Impact of ESG disclosure and financial reporting quality on investment efficiency

Abstract

Purpose This study aims to examine the impacts of environmental, social and governance (ESG) disclosure and financial reporting quality (FRQ) on investment efficiency. Design/methodology/approach Several econometric models have been applied to estimate the impacts of ESG disclosure and FRQ on investment efficiency, using the United Arab Emirates (UAE) as a sample in 2010–2019. Estimations considered subsamples of underinvestment, overinvestment and low and high FRQ values. Findings Empirical results show a positive relationship between ESG disclosure, FRQ and investment efficiency, and that this relationship is more important in the underinvestment and high FRQ sub-samples. Results suggest that ESG disclosure improves transparency, mitigates information asymmetry and enhances investment efficiency. Research limitations/implications The findings could help UAE regulators incorporate ESG information into reporting and implement effective mechanisms to increase the extent of ESG information to improve investment efficiency. This study only examined UAE traded companies. Future research should investigate other factors influencing investment efficiency and conduct comparative studies across Gulf Cooperation Council countries. Social implications This study reveals the significant positive impact of ESG disclosure and FRQ on investment efficiency. These findings will help companies optimize their ESG information disclosure, improve the quality of their financial reports and comply with ESG standards. The study aims to develop knowledge that will not only benefit companies regarding the potential impact of ESG disclosure but also help national and international society create a better social environment and reduce climate change. Originality/value To the best of the authors’ knowledge, this study is the first to examine the relationship between ESG disclosure, FRQ and corporate investment efficiency. The research contributes to understanding the financial impacts of ESG disclosure and FRQ and supports regulators’ efforts to enforce ESG disclosure and improve FRQ.