The Effect of Non-financial Information Disclosure on Firm Value: Evidence from the EU

This study examines how the extent of non-financial disclosures influences firm value. To approximate the extent of non-financial disclosure, Bloomberg ESG disclosure scores are used. More extensive ESG disclosures mitigate information asymmetry and increase firm transparency making it easier for investors to value a firm. According to the stakeholder and legitimacy theories, higher levels of disclosure should be value-enhancing. However, more extensive disclosures are connected with proprietary costs and the costs of measurement and dissemination of such information which can be detrimental for firm value. Therefore, the effect of ESG disclosures is ambiguous. To investigate it, panel data for 1109 firms from the EU in 2005-2019 is estimated with Generalized method of moments. This study finds that more extensive non-financial disclosures reduce firm value. However, value-enhancing effect of ESG reporting can be achieved at very high levels of disclosure. Thus, it can be recommended to firms to boost their levels of transparency to the point where benefits from extensive disclosures outweigh their costs.