.119 0.154* 0.012*** −0.021 2.642*** −5.939*** −0.306***
(0.086) (0.087) (0.004) (0.020) (0.161) (0.583) (0.094)
Dividend Payer t −1 0.238*** 0.282*** 0.034*** 0.385** −0.029 −0.045 3.138*** 0.432***
(0.078) (0.079) (0.004) (0.154) (0.027) (0.153) (1.099) (0.110)
Cash t −1 −2.253*** −2.176*** 0.036*** −1.823*** −0.446*** −2.078*** 16.963***
(0.210) (0.219) (0.005) (0.160) (0.028) (0.183) (1.821)
Inst Own t −1 0.076 0.132 0.087*** 0.475** −0.020 −0.356 7.942*** 1.083***
(0.163) (0.168) (0.007) (0.226) (0.043) (0.250) (1.977) (0.182)
(Continued)
T A B L E 5—(Continued)
(1) (2) (3) (4) (5) (6) (7) (8)
Net Equity Equity Log(Book Net Debt Log(LT
Issuance Issuance Equity) Issuance Debt) Leverage Equity Ratio Cash
Country Controls
% Δ GDP Per Cap. t −1 0.122* 0.076 −0.007** −0.024 0.028 −0.162 −1.343 0.098
(0.068) (0.068) (0.004) (0.113) (0.024) (0.126) (1.290) (0.092)
Country-Year Tobin’s Q t −1 0.051 0.220** 0.020*** 0.822*** −0.010 1.174*** −1.689 0.100
(0.098) (0.101) (0.005) (0.160) (0.033) (0.198) (1.690) (0.145)
Country-Year Issuance t −1 0.219 0.248* −0.028*** 1.957*** 0.041 2.075*** −4.412*** −0.120
(0.156) (0.146) (0.006) (0.219) (0.040) (0.286) (1.499) (0.200)
Country-Year Investment t −1 −0.111 −0.152* −0.008* −0.219 0.094** −0.356* 2.992* 0.208
(0.090) (0.089) (0.005) (0.163) (0.042) (0.201) (1.780) (0.137)
Firm FE Yes Yes Yes Yes Yes Yes Yes Yes
Industry × Year FE Yes Yes Yes Yes Yes Yes Yes Yes
Adj. R-squared 0.302 0.282 0.986 0.433 0.763 0.582 0.423 0.637
Observations 82,633 82,633 80,822 82,633 82,633 82,633 73,998 82,633
This table presents OLS regressions of measures of firm financing on changes to E&S disclosure regulations. Columns 1–3 show equity issuance and log-levels of book equity.
Columns 4 and 5 show debt issuance and log-levels of lon-g-term book debt. Columns 6 and 7 capture leverage ratios. Column 8 gives cash holdings. The independent variable of
interest is E&S Regulation, which is equal to one if mandatory E&S disclosure rules were adopted in the country where the firm is headquartered in the prior year, and zero otherwise.
All variables are defined in the appendix. All columns have firm and industry-by-year-level fixed effects. All independent variables are lagged by one year. The control variables
not reported on a logarithmic scale are standardized to have a mean of zero and unit variance. Standard errors clustered at the firm level are reported in parentheses. Statistical
significance is denoted by *, **, and *** at the 10%, 5%, and 1% level.
23
24 b. gibbons
typical user of financial statements. However, the prior section demon-

strated that disclosing E&S and social information does have material
effects on investors’ allocation decisions and real effects on firms, regard-
less of the financial materiality of the information itself. In this section, I
identify and test two potential mechanisms behind these effects. I hypoth-
esize that E&S disclosure could produce these outcomes because E&S dis-
closures contain information that reduces adverse selection costs. Or, dis-
closure could also attract certain clientele to the shareholder base which
has real effects on firm decision making. These two mechanisms are not
necessarily mutually exclusive.
5.1 e&s information and adverse selection
When information about the firm is costly to acquire, asymmetries arise
between informed market participants who invest in information acquisi-
tion and uninformed market participants who do not invest. These adverse
selection costs result in decreased liquidity and investment frictions. If E&S
information is relevant to a significant contingent of investors, then ad-
verse selection could exist in this context. E&S disclosure should lower the
amount investors spend acquiring information about the firm’s E&S activ-
ities, thereby decreasing adverse selection among investors and improving
liquidity (Verrecchia [2001]). Like in the financial disclosure literature, im-
provements to the information environment could also lead to increases in
institutional investment, allowing these skilled investors to use nonfinancial
information to improve the monitoring of the firm (Bushman and Smith
[2001]).
I test for changes in adverse selection among investors after E&S disclo-
sure mandates using Bid-Ask Spread as a proxy for information asymmetry
(Glosten and Milgrom [1985]). Following prior literature (e.g., Daske et al.
[2008], Lang, Lins, and Maffett [2012]), I measure Bid-Ask Spread as the log-
arithm of the mean daily closing asking price minus the closing bid price
divided by the midpoint of these two prices for each trading day over the
calendar year. I regress this measure of liquidity on E&S Regulation.
I present the results of this regression in table 6. Regardless of functional
form, mandatory disclosure does not appear to meaningfully reduce infor-
mation asymmetry. Likewise, in columns 5 and 6, I do not find that dis-
closure significantly impacts firm value. This finding contrasts with prior
research that shows a positive relation between mandatory disclosure and
firm value (Ioannou and Serafeim [2019])), primarily due to a reduction
in information asymmetry (i.e., bid-ask spreads). For example, Krueger
[2015] finds, within a causal framework, that bid-ask spreads fall and firm
value increases after U.K. firms are required to disclose carbon emissions
under the Companies Act 2006 Regulations 2013.
These previous studies demonstrate that mandatory nonfinancial disclo-
sure can result in a reduction in E&S-based adverse selection. However, the
results here show that this may not always be the outcome. The most likely
explanation for this difference is that the scope of regulations, as well as the
TABLE 6
Information Asymmetry
(1) (2) (3) (4) (5) (6)
Bid-Ask Log(Bid-Ask) Bid-Ask Log(Bid-Ask) Tobin’s Q Tobin’s Q
E&S Regulation t −1 −0.052 0.012 −0.051 0.016 0.002 0.009
(0.040) (0.013) (0.041) (0.013) (0.015) (0.015)
Controls Yes Yes Yes Yes Yes Yes
Year FE Yes Yes No No Yes No
Industry × Year FE No No Yes Yes No Yes
Adj. R-squared 0.513 0.862 0.512 0.865 0.535 0.549
Observations 69,941 69,819 69,858 69,736 82,707 82,633
This table presents OLS regressions of the firm’s bid-ask spread on changes to E&S disclosure regula-
tions. The dependent variable is Bid-Ask, which is calculated as the (log of) the annual average of the daily
closing ask price minus the daily closing bid price divided by the midpoint of these two numbers in columns
1 and 3 (columns 2 and 4). Columns 5 and 6 capture the impact of disclosure on firm value, as measured by
Tobin’s Q. The independent variable of interest is E&S Regulation, which is equal to one if mandatory E&S
disclosure rules were adopted in the country where the firm is headquartered in the prior year, and zero
otherwise. All control variables from the baseline specification in table 4 are included but unreported. Firm
and year-level fixed effects are included in columns 1, 2, and 5. Firm and industry-by-year-level fixed effects
are included in columns 3, 4, and 6. Standard errors clustered at the firm level are reported in parentheses.
Statistical significance is denoted by *, **, and *** at the 10%, 5%, and 1% level.
institutional background, is heterogeneous across these countries—which

is not the case for previous studies focused on a single regulation or a small
set of homogeneous regulations. The average investor may not find the
additional information produced by many of the 40 disclosure regulations
in this setting useful for determining fundamental value, judging risk, or
monitoring managers. Thus, there is no significant effect on liquidity and
value, on average.
5.2 clientele-driven effects

Exogenous changes in the shareholder base can affect managerial de-
cision making. For example, investment from specific groups of owners,
including dedicated institutional investors with less portfolio turnover, can
incentivize managers to increase investment in innovation (Aghion, van
Reenen, and Zingales [2013]), as well as affect payout (Crane, Michenaud,
and Weston [2016]) and financing decisions (Cao Gustafson, and Velhuis
[2019]). If the effects of these regulations cannot be attributed to lower
adverse selection costs, then changes in the investor clientele of disclosing
firms may have feedback effects on those firms, resulting in financially ma-
terial real effects. Christensen, Hail, and Leuz [2021] emphasize this poten-
tial channel stating, “tastes give rise to investor clientele or shareholder base
effects… investor preferences and actions by institutional investors could
be an important mechanism for real effects from [E&S] reporting.”
In this section, I first test whether the baseline results for investment and
issuance are related to overall predisclosure institutional ownership. Con-
ditioning on predisclosure ownership helps demonstrate that the changes
in ownership by institutional clientele seen in table 3 drive the effects on
26 b. gibbons
the firm from tables 4 and 5, rather than the reverse. Second, I test if the
changes in the shareholder base and resulting real effects on firms are due
specifically to investors with E&S preferences.
5.2.1. Baseline Effects Conditional on Institutional Ownership. If institutional
clientele drive the baseline results, one would expect the estimates from
tables 4 and 5 to be larger for firms with lower institutional ownership
before disclosing, as the clientele effect for these firms would be larger.
Table 7 uses the following conditional specification to test this conjecture:
Yi,t = α + β1 E &S Regul at ioni,t −1 × Low I Oi + β2 E &S Regul at ioni,t −1
×H igh I Oi + δXi,t −1 + μi + πt + εi . (2)
This model is equivalent to equation (1) with an additional interaction
term between both Low IO and High IO and the original treatment variable.
Low IO (High IO) is equal to one if the firm’s median institutional own-
ership before treatment was below (above) the median for all untreated
observations.8 Thus, this specification identifies the effects in the baseline
analysis conditional on the level of predisclosure institutional ownership.
Column 1 shows that institutional ownership increases (decreases) for
firms with lower (higher) institutional ownership prior to disclosing. This
effect is consistent with a reallocation of capital from institutional investors.
Institutional investors are not increasing ownership in all disclosing firms
but rather the ones they avoided before the mandatory disclosure regula-
tion, seemingly due to insufficient E&S disclosure.
Columns 2 through 8 show that the positive effect of disclosure on Equity
Issuance and R&D is exclusive to firms with less institutional ownership be-
fore disclosing. These results suggest that disclosure does not just relate to
a preference-based reshuffling of ownership in the secondary market, but
that the change in the shareholder base also is connected to real effects
on firms’ financing and investment choices—arguably a more important
sign of the economic relevance of this nonfinancial information friction
for both investors and firms.
5.2.2. Reliance on External Equity, Institutional Ownership, and Innovation.
To provide further evidence that E&S information frictions create share-
holder base effects that have material effects on the firm, I test whether
more equity-dependent firms—specifically equity-dependent firms with low
predisclosure institutional ownership—drive the result of increased invest-
ment in innovation following disclosure. Brown and Martinsson [2019]
show that increased financial transparency leads equity-dependent firms to
innovate more when information frictions are reduced. This result follows
naturally from the fact that most firms rely on external equity to finance in-
vestment in innovation (Hall [2002], Brown, Fazzari, and Petersen [2009]).
8 Table C3 in the internet appendix measures median institutional ownership within an
industry rather than across the whole sample. The results are unchanged.
TABLE 7
Baseline Results Conditional on Prior Institutional Clientele
(1) (2) (3) (4) (5) (6) (7) (8)
Net Equity Equity Net Equity Equity
Inst. Own. Issuance Issuance R&D/Assets Inst. Own. Issuance Issuance R&D/Assets
*** *** ** *** *** *** **
Low IO × E&S Regulation t −1 1.304 0.735 0.455 0.137 1.451 0.752 0.457 0.142***
(0.332) (0.175) (0.177) (0.050) (0.334) (0.176) (0.178) (0.050)
High IO × E&S Regulation t −1 −3.880*** 0.459 0.054 −0.167 −3.770*** 0.679* 0.255 −0.191
(0.744) (0.390) (0.385) (0.122) (0.763) (0.393) (0.392) (0.122)
Controls Yes Yes Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes No No No No
Industry × Year FE No No No No Yes Yes Yes Yes
Adj. R-squared 0.879 0.307 0.286 0.828 0.880 0.308 0.287 0.827
Observations 76,969 76,969 76,969 76,969 76,893 76,893 76,893 76,893
This table presents OLS regressions of the variables of interest from tables 3–5 on changes to E&S disclosure regulation, conditional on the level of institutional ownership prior
to the disclosure regulation. The independent variable of interest is E&S Regulation, which is equal to one if mandatory E&S disclosure rules were adopted in the country where
the firm is headquartered in the prior year, and zero otherwise. I interact this variable with pretreatment institutional ownership. Low IO (High IO) is equal to one if the firm’s
median institutional ownership prior to treatment was below (above) the median for all untreated observations. All control variables from the baseline specifications in tables 3–5 are
included but unreported. Firm-level and year-level fixed effects are included in columns 1–4. Columns 5–8 have stricter industry-by-year-level fixed effects. All variables are defined
in the appendix. Standard errors clustered at the firm level are reported in parentheses. Statistical significance is denoted by *, **, and *** at the 10%, 5%, and 1% level.
27
28 b. gibbons
In columns 1–3 of table 8, I show how the increase in innovation follow-

ing disclosure shocks from table 4 varies conditional on industry reliance
on external equity. If the institutional shareholder base is indeed driving
these effects, increases in innovation should be more substantial for firms
more reliant on external capital, as these firms would be more sensitive
to the preferences and characteristics of their external owners. I use the
following model:
R&Di,t = α + β1 E &S Regul at ioni,t −1 × E quit y De pendencei
+ β2 E &S Regul at ioni,t −1 + δXi,t −1 + μi + π j,t + εi . (3)
This model is equivalent to equation (1) with the addition of the inter-
action between Equity Dependence—three different proxies for industry re-
liance on external equity—and the original treatment variable.9 I create
two measures following Brown and Martinsson [2019]. The first, External
Equity, indicates if the firm is in an industry (SIC4) in which yet untreated
firms have an above-median amount of equity issuance, as measured by an-
nual Equity Issuance. The second, Equity Ratio, indicates that the firm is in
an industry where untreated firms have an above-median equity-to-debt ra-
tio before treatment. Finally, I build a measure of the industry’s sensitivity
of R&D expenditure to external equity issuance, R&D-Equity Sensitivity. To
construct this measure, I regress R&D on lagged Equity Issuance and a set
of firm and year-level fixed effects for untreated and treated firms before
treatment.10 I aggregate the coefficients of the firm-level fixed effect by in-
dustry. I classify all firms in industries with an above-median value of this
measure as having high R&D-equity sensitivity, where R&D-Equity Sensitivity
is equal to one for these firms and zero otherwise.
I interact E&S Regulation with these three measures in table 8. As ex-
pected, the effect of the shock to E&S disclosure on innovation is larger
for firms in industries that rely more heavily on external equity to finance
innovation.
Next, I test whether this effect is also related to predisclosure institu-
tional ownership. Columns 4 to 6 include an additional interaction term,
Low IO. The effect of E&S disclosure on investment in innovation is ex-
clusive to equity-dependent firms that had low institutional ownership be-
fore disclosing—consistent with institutional owners’ preferences and in-
vestment patterns driving these effects. In untabulated regressions, I find
that these same firms also issue more new equity following disclosure. How-
ever, increased issuance is not necessary for the shareholder base to affect
9 In this table, I scale R&D by prior year sales, as this metric is used more commonly by
managers to forecasting R&D expenditures. Previously, in the baseline analysis R&D is scaled
by assets to provide comparability to capital expenditures. The results are similar regardless of
this choice.
10 All three of these measures capture ex ante industry characteristics by dropping treated
observations after treatment. The results are unchanged in untabulated regressions if I mea-
sure industry reliance by including all observations in the sample.
TABLE 8
Cross-Sectional Effects: Reliance on External Equity
(1) (2) (3) (4) (5) (6)
R&D R&D R&D R&D R&D R&D
E&S Regulation t −1 × External Equity 0.722*** −0.248
(0.211) (0.372)
E&S Regulation t −1 × Equity Ratio 0.419*** −0.195
(0.119) (0.251)
E&S Regulation t −1 × R&D-Equity Sensitivity 0.620*** −0.096
(0.148) (0.287)
E&S Regulation t −1 × External Equity × Low IO 1.204***
(0.436)
E&S Regulation t −1 × Equity Ratio × Low IO 0.729***
(0.276)
E&S Regulation t −1 × R&D-Equity Sensitivity × Low IO 0.856***
(0.303)
E&S Regulation t −1 × Low IO −0.013 −0.094 −0.109
(0.125) (0.172) (0.143)
E&S Regulation t −1 0.099 0.059 −0.013 0.117 0.150 0.082
(0.062) (0.057) (0.053) (0.128) (0.168) (0.146)
Industry × Year FE Yes Yes Yes Yes Yes Yes
Adj. R-squared 0.783 0.783 0.783 0.783 0.783 0.783
Observations 82,633 82,633 82,633 76,893 76,893 76,893
This table presents the effect of E&S disclosure on investment in innovation depending on the firm’s reliance on external equity and institutional ownership prior to the
disclosure regulation. The independent variable of interest is E&S Regulation, which is equal to one if mandatory E&S disclosure rules were adopted in the country where the firm
is headquartered in the prior year, and zero otherwise. I interact this treatment effect with three proxies for industry reliance on external equity, External Equity, Equity Ratio, and
R&D-Equity Sensitivity, in columns 1, 2, and 3, respectively. R&D is scaled by the firm’s prior year sales. All control variables are lagged by one year. Columns 4, 5, and 6, include
an additional interaction term Low IO. Low IO is equal to one if the firm’s median institutional ownership prior to treatment was below the median for all untreated observations.
All control variables from the baseline specification in table 4 are included but unreported. Firm and industry-by-year-level fixed effects are included in all specifications. Standard
errors clustered at the firm level are reported in parentheses. Statistical significance is denoted by *, **, and *** at the 10%, 5%, and 1% level.
29
30 b. gibbons
investment in innovation. For example, some firms in equity-dependent in-

dustries may not need to issue additional shares to fund R&D, but they still
are more sensitive to changes in the characteristics of their shareholder
base and may modify their investment policy as a result.
5.2.3. E&S Clientele and Real Effects. The prior subsection demonstrated
a link between institutional clientele and the financial policies of disclos-
ing firms. Here, I examine whether this link relates specifically to investors
with E&S preferences or if the phenomenon is more general. I test if exoge-
nously imposed E&S disclosure mandates attract a subset of institutional
investors with specific preferences for E&S information and, if so, whether
such investors are more long-term oriented. Then, a final set of tests exam-
ines whether changes in ownership by E&S clientele or other institutional
clientele can explain the real effects of disclosure on firms.
I follow prior studies to identify institutions that have explicit E&S objec-
tives using Thomson Reuters S34 (13f) data. Although these data do not
give the entire picture of a firm’s ownership structure, they do contain de-
tailed holdings and descriptive data for all institutions required to file with
the SEC. I condition the sample on the ability to match a firm to institu-
tional holdings in the S34 data by CUSIP.
I categorize institutions that have previously signed the PRI initiative as
investment managers with E&S preferences. These signatures are a direct
proxy for E&S preferences, as the key principle these investors acknowl-
edge with their signature is that they incorporate the analysis of ESG issues
into investment decisions. I follow Gibson et al. [2022] and identify S34 in-
stitutions that are PRI signers by hand-matching the names from the PRI
list to the 15,971 institutions in the S34 database. I match 529 PRI signatory
institutions over the period, comparable to the 684 in Gibson et al. [2022].
In panel A of table 9, I show that ownership by PRI signatories increases
in disclosing firms by 4.6%—a 62% increase relative to their average hold-
ing. Conversely, institutions that are not PRI signatories decrease holdings.
These results expand upon the results from table 3 to show that it is not
all institutional investors that increase ownership postdisclosure, but rather
primarily those with E&S preferences and, presumably, a demand for E&S
information.
Next, in panel B, I test whether more ownership by PRI institutions is
associated with a more long-term–oriented shareholder base. To capture
the investment horizon of a firm’s shareholder base, I construct the vari-
able Investor Turn following Gaspar, Massa, and Matos [2005]. This variable
captures the weighted average churn rate (i.e., how frequently an investor
rotates the positions in their portfolio) for all S34 institutions holding the
firm’s stock. A lower Investor Turn denotes a shareholder base with less port-
folio churn and a longer term investment horizon.
Columns 1 and 3 of panel B show that, overall, higher ownership from
both PRI signatories and non-PRI signatories relates to lower Investor
Turn within a firm. A stark difference between these two groups emerges,
TABLE 9
Disclosure and E&S Clientele
Panel A: E&S vs. non-E&S ownership
(1) (2)
Dep. Variable: Inst Own = PRI Non-PRI
E&S Regulation t −1 4.578*** −8.277***
(0.418) (1.436)
x̄ = 7.418 47.559
Controls Yes Yes
Firm FE Yes Yes
Industry × Year FE Yes Yes
Panel B: Investor horizon
Inst Own = PRI Non-PRI
Dep. Variable = Investor Turn (1) (2) (3) (4)

Inst Own t −1 −0.082 ***
−0.079 ***
−0.053 ***
−0.053***
(0.012) (0.012) (0.005) (0.005)
Inst Own t −1 × E&S Regulation t −1 −0.226*** −0.007
(0.057) (0.014)
Controls Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes
Industry × Year FE Yes Yes Yes Yes
Adj. R-squared 0.523 0.524 0.528 0.528
Observations 20,701 20,701 20,701 20,701
This table presents the effect of E&S disclosure on changes in institutional ownership from “E&S” in-
vestors, as well as the investment horizon for the firm’s shareholder base. The independent variable of
interest is E&S Regulation, which is equal to one if mandatory E&S disclosure rules were adopted in the
country where the firm is headquartered in the prior year, and zero otherwise. Panel A aggregates owner-
ship into E&S clientele categories using individual institutional holdings from the Thomson Reuters S34
database. Columns 1 and 2 follow Gibson et al. [2022] and measure firm ownership by S34 institutions that
have (have not) previously signed the Principles for Responsible Investment (PRI) compact. Observations
are excluded from panel A if a match between the firm and the S34 database is not possible using the firm’s
CUSIP. Panel B captures the effect of S34 ownership and disclosure on firm-level investor horizon. The
dependent variable Investor Turn follows Gaspar et al. [2005] and captures the weighted average portfolio
churn rate for all S34 institutions invested in the firm. All control variables from the baseline specification
in table 3 are included but unreported. Firm and industry-by-year-level fixed effects are included in all spec-
ifications. Standard errors clustered at the firm level are reported in parentheses. Statistical significance is
denoted by *, **, and *** at the 10%, 5%, and 1% level.
however, when I interact ownership with the indicator for mandatory E&S
disclosure. In column 2, the marginal sensitivity between PRI ownership
and the investment horizon of the firm’s shareholder base increases
in magnitude and is highly significant postdisclosure, whereas the re-
lation between non-PRI investment and investor turnover in column 4
is unchanged. These results indicate that, although an increase in PRI
ownership relates to a more long-term–oriented shareholder base prior to
disclosure, PRI investors increasing position sizes after disclosure are even
more long-term oriented. This difference, in combination with the results
32 b. gibbons
TABLE 10
Real Effects of E&S Clientele Changes
Panel A: Individual ownership categories
Dep. Variable= R&D Equity Issuance
(1) (2) (3) (4) (5) (6)

Δ Inst Own = Inst Own PRI Non-PRI Inst Own PRI Non-PRI
Δ Inst Own × E&S 0.058** 0.275** 0.064** 0.147* 0.756*** 0.106
Regulation t −1 (0.027) (0.135) (0.025) (0.079) (0.266) (0.084)
Industry × Year FE Yes Yes Yes Yes Yes Yes
Adj. R-squared 0.777 0.777 0.777 0.329 0.329 0.329
Observations 29,309 29,309 29,309 29,309 29,309 29,309
Panel B: Horserace between changes in PRI investment and Inst Own
(1) (2)
R&D Equity Issuance
Δ Inst Own × E&S Regulation t −1 −0.010 −0.046
(0.040) (0.098)
Δ PRI × E&S Regulation t −1 0.291* 0.827***
(0.172) (0.320)
Controls Yes Yes
Firm FE Yes Yes
Industry × Year FE Yes Yes
This table presents the effect of E&S disclosure on firms’ equity issuance and investment in innovation
conditional on changes in institutional ownership from “E&S” investors. The independent variable of inter-
est is E&S Regulation, which is equal to one if mandatory E&S disclosure rules were adopted in the country
where the firm is headquartered in the prior year, and zero otherwise. I interact this treatment effect with
three measures of institutional ownership (Δ Inst Own) which capture the change in ownership for a firm
from t−1 years before disclosure to t+1 years after disclosure. In panel A, columns 1 and 4 measure the
overall change in Inst Own for institutions required to report in the S34 database. Columns 2 and 5 (3 and
6) follow Gibson et al. [2022] and measure ownership of S34 institutions that have (have not) previously
signed the Principles for Responsible Investment (PRI) compact. Panel B estimates the effect of the over-
all change in Inst Own and the change in PRI ownership in the same regression. Equity Issuance and R&D
are scaled by prior year assets and sales, respectively. All control variables from the baseline specifications
are included but unreported. Firm and industry-by-year-level fixed effects are included in all specifications.
Standard errors clustered at the firm level are reported in parentheses. Statistical significance is denoted by
*, **, and *** at the 10%, 5%, and 1% level.
of panel A, provides evidence that disclosure leads to an E&S-specific

clientele effect. The shareholder base shifts toward investors with E&S pref-
erences postdisclosure, and these clientele have longer term investment
horizons.
Table 10 tests whether increases in innovation and equity issuance fol-
lowing disclosure are related to the E&S clientele effects documented in
table 9. Here, I test whether the actual change in institutional ownership
for a firm from the year before to the year after mandatory disclosure re-
lates to subsequent investments in innovation and issuance decisions.
Increases in the overall level of institutional ownership relate to higher

equity issuance and increased R&D, as shown in columns 1 and 4. The
remaining columns condition on the E&S preferences of the owner. I find
a positive relation between R&D and the change in both E&S and non-
E&S institutional investment, as shown in columns 2 and 3. However, the
magnitude of the effect on R&D of a change in PRI ownership is much
larger than the effect for non-PRI ownership. These results are consistent
with the results in table 9. Increases in PRI ownership are accompanied
by a higher increase in investment in innovation than a similar increase
in non-PRI ownership because the new PRI owners are significantly more
long-term oriented.
A similar effect occurs with firms’ equity issuance decisions in columns 4
to 6. Increases in the overall level of institutional ownership are marginally
related to increases in Equity Issuance in column 4. However, when I substi-
tute the more specific measure of changes in PRI ownership in column 5,
the effect is large and highly significant. Whereas non-PRI ownership is not
significant in column 6.
Panel B performs a horserace between the effect of changes in overall
institutional ownership and changes in PRI ownership on firm-level out-
comes. Putting the two measures in the same regression allows for com-
parisons of the strength of the two variables with firm outcomes, holding
all else constant. This regression tests whether the change in overall insti-
tutional ownership or the change in PRI ownership—a subcomponent of
the overall institutional change—has more statistical power to explain these
real effects.
In both columns, holding institutional ownership and all other controls
constant, the effect of increased PRI ownership is statistically significant and
the magnitudes of the partial regression coefficients are comparable to the
coefficients in the baseline regressions in tables 4 and 5. Conversely, overall
institutional ownership changes are not predictive of firm outcomes when
the change in PRI ownership is held constant at its average value. Here,
the effects of the change in institutional ownership are statistically indis-
tinguishable from zero. These results show that it is primarily the variation
within PRI ownership that explains the outcomes in panel A, columns 1
and 4, not the overall change in institutional ownership itself.
Thus, it appears that the effects on firm policy are driven primarily by
a clientele effect from owners with E&S preferences that influence firms’
financing and investment decisions. Firms appear to respond to more long-
term dedicated ownership from these investors by shifting the mix of their
own investments toward long-term projects and by issuing more shares.
Overall, the results of this section support the mechanism that manda-
tory E&S disclosure leads to material real effects on the firm because E&S
disclosure attracts investment from institutional clientele with E&S prefer-
ences and longer term investment horizons. This also demonstrates that
regardless of whether the scope of the regulation reduces adverse selection
problems, E&S disclosure can have material effects on firms as a result of
34 b. gibbons
this clientele effect. The identification of the effects of this clientele chan-
nel is a novel contribution of this study.
6. Robustness Checks
6.1 instrumental variables
To further support the robustness of the results, I reorganize the base-
line D-i-D regressions into an instrumental variable regression to estimate
the local average treatment effect. I present the results of a two-stage least
squares (2SLS) regression in table C4. In panel A, I instrument ESG disclo-
sure scores with the E&S disclosure regulations, following Ioannou and Ser-
afeim [2019]. In panel B, I use institutional ownership as the instrumented
variable of interest instead. Regardless of the specification, the results re-
main unchanged.
I avoid using the instrumental variable regression from panel A as the
main specification because this sample requires that the firm have a disclo-
sure score in Bloomberg. Bloomberg’s coverage of global firms is limited,
which imposes unknown selection bias on the sample. Additionally, since
missing and zero values are indistinguishable, this regression leaves out any
firm that does not disclose before treatment, which is undesirable in this
context.
Although panel B corrects the sampling issue, problems still exist with
this specification. Although E&S disclosure mandates meet the relevance
condition for both E&S disclosure quality (table C1) and institutional own-
ership (table 3), it is not clear that E&S disclosure regulations meet the
exclusion restriction in this case. The identifying assumption is that an E&S
disclosure regulation is unrelated to firm behavior (i.e., capital structure,
investment) except through its effect on the level of institutional owner-
ship. Although I show in the previous analysis that the effects are mainly
due to postdisclosure changes in institutional ownership, this identifying
assumption is likely invalid in the context of instrumental variables. For ex-
ample, producing disclosures is costly and takes time and resources away
from other investment opportunities. Due to these issues, these tests are in
the internet appendix rather than the main results.
6.2 alternative matching: combined statistical distance

In table C5, I create an alternative sample of matched firms to com-
plement the full sample analysis and the synthetic control sample. I use
the combined statistical distance function from Dettmann, Giebler, and
Weyh [2020] and match each treated observation to its nearest untreated
neighbor in the same industry (SIC2) in the year before treatment.11
11 This function is an equally weighted average of a scaled distance between treated firms
and potential controls for all covariates included in the matching procedure. Each covari-
ate distance calculated for an observation is “scale-specific” or normalized by the maximum
I match firms using Log(Assets), Tobin’s Q, LT Debt Ratio, Tangibility, Prof-

itability, Cash, Debt Issuance, and Log(GDP Per Cap). These parameters help
to ensure matches are of comparable size, have similar financial positions,
and operate in similar-sized economies. I replace control firms during the
matching procedure. For inclusion in the matched sample, the firms must
not have any missing variables during the five years following the treatment
date. The matches also must fulfill the common support condition.
This procedure results in 2,494 treated firms and 1,085 control firms
for this nearest-neighbor–matched sample. The results in table C5 mirror
those in the full sample.
6.3 country-level selection

By utilizing national mandatory E&S disclosure regulations, I mitigate se-
lection issues at the firm level. Still, endogenous selection at the country
level due to economic, political, or social factors could also be correlated
with institutional ownership, innovation, or decisions to issue equity. I con-
duct several tests to rule out this possibility.
First, in table C6, I exclude Japan and the United States, the two largest
treated and control countries, to verify that observations from these coun-
tries do not drive the results. Panel A repeats the baseline analysis excluding
both U.S. and Japanese firms. Although the effects on institutional owner-
ship and R&D are unchanged, the equity issuance result is no longer signif-
icant after excluding U.S. firms. This loss of significance here is not a cause
for concern. First, changes to institutional ownership could still affect firms’
decisions to innovate, even without the firm issuing new equity. Second, the
general relation between disclosure, institutional ownership, and issuance
here may be weak because it does not fully capture these nuanced effects of
E&S investment. In panel B, I show that the real effects of investment from
E&S clientele in table 10 remain robust. Non-U.S. and Japanese firms issue
more equity when PRI ownership increases after disclosure.
Next, to further alleviate concerns about correlated omitted variables
at the country level, I estimate a within-country effect using country-year
and country-industry-year fixed effects in table C7. The baseline tests utilize
broad, national-level disclosure rules from Carrots & Sticks and the sample
only includes large public firms likely subject to the disclosure rule. Thus,
the treatment does not vary for any firm within a country-year. However,
country-year fixed effects are possible in this setting if I condition treated
firms in some manner.
Panel A of table C7 repeats the analysis from table 10 and gives the
marginal effect of treatment conditional on changes in institutional own-
ership from “E&S” investors for firms within the same country-year. This
observed difference for the covariate among all observations. This procedure has several ad-
vantages over Mahalanobis distance or estimating a propensity score. See Dettmann, Giebler,
and Weyh [2020] for more details.
36 b. gibbons
table shows that the effects from table 10 are still present when compar-
ing firms within the same country—marginal increases in E&S institutional
investment relate positively to equity issuance and R&D investment postdis-
closure.
To supplement this analysis, I utilize the variation generated by firms with
their primary shares listed abroad to estimate a within-country treatment ef-
fect in the country where the firm is cross-listed in panels B and C of table
C7. I use data on firms’ primary listing locations from FactSet to identify
firms that are affected by a disclosure regulation due to their headquarters
location but likely operate and compete with firms in a country unaffected
by that disclosure regulation.12 Although this setup does not entirely as-
suage the concern that something specific is motivating the adoption of
disclosure in a treated country, it instead allows a comparison of a treated
firm with an economic presence in a foreign country against similar firms
in the same foreign country at the same point in time.
This test suffers from a significant loss of power compared to the ini-
tial set of results. Of the 4,105 firms that receive a shock to disclosure in
the baseline sample, only 140 have their primary listing in a country where
they are not headquartered. Regardless, in the baseline analysis in panel
B, there is still an observable effect on overall levels of institutional owner-
ship, conditional on predisclosure ownership. There is a marginal effect on
R&D when missing observations are dropped. When I repeat the analysis of
table 10 in panel C, however, and utilize the variation generated by cross-
listed firms, the clientele-driven explanation remains robust and is highly
significant. Across the specifications that repeat the analysis from table 10
in tables C6 and C7, untabulated regressions also show a positive and signif-
icant effect for PRI ownership increases and Net Equity Issuance and a null
result for Capex and Investment.
I test whether various country-level economic, political, or social trends
predict the adoption of a regulation in table C8 by following the method
used by Acharya, Baghai, and Subramanian [2014], Cremers, Guernsey,
Sepe [2019], and Serfling [2016]. I do not find that any country-level eco-
nomic, political, or institutional factors significantly predict the adoption
of E&S disclosure regulations in these specifications. This robustness test
provides confidence that observable selection at the country level is not
driving the effects in the baseline analysis.
These tests in tables C6 to C8 help to validate that the changes in firm-
level financial policy and investment by institutional investors around the
adoption of E&S disclosure regulations are not driven by endogenous se-
lection at the country level and that relations in the baseline regressions
12 Although there are several reasons a firm might choose to cross-list, a principal reason
to list primary shares abroad is to strengthen economic presence in the foreign market, often
because the foreign market has more peer firms than the domestic market (PWC [2012],
Baker McKenzie [2022]).
are not a result of reverse causality. Likewise, the findings from these ro-
bustness checks lend support to the validity of the clientele mechanism.
Additionally, the lack of significant predictors in table C8 and the model’s
low overall predictive power suggest that predicting the timing of the adop-
tion of an individual regulation might be difficult for a firm.
6.4 placebo test

Finally, I conduct a placebo analysis in table C9 in which I randomly
shock firms with a placebo treatment over the same sample period to pro-
vide additional evidence that omitted confounders are not biasing the re-
sults of the baseline tests. I randomly assign false treatment to firms fol-
lowing the original distribution of the actual number of firms shocked per
year (Cornaggia et al. [2015]). These firms are drawn with replacement,
as countries often have multiple disclosure regulations over time. I do not
observe significant relation between the placebo treatment and the depen-
dent variables of interest. I maintain that omitted variables are not improp-
erly driving the relation in the baseline analysis.
7. Conclusion
This study shows how disclosure of nonfinancial information that may
not meet regulatory agencies’ definition of “financial materiality” can ma-
terially impact external investors and firms’ investment and financing de-
cisions. I find that institutional ownership increases significantly for firms
required to disclose E&S information. These results coincide with institu-
tional investors’ complaints about insufficient disclosure of E&S informa-
tion, indicating that these complaints reflect investors’ true preferences
and are not just a form of “greenwashing.” Following this increase in insti-
tutional investment, firms subject to mandatory E&S disclosure increase in-
vestment in R&D and improve the quantity and quality of patenting. Effects
are limited to more information-sensitive forms of investment, as I do not
find a similarly consistent effect for investment in fixed capital. Likewise,
firms shift the mix of external financing issuance toward equity following
disclosure.
I document that these effects are primarily due to a feedback effect from
a shift in investor clientele toward long-term–oriented owners with E&S
preferences. Disclosing firms adjust their financial policies following the
shift in the investor base and, like these new clientele, invest in more long-
term projects. Although carefully crafted E&S disclosure regulations can
meaningfully reduce adverse selection (e.g. following the U.K.’s Companies
Act 2006 Regulations 2013), this clientele effect has been the main driver
of the observed effects following the adoption of prior E&S disclosure rules
around the world.
This mechanism suggests that the economic power of E&S investing has
grown to the point that a lack of consistent and comparable E&S disclo-
sure creates its own financially material information frictions, regardless of
38 b. gibbons
whether new disclosure of nonfinancial information is financially material

itself. The identification of this channel is a unique contribution of this
study to the disclosure literature. The evidence from the impact of dozens
of disclosure rules from around the world supports the view that rules-based
disclosure standards can meaningfully reduce these E&S-information fric-
tions.
appendix: variable definitions
Variable Definition
E&S Regulation Variables
E&S Regulation An indicator variable equal to one if the firm is headquartered in
a country that adopted a mandatory environmental or social
law in the prior year. Once a country has adopted such a law,
the variable remains equal to one. Otherwise, the variable
equals zero. [Source: Carrots & Sticks Report]
Firm Outcome Variables
Inst Own The percentage of the firm’s outstanding shares owned by
institutional investors [Source: Factset Ownership, Excel Code:
OS_SEC_PCT_HLD_INST]
Equity Issuance Sale of Common and Preferred Stock t / Total Assets t−1. Sale of
common and preferred stock includes amounts received from
the conversion of debentures or preferred stock into common
stock, exchange of common stock for debentures, sale of
treasury shares, shares issued for acquisitions, and proceeds
from stock options. [Source: Worldscope]
Net Equity Issuance (Sale of Common and Preferred Stock t –Stock Buybacks t ) /
Total Assets t−1. [Source: Worldscope]
R&D / Assets Research and development expense t / Total Assets t−1 [Source:
Worldscope]
R&D / Sales Research and development expense t / Sales t−1 [Source:
Worldscope]
R&D (Indicator) An indicator variable equal to one if R&D t >0, and zero
otherwise. [Source: Worldscope]
Capex Capital Expenditures t / Total Assets t−1 [Source: Worldscope]
Investment (Research and development expense t + Capital Expenditures t )
/ Total Assets t−1 [Source: Worldscope]
Patents The number of patent applications filed by the firm with the
USPTO in the year. [Source: UVA Darden Global Corporate
Patent Dataset]
Cites The number of citations the firm receives on existing patents with
the USPTO in the year. [Source: UVA Darden Global
Corporate Patent Dataset]
Bid-Ask The mean daily (Ask-Bid) / ((Ask+Bid)/2) over a calendar year,
where Ask and Bid are captured at the daily close. [Source:
Worldscope]
Tobin’s Q (Market Capitalizationt + Total Liabilitiest ) / Total Assets t−1
[Source: Worldscope]
PRI (Inst Own) Percent of common stock outstanding owned by S34 institutions
that had signed the PRI compact in the prior year or before
[Source: Thomson Reuters S34]
Variable Definition
Turnover Annual Traded Volumet / Common Stock Outstandingt [Source:
Worldscope]
Investor Turn Weighted average portfolio churn rate for all S34 institutions
invested in the firm over past four quarters. See Gaspar, Massa
and Matos [2005] for details on construction of churn rates.
[Source: Thomson Reuters S34]
Firm-Level Controls
Mkt Equity Market Capitalizationt in $USD millions [Source: Worldscope]
Volatility The variance in monthly returns over the prior two years [Source:
Datastream]
Return Log(Market Capitalizationt / Market Capitalizationt−1 ) [Source:
Worldscope]
Price Market Capitalizationt ($ USD millions) / Common Stock
Outstandingt [Source: Worldscope]
Yield Dividendst / Market Capitalizationt−1 [Source: Worldscope]
Assets Total Assets t in $USD millions [Source: Worldscope]
LT Debt Ratio Long-Term Debt t / Total Assets t−1 [Source: Worldscope]
Profitability Operating Earnings t + Depreciation t + Amortization t / Total
Assets t−1 [Source: Worldscope]
Tangibility Total Net Property Plant and Equipment t / Total Assets t−1
[Source: Worldscope]
Dividend Payer Indicator equal to one if the company pays a dividend in year t,
and zero otherwise [Source: Worldscope]
Debt Issuance Long-term Debt Issuance t / Total Assets t−1 [Source: Worldscope]
Cash Cash and Short-Term Investments t / Total Assets t−1 [Source:
Worldscope]
External Equity Indicator equal to one if the firm is in an industry (SIC4) where
untreated firms raise an above-median amount of external
equity, as measured by annual Equity Issuance, and zero
otherwise [Source: Worldscope]
Equity Ratio Indicator equal to one if the firm is in an industry (SIC4) where
untreated firms have an above-median equity-to-debt ratio, and
zero otherwise [Source: Worldscope]
R&D-Equity Sensitivity Indicator equal to one if the firm is in an industry (SIC4) where
untreated firms have an above-median R&D-equity sensitivity
and zero otherwise. R&D-equity sensitivity is the coefficient of
the firm-level fixed effect of the regression of R&D t on Equity
Issuance t−1 and firm and year fixed effects for all observations
before treatment [Source: Worldscope]
High (Low) IO Indicator equal to one if the median value of the firm’s Inst Own
prior to treatment is above (below) the median of all untreated
observations, and zero otherwise. [Source: Worldscope]
Country-Level Controls
GDP Per Cap. The gross domestic product divided by mid-year population
count. GDP is measured in 2020 U.S. dollars as the sum of gross
value added by all resident producers in the economy plus any
product taxes and minus any subsidies not included in the
value of the products. [Source: World Bank / OECD]
40 b. gibbons
Variable Definition
% Δ GDP Per Cap. The annual percentage change in gross domestic product divided
by mid-year population count. GDP is measured in 2020 U.S.
dollars as the sum of gross value added by all resident
producers in the economy plus any product taxes and minus
any subsidies not included in the value of the products.
[Source: World Bank / OECD]
Unemployment The share of the labor force that is without work but available for
and seeking employment [Source: World Bank / International
Labour Organization]
Taxes % of GDP Compulsory transfers to the central government for public
purposes scaled by annual gross domestic product. [Source:
World Bank / International Monetary Fund / OECD]
Government HHI The sum of the squared seat shares of all parties in the
government. [Source: World Bank / Inter-American
Development Bank]
Rule of Law Perceptions of the extent to which agents have confidence in and
abide by the rules of society and the quality of contract
enforcement, property rights, the police, and the courts, as well
as the likelihood of crime and violence. This measure gives the
country’s score in terms of an aggregate indicator. The measure
follows a standard normal distribution, ranging from
approximately −2.5 to 2.5. [Source: World Bank]
Political Stability Perceptions of the likelihood of political instability and/or
politically motivated violence, including terrorism. This
measure gives the country’s score in terms of an aggregate
indicator. The measure follows a standard normal distribution,
ranging from approximately −2.5 to 2.5. [Source: World Bank]
Corruption Control Captures perceptions of the extent to which public power is
exercised for private gain, including both petty and grand
forms of corruption, as well as “capture” of the state by elites
and private interests. [Source: World Bank]
Carbon Emission Per Cap. The total metric tons of carbon dioxide emissions from the
burning of fossil fuels and the manufacture of cement per
capita. These include carbon dioxide produced during the
consumption of solid, liquid, and gas fuels and gas flaring.
[Source: World Bank / Carbon Dioxide Information Analysis
Center]
% Renewable Energy The share of energy consumed in the country from sources that
do not produce carbon dioxide during generation (including
nuclear) [Source: World Bank]
Country-Year Variable The annual average of variable for firms within a country
E&S Disclosure
Annual Report An indicator variable equal to one if the firm either publishes an
annual E&S/sustainability report or devotes a section of its
annual report to E&S/sustainability, and zero otherwise.
[Source: Asset4]
ESG Disclosure This score measures the firm’s ESG disclosure quality. The score
ranges from 0 to 100 based on the weighted number of
reported data points out of all data points Bloomberg considers
to be relevant to full ESG disclosure [Source: Bloomberg]
Variable Definition
Env. Disclosure This score measures the firm’s environmental disclosure quality.
The score ranges from 0 to 100 based on the weighted number
of reported data points out of all that Bloomberg considers to
be full environmental disclosure.
[Source: Bloomberg]
Social Disclosure This score measures the firm’s social disclosure quality. The score
ranges from 0 to 100 based on the weighted number of
reported data points out of all data points Bloomberg considers
to be full social disclosure.
[Source: Bloomberg]
High (Low) Discloser Indicator equal to one if the median value of the firm’s ESG
Disclosure prior to treatment is above (below) the median of all
untreated observations, and zero otherwise. [Source:
Bloomberg]
REFERENCES
Acharya, V. V.; R. P. Baghai; and K. V. Subramanian. “Wrongful Discharge Laws and Inno-
vation.” Review of Financial Studies 27 (2014): 301–46.
Aghion, P.; J. van Reenen; and L. Zingales. “Innovation and Institutional Ownership.” Amer-
ican Economic Review 103 (2013): 277–304.
Allman, E., and J. Won. “The Effect of ESG Disclosure on Corporate Investment Efficiency.”
Working Paper, November 2021.
Almeida, H., and M. Campello. “Financial Constraints, Asset Tangibility, and Corporate In-
vestment.” Review of Financial Studies 20 (2007): 1429–60.
Arrow, K. J. “Economic Welfare and the Allocation of Resources for Invention,” In: Rowley,
C.K. (eds) Readings in Industrial Economics. Palgrave, London. (1972): 219–36.
Baker, A.; D. F. Larcker; and C. C. Y. Wang. “How Much Should We Trust Staggered
Difference-in-Differences Estimates?” Journal of Financial Economics 144 (2022): 370–95.
Baker McKenzie. “Cross-Border Listings Guide, 9th Edition.” 2022. Available at
https://f.datasrvr.com/fr1/422/69958/Cross_Border_Listing_Guide_9th_Edition.pdf?
cbcachex=447333.
Bartels, W.; T. Fogelberg; A. Hoballah; and C. T. van der Lugt. “Carrots & Sticks: Global
Trends in Sustainability Reporting Regulation and Policy.” 2016. Available at https://assets.
kpmg.com/content/dam/kpmg/pdf/2016/05/carrots-and-sticks-may-2016.pdf.
Bena, J.; M. A. Ferreira; P. Matos; and P. Pires. “Are Foreign Investors Locusts? The Long-
Term Effects of Foreign Institutional Ownership.” Journal of Financial Economics 126 (2017):
122–46.
Ben-Michael, E.; A. Feller; and J. Rothstein. “Synthetic Controls with Staggered Adop-
tion.” Journal of the Royal Statistical Society Series B: Statistical Methodology 84 (2022): 351–81
Bhattacharya, S., and J. R. Ritter. “Innovation and Communication: Signaling with Partial
Disclosure.” The Review of Economic Studies 50 (1983): 331–46
Biddle, G. C., and G. Hilary. “Accounting Quality and Firm-Level Capital Investment.” Ac-
counting Review 81 (2006): 963–82.
Biddle, G. C.; G. Hilary; and R. S. Verdi. “How Does Financial Reporting Quality Relate to
Investment Efficiency?” Journal of Accounting and Economics 48 (2009): 112–31.
Brown, J. R.; S. M. Fazzari; and B. C. Petersen. “Financing Innovation and Growth: Cash
Flow, External Equity, and the 1990s R&D Boom.” The Journal of Finance 64 (2009): 151–85.
Brown, J. R., and G. Martinsson. “Does Transparency Stifle or Facilitate Innovation?” Man-
agement Science 65 (2019): 1600–23.
Bushman, R. M., and A. J. Smith. “Financial Accounting Information and Corporate Gover-
nance.” Journal of Accounting and Economics 32 (2001): 237–333.
42 b. gibbons
Cao, C.; M. Gustafson; and R. Velthuis. “Index Membership and Small Firm Financing.”
Management Science 65 (2019): 4156–4178.
Chava, S. “Environmental Externalities and Cost of Capital.” Management Science 60 (2014):
2223–47.
Chen, T.; H. Dong; and C. Lin. “Institutional Shareholders and Corporate Social Responsibil-
ity.” Journal of Financial Economics 135 (2020): 483–504.
Chen, Yi C; M. Hung; and Y. Wang. “The Effect of Mandatory CSR Disclosure on Firm Prof-
itability and Social Externalities: Evidence from China.” Journal of Accounting and Economics
65 (2018): 169–90.
Christensen, H. B.; E. Floyd; L. Y. Liu; and M. Maffett. “The Real Effects of Man-
dated Information on Social Responsibility in Financial Reports: Evidence from Mine-Safety
Records.” Journal of Accounting and Economics 64 (2017): 284–304.
Christensen, H. B.; L. Hail; and C. Leuz. “Mandatory CSR and Sustainability Reporting:
Economic Analysis and Literature Review.” Review of Accounting Studies 26 (2021): 1176–248.
Chung, K. H., and H. Zhang. “Corporate Governance and Institutional Ownership.” Journal
of Financial and Quantitative Analysis 46 (2011): 247–73.
Clayton, J. “Proposed Amendments to Modernize and Enhance Financial Disclosures; Other
Ongoing Disclosure Modernization Initiatives; Impact of the Coronavirus; Environmen-
tal and Climate-Related Disclosure.” 2020. Available at https://www.sec.gov/news/public-
statement/clayton-mda-2020-01-30
Cornaggia, J.; Y. Mao; X. Tian; and B. Wolfe. “Does Banking Competition Affect Innova-
tion?” Journal of Financial Economics 115 (2015): 189–209.
Crane, A D.; S. Michenaud; and J. P. Weston. “The Effect of Institutional Ownership on
Payout Policy: Evidence from Index Thresholds.” The Review of Financial Studies 29 (2016):
1377–1408.
Cremers, K. J. M.; S. B. Guernsey; and S. M. Sepe. “Stakeholder Orientation and Firm Value.”
Working Paper, 2019. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=
3299889.
Dambra, M.; L. C. Field; and M T. Gustafson. “The JOBS Act and IPO Volume: Evidence
that Disclosure Costs Affect the IPO Decision.” Journal of Financial Economics 116 (2015):
121–43.
Daske, H.; L. Hail; C. Leuz; and R. Verdi. “Mandatory IFRS Reporting Around the World:
Early Evidence on the Economic Consequences.” Journal of Accounting Research 46 (2008):
1085–1142.
Denis, D. J., and V. Sibilkov. “Financial Constraints, Investment, and the Value of Cash Hold-
ings.” Review of Financial Studies 23 (2010): 247–69.
Dettmann, E.; A. Giebler; and A. Weyh. “Flexpaneldid: A Stata Toolbox for Causal Analysis
with Varying Treatment Time and Duration.” Working Paper, 2020. Available at https://
ssrn.com/abstract=3692458.
Duchin, R.; O. Ozbas; and B. A. Sensoy. “Costly External Finance, Corporate Investment,
and the Subprime Mortgage Credit Crisis.” Journal of Financial Economics 97 (2010): 418–35.
Dyck, A.; K. v. Lins; L. Roth; and H. F. Wagner. “Do Institutional Investors Drive Corpo-
rate Social Responsibility? International Evidence.” Journal of Financial Economics 131 (2019):
693–714.
Fama, E F., and K R. French. “Disagreement, Tastes, and Asset Prices.” Journal of Financial
Economics 83 (2007): 667–89.
Fazzari, B. S; R. Glenn Hubbard; and B. Petersen. “Investment, Financing Decisions, and
Tax Policy.” The American Economic Review 78 (1988): 200–5.
Fiechter, P.; J.-M. Hitz; and N. Lehmann. “Real Effects of Disclosure Regulation: Evidence
from the European Union’s CSR Directive.” Journal of Accounting Research 60 (2022): 1499–
1549.
Gaspar, J.-M.; M. Massa; and P. Matos. “Shareholder Investment Horizons and the Market
for Corporate Control.” Journal of Financial Economics 76 (2005): 135–65.
Ghoul, S.; O. Guedhami; C. C. Y. Kwok; and D. R. Mishra. “Does Corporate Social Respon-
sibility Affect the Cost of Capital?” Journal of Banking and Finance 35 (2011): 2388–2406.
Gibson, R.; S. Glossner; P. Krueger; P. Matos; and T. Steffen. “Do Responsible Investors
Invest Responsibly?” Review of Finance 26 (2022): 1389–1432.
Gibson, R.; P. Krueger; and S. F. Mitali. “The Sustainability Footprint of Institutional In-
vestors: ESG Driven Price Pressure and Performance.” Swiss Finance Institute Research Paper,
2020.
Glosten, L. R., and P. R. Milgrom. “Bid, Ask and Transaction Prices in a Specialist Market
with Heterogeneously Informed Traders.” Journal of Financial Economics 14 (1985): 71–100.
Gompers, P.; J. Ishii; and A. Metrick. “Corporate Governance and Equity Prices.” The Quar-
terly Journal of Economics 118 (2003): 107–55.
Hall, B. H. “The Financing of Research and Development.” Oxford Review of Economic Policy 18
(2002): 35–51.
Hart, O., and L. Zingales. “Companies Should Maximize Shareholder Welfare Not Market
Value.” Journal of Law, Finance, and Accounting 2 (2017): 247274.
Hubbard, R. G. “Capital-Market Imperfections and Investment.” Journal of Economic Literature
36 (1998): 193–225.
Ilhan, E.; P. Krueger; Z. Sautner; and L T. Starks. “Climate Risk Disclosure and Institu-
tional Investors” Review of Financial Studies 36 (2023): 2617–50.
Iliev, P. “The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices.” The Journal
of Finance 65 (2010): 1163–96.
Iliev, P., and L. Roth. “Director Expertise and Corporate Sustainability” Review of Finance
(2023): 1–39.
Ioannou, I., and G. Serafeim. “The Consequences of Mandatory Corporate Sustainability
Reporting.” In: McWilliams, A. (eds) The Oxford Handbook of Corporate Social Responsibility:
Psychological and Organizational Perspectives. Oxford Handbooks. (2019): 452–89.
iShares. “ESG Aware Equity ETFs.” 2021. Available at https://www.ishares.com/us/
literature/product-brief/ishares-esg-aware-equity-brief.pdf.
Jouvenot, V., and P. Krueger. “Mandatory Corporate Carbon Disclosure: Evidence from
a Natural Experiment.” Working Paper, 2021. Available at https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3434490
Krueger, P. “Climate Change and Firm Valuation: Evidence from a Quasi-Natural Exper-
iment.” Swiss Finance Institute Research Paper, 2015. Available at https://papers.ssrn.com/
sol3/papers.cfm?abstract_id=3832745
Krueger, P.; Z. Sautner; D. Y. Tang; and R. Zhong. “The Effects of Mandatory ESG Dis-
closure Around the World.”Swiss Finance Institute Research Paper and European Corporate
Governance Institute - Finance Working Paper, 2021. Available at https://papers.ssrn.com/
sol3/papers.cfm?abstract_id=3832745
Lang, M.; K. V. Lins; and M. Maffett. “Transparency, Liquidity, and Valuation: International
Evidence on When Transparency Matters Most.” Journal of Accounting Research 50 (2012):
729–74.
Lee, A. “‘Modernizing’ Regulation S-K: Ignoring the Elephant in the Room.” 2020. Available
at https://www.sec.gov/news/public-statement/lee-mda-2020-01-30.
Leuz, C., and P. D. Wysocki. “The Economics of Disclosure and Financial Reporting Reg-
ulation: Evidence and Suggestions for Future Research.” Journal of Accounting Research 54
(2016): 525–622.
Pástor, Ľ.; R. F. Stambaugh; and L. A. Taylor. “Sustainable Investing in Equilibrium.” Jour-
nal of Financial Economics 142 (2021): 550–571.
Plumlee, M.; D. Brown; R. M. Hayes; and R. S Marshall. “Voluntary Environmental Dis-
closure Quality and Firm Value: Further Evidence.” Journal of Accounting and Public Policy 34
(2015): 336–61.
PWC. “‘Equity sans Frontières’ Trends in Crossborder IPOs and an Outlook for the Fu-
ture.” 2012. Available at https://www.pwc.com/gx/en/audit-services/ipo-centre/assets/
pwc-cross-border-ipo-trends.pdf
Rauter, T. “The Effect of Mandatory Extraction Payment Disclosures on Corporate Payment
and Investment Policies Abroad.” Journal of Accounting Research 58 (2020): 1075–1116.
44 b. gibbons
Roychowdhury, S. “Earnings Management Through Real Activities Manipulation.” Journal of

Accounting and Economics 42 (2006): 335–70.
Schiller, C. “Global Supply-Chain Networks and Corporate Social Responsibility.” Working
Paper, 2018. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3089311
SEC Investor Advisory Committee. “Recommendation of the SEC Investor Advisory
Committee Relating to ESG Disclosure” (2020), 1–10. Available at https://www.sec.gov/
spotlight/investor-advisory-committee-2012/esg-disclosure.pdf
Securities and Exchange Commission. “Annual Regulatory Agenda 2021.” 2021. Available
at https://www.sec.gov/news/press-release/2021-99
Serafeim, G. “Integrated Reporting and Investor Clientele.” Journal of Applied Corporate Finance
27 (2015): 34–51.
Serfling, M. “Firing Costs and Capital Structure Decisions.” Journal of Finance 71 (2016):
2239–86.
Starks, L. T.; P. Venkat; and Q. Zhu. “Corporate ESG profiles and Investor Horizons.”
Working Paper, 2017. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=
3049943
Tomar, S. “Greenhouse Gas Disclosure and Emissions Benchmarking.” Journal of Accounting
Research 61 (2023): 451–492.
US SIF. “Report on US Sustainable, Responsible and Impact Investing Trends 2018.” 2018.
Available at www.ussif.org
Verrecchia, R. E. “Essays on Disclosure.” Journal of Accounting and Economics 32 (2001): 97–
180.
Zhong, R. (Irene). “Transparency and Firm Innovation.” Journal of Accounting and Economics
66 (2018): 67–93.

The Financially Material Effects of Mandatory Nonfinancial Disclosure

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Financially Material Effects of Mandatory Nonfinancial Disclosure

Uploaded by

Copyright:

Available Formats

DOI: 10.1111/1475-679X.

The Financially Material Effects of

Received 30 November 2021; accepted 27 May 2023

Complaints from institutional investors suggest that principles-based disclo-

∗ Oregon State University

materiality disclosure standards create nonfinancial information frictions

JEL codes: D82, G23, G32, G38, M14, O31, Q56

“Investors consider certain environmental and social information material to their

whether disclosure has material effects on firms’ investment and financing

long-term investment. Likewise, managerial decision making could poten-

insignificant. Again, these findings are similar to Brown and Martinsson

2. Data and Summary Statistics

contains regulations and requirements issued by governments, regulators,

Panel A: Distribution of treatment by country

Country N Obs. N Firms Country N Obs. N Firms Country N Obs. N Firms

Argentina 159 17 Iceland 51 8 Philippines 335 34

sample includes 82,707 firm-year observations from 7,400 firms in 65 coun-

All specifications include time-varying firm-level and country-level con-

2.3 summary statistics

3.1 identification strategy

In this specification, i indexes firm and t indexes year. Yi,t is an outcome

3.2 confirming the strength of the disclosure shock

As a quasi-first-stage regression for the D-i-D analysis in section 4, I in-

worldwide do not have an explicit mandate to invest with environmental

However, this setting is distinct from studies that examine improvements

an empirical question of whether improved nonfinancial transparency will

E&S Regulation t −1 0.096** −0.205** −0.114 0.093* −0.229** −0.138

table is an indicator variable that measures R&D investment on the exten-

investors. However, all investors have access to the information contained

5. Potential Mechanisms: Adverse Selection and Clientele-Driven

*** ** ** *** *** **

typical user of financial statements. However, the prior section demon-

institutional background, is heterogeneous across these countries—which

5.2 clientele-driven effects

8 Table C3 in the internet appendix measures median institutional ownership within an

In columns 1–3 of table 8, I show how the increase in innovation follow-

investment in innovation. For example, some firms in equity-dependent in-

Panel B: Investor horizon

Inst Own = PRI Non-PRI

Dep. Variable = Investor Turn (1) (2) (3) (4)

Dep. Variable= R&D Equity Issuance

(1) (2) (3) (4) (5) (6)

Panel B: Horserace between changes in PRI investment and Inst Own

of panel A, provides evidence that disclosure leads to an E&S-specific

Increases in the overall level of institutional ownership relate to higher

6.2 alternative matching: combined statistical distance

I match firms using Log(Assets), Tobin’s Q, LT Debt Ratio, Tangibility, Prof-

6.3 country-level selection

6.4 placebo test

whether new disclosure of nonfinancial information is financially material

appendix: variable definitions

Roychowdhury, S. “Earnings Management Through Real Activities Manipulation.” Journal of

You might also like

E&S Regulation t −1 0.096 −0.205 −0.114 0.093* −0.229** −0.138

* * *