Financial Statement Comparability and Environmental, Social, and Governance (ESG) Performance

Abstract

This study explores the effect of financial statement comparability on environmental, social, and governance (ESG) performance. Comparability is a qualitative characteristic that enhances the usefulness of accounting information, as emphasized in the conceptual framework of accounting standards. Reporting accounting information with high comparability reduces the cost of obtaining information for users of financial statements, thereby enabling them to make decisions more efficiently. However, increased comparability of financial statements may lead managers to avoid investments that do not directly and rapidly enhance corporate value. In the context of ESG, this behavior could lead to a reduction in ESG investments, thereby lowering overall ESG performance. This study empirically investigates this hypothesis by analyzing data from listed firms in Korea. The analysis reveals a negative relationship between the comparability of financial statements and ESG performance. When breaking down ESG performance into individual components, the environmental (E) and social (S) factors show a negative relationship with comparability, while no significant relationship is observed with the governance (G) factor. The results remain consistent across various additional tests, including the use of alternative comparability and ESG proxies, as well as when employing firm fixed effects models. The findings of this study highlight the potential adverse effects of financial statement comparability on ESG performance. These results suggest that while comparability facilitates better decision-making through enhanced information efficiency, it may inadvertently discourage managers from engaging in ESG investments, thereby negatively impacting a company’s sustainability.