Guo et al. ( 2026 ) investigated whether country-level generalized trust is associated with the provision of auditor-provided nonaudit services (NAS) in Europe. Using a large cross-country sample covering 2011–2020, the authors documented a positive association between societal trust and both the level and proportion of NAS. They presented additional analyses addressing capital market perceptions, regulatory quality, NAS restrictions, and different NAS categories. In this discussion, I review the paper’s contributions by emphasizing its key strengths, including the importance of trust in the auditing setting, its treatment of trust as an informal institutional determinant of audit market outcomes, and the use of a multicountry European setting. At the same time, I raise selected conceptual, institutional, and methodological considerations. In particular, the discussion examines the applicability of generalized trust in audit settings, the credibility of competing theoretical mechanisms, the role of regulation and selection in shaping observed NAS outcomes, and limitations related to the measurement of trust.
SynopsisThe research problemWe investigated the effect of country-level generalized trust on the demand and supply of auditor-provided nonaudit services (NAS).MotivationWhether NAS impairs auditor independence has been - and continues to be - a topic of intense debate among practitioners and regulators. In response, regulators worldwide are increasingly imposing restrictions on the provision of NAS, and audit firms have begun voluntarily abstaining from offering NAS to their audit clients. Nevertheless, the overall level of NAS provision varies significantly across countries, and the reasons for this variation remain unclear. The lack of evidence on the role of country-level generalized trust in explaining cross-country differences in the demand and supply of NAS motivated our study.The test hypothesisWe hypothesized that generalized trust is associated with the level of NAS. Given competing theoretical arguments, we adopted a nondirectional hypothesis.Target populationOur study focused on listed companies in Europe. We used a sample of 3,528 publicly listed companies in 27 European countries for the period 2011-2020. Using a European sample offered the advantage of examining firms operating under similar regulatory frameworks established by EU law.Adopted methodologyWe performed ordinary least squares regressions to test our hypothesis.AnalysesTo measure country-level generalized trust, we used data from the Integrated Values Survey. We captured NAS supply and demand using the natural logarithm of nonaudit fees and the ratio of nonaudit fees to total auditor fees.FindingsWe found a positive association between generalized trust and NAS. In additional analyses, we found that, first, the often-reported positive association between NAS and cost of capital is present only in low-trust countries, which suggests that generalized trust mitigates concerns related to the appearance of independence. Second, the effect of generalized trust on auditor-provided NAS is more pronounced in countries with low regulatory quality. Third, our main findings on the positive effect of generalized trust on auditor-provided NAS are not conditional on the strictness of NAS requirements at the country level. Fourth, the positive association between NAS and generalized trust holds only for NAS other than audit- or tax-related NAS.
This discussion paper critically evaluates the current research on the impact of the regulatory switch from International Financial Reporting Standards (IFRS) to local Generally Accepted Accounting Principles (GAAP) on the analyst’s information environment. While the voluntary and mandatory adoption of IFRS has been examined extensively, research on the voluntary switch from IFRS back to local accounting standards is sparse. The study by Filip et al (2026) enhances our understanding by examining the effects of a firm’s reversion to local GAAP on the analyst’s information environment. It reveals that a voluntary switch leads to reduced analyst following, lower forecast accuracy, and diminished informativeness of analyst recommendations. Future research could further investigate the economic implications, regulatory influences, and methodological concerns associated with such voluntary switches.
SynopsisThe research problemWe examine the insights from prior studies on the question of whether management-provided environmental, social, and governance (ESG) disclosure can reduce ESG-related rating disagreement (hereafter, ESG disagreement). Specifically, we summarize evidence from prior studies on: (a) what ESG disagreement is, (b) the importance of ESG disagreement, (c) the causes of ESG disagreement, (d) potential solutions for mitigating ESG disagreement, and (e) the specific role of ESG disclosure as a potential solution. We outline directions and provide insights for future research in this area.MotivationESG rating agencies often disagree with each other about individual firms' ESG performance, as reflected in substantial differences in ESG ratings. Such disagreement is associated with adverse capital market and firm outcomes, sparking interest from researchers, policymakers, and firms in strategies to mitigate it. ESG disagreement is attributable to different understandings of what constitutes good ESG performance as well as differences in data sources, methodologies, and rating agency incentives. In addition, the lack of completeness, standardization, and consistency in ESG data allows for varying interpretations, further contributing to ESG disagreement. Transparency about ESG performance can resolve ESG disagreements by addressing many of its underlying causes. Managers are well-placed to provide this transparency because they possess the most direct knowledge of their firms' ESG activities. Therefore, in this study, we review prior literature on the effect of management-provided ESG disclosure in resolving ESG disagreement.Adopted methodologyWe provide a structured literature review. Specifically, we review prior literature regarding ESG disagreement and ESG disclosure and highlight potential future research directions in this context.AnalysesWe analyzed 21 working papers and 30 papers published in peer-reviewed high-quality journals that are related to ESG disagreement in the English language over a 23-year period (2002-2024).FindingsManagement-provided ESG disclosure can reduce ESG-related disagreement. However, whether it achieves this outcome depends on various factors, including the characteristics of the disclosure itself and the broader institutional environment. Ongoing developments offer many avenues for researchers to explore to better understand the impact of ESG disclosure on ESG disagreement. We highlight some potential future research directions in this context.
The research problem This study leverages the Swiss context, where listed firms can voluntarily turn away from International Financial Reporting Standards (IFRS) to Swiss Generally Accepted Accounting Principles (GAAP). The aim is to provide a better understanding of the relationship between firms' financial disclosures and analysts' information environment. Motivation or theoretical reasoning The study seeks to deepen our understanding of financial analysts' roles as information intermediaries in capital markets and how changes in reporting standards impact their ability to provide accurate forecasts, recommendations, and market insights. The test hypotheses We tested the following main hypothesis: Analysts following firms that voluntarily turn away from IFRS to Swiss GAAP experience a decrease in their information environment. We further investigated whether this negative association is driven by analysts without prior experience with Swiss GAAP and by foreign analysts. Target population The study targets financial analysts covering Swiss-listed firms, especially those following companies that voluntarily change their financial reporting standards from IFRS to Swiss GAAP. Adopted methodology We adopted a staggered difference-in-differences analysis to test our hypotheses. Analyses At the analyst level, we tracked the forecast accuracy as the absolute difference between the analyst's forecast and the firm's earnings per share, scaled by the last available closing price. We also analyzed the informativeness of analyst recommendations by measuring market reactions to recommendation changes. Additionally, we differentiated between analysts with prior Swiss GAAP experience and those without, as well as foreign versus local analysts. Findings Our findings show that firms voluntarily turning away from IFRS to Swiss GAAP experience a decrease in analyst following, a decrease in forecast accuracy, and analyst upgrade recommendations are less informative. Further analysis reveals that these effects are primarily driven by analysts who lack prior experience with Swiss GAAP, rather than foreign analysts. Our findings highlight that accounting expertise, rather than geographic location, plays a critical role in maintaining analysts' effectiveness in navigating reduced disclosures.
Synopsis The research problem This paper provides an up-to-date and comprehensive systematic literature review (SLR) and bibliometric analyses of the existing studies on environment, social, and governance (ESG) in accounting, including analyzing and reporting the current research characteristics from multiple perspectives, classifying and organizing key topics, and identifying future research opportunities. Motivation The ESG literature in accounting has witnessed a steady growth over the past 10 years. While there are few review studies relating to ESG and accounting, the exponential increase in this literature in recent times, along with the emergence of literature review analysis tools, such as bibliometric techniques, has offered unique opportunities to extend, as well as make new contributions to the extant ESG literature through SLR and bibliometric analysis. Research questions In this paper, we set out to address the following interrelated questions: (1) How has the ESG and accounting stream of literature progressed over time? (2) What are the key developments within the ESG and accounting research field? (3) What are the major new directions for future research within the ESG and accounting literature? Target population We targeted all ESG studies published between 2013 and 2023 in all 27 accounting journals rated Tier3, Tier4, and Tier4* in the 2021 Association of Business Schools (ABS) Academic Journal Guide (AJG). Adopted methodology We applied SLR and bibliometric analysis techniques to analyze 273 articles published in 27 top accounting journals between 2013 and 2023. Analyses We employed SLR and bibliometric techniques to identify key patterns and trends in ESG studies published in accounting journals, discuss and organize key topics, and identify future research opportunities. Findings Through a series of rigorous quality control procedures and report analysis frameworks, we first find that the publication trend of accounting and ESG publications fluctuates, but generally increases. We identify “star” journals, explain that the data sources in current research come from a few countries, and the application of theories shows that a particular category or specific theories are frequently applied. Second, we summarize four major topics within the current literature through a review strategy that combines software technology and manual review. Finally, we outline the limitations of past ESG in accounting studies, as well as identify key new directions and avenues for future research.
SynopsisResearch problemWe evaluate how CEO cultural masculinity impacts earnings management practices.Motivation or theoretical reasoningEarnings management can impede corporate transparency and fair competition, mislead investors, and cause a significant decline in shareholder value once detected. Literature has shown that CEO traits and characteristics matter for their firm's accounting practices, including earnings management. We consider the CEO's cultural heritage, which influences the CEO's values, beliefs, and preferences. We focus on a CEO's masculinity, a set of cultural norms and values associated with the "masculine" dimension of being performance-driven versus the "feminine" dimension of caring (Hofstede, 1980, 2001). Masculinity is associated with a strong emphasis on achievement, competition, and pursuing material wealth, closely aligning with the motivations driving earnings manipulation. Arguably, masculine CEOs are more likely to engage in earnings management to meet their financial targets because they emphasize short-term financial success and achievement.HypothesisA CEO's cultural masculinity is positively associated with the firm's earnings management.Target populationWe used a sample of U.S. Standard & Poor's 1,500 nonfinancial firms from 2004 to 2015.MethodologyWe measured CEO cultural masculinity based on the CEO's ancestry derived from their last name, using Hofstede's cultural dimensions. Earnings management was measured using discretionary accruals from a modified Jones (1991) model and performance-adjusted discretionary accruals (Kothari et al., 2005). We also considered alternative measures of accounting malpractices, such as restatements and Securities and Exchange Commission (SEC) enforcement actions.AnalysesIn addition to panel data regressions, we conducted a difference-in-difference analysis to address the potential endogeneity concerns. We also ruled out several alternative explanations. Finally, we took further steps to examine how the associations vary across different levels of earnings management incentives and the strength of governance and monitoring mechanisms.FindingsWe document a positive relationship between CEO cultural masculinity and the firm's earnings management. The analysis around CEO changes reinforces the findings. Further evidence shows that masculine CEOs manage earnings more before initiating acquisitions and following poor stock performance of their firms, while strong governance and monitoring mechanisms are effective in preventing earnings management by masculine CEOs.
SynopsisThe research problemThis paper examines the relationship between managerial myopia (or short-termism) and corporate tax avoidance. The main purpose is to explore whether CEOs with short-term equity incentives engage in tax avoidance to maximize private benefits at the expense of long-term shareholder wealth.MotivationManagerial short-termism arises when executives prioritize short-term stock price performance over long-term firm value. Prior research has suggested that short-term equity incentives lead to myopic decisions, such as cutting R&D expenditures or engaging in earnings management. This study extends this literature by investigating whether CEOs use corporate tax avoidance as a tool for short-termism. Unlike prior studies that examined tax avoidance within an efficient contracting framework, this study highlights how short-term wealth incentives induce tax avoidance that benefits executives but potentially harms long-term firm value.The test hypothesesThis study examines whether managerial myopia is associated with corporate tax avoidance. In particular, the analysis evaluates whether managerial myopia is positively associated with corporate tax avoidance (H1a) or, alternatively, negatively associated with corporate tax avoidance (H1b).Target populationVarious stakeholders interested in corporate tax avoidance, including policymakers, compensation consultants, board of directors, investors, and firm managers.Adopted methodologyMultivariate analyses using ordinary least squares, two-stage least squares, panel logit, as well as event-study Difference-in-Differences regressions.AnalysesWe examined 10,940 firm-CEO-year observations from Russell 3000 firms between 2006 and 2016. Corporate tax avoidance refers to strategies that reduce tax payments relative to pretax income, (Blouin, 2014) measured using annual cash effective tax rates (ETR) to capture short-term within-firm tax variations. Managerial myopia, defined as the CEO's focus on short-term stock performance (Edmans, Fang et al., 2017), is proxied by vesting equity delta scaled by annual compensation, which quantifies the sensitivity of vesting equity to changes in firm value (Edmans et al., 2009).FindingsThe results indicate that vesting equity delta is associated with declines in cash ETR, supporting H1a. Each standard deviation increase in vesting equity delta is associated with a 0.80-1.54 percentage points drop in cash ETR, translating into a $5.71m-$10.99m reduction in annual tax payments for the average firm. We also identify CEO equity sales and mispricing potential as the underlying economic mechanisms. Additional analyses indicate that vesting equity induces costly tax avoidance, which is positively (negatively) associated with short-term (long-term) shareholder wealth. We address endogeneity concerns by using vesting schedules determined several years prior and options acceleration before the adoption of FAS 123R as events plausibly exogenous to the current corporate tax avoidance environment.
SynopsisThe research problemOur study explored the impact of supply chain digitalization on corporate climate risk.MotivationAmid the global wave of digital transformation, the spillover effects of supply chain digitalization on climate risk management in manufacturing firms warrant closer examination. Grounded in dynamic capabilities theory, our study investigated the association between supply chain digitalization and corporate climate risk.The test hypothesisWe tested a core hypothesis: supply chain digitalization enhances firms' dynamic capabilities, thereby reducing their exposure to climate risks.Target populationThe target population comprised Chinese A-share listed manufacturing companies during the 2013-2023 period. The sample included enterprises from various sub-sectors. Corporate climate risks were extracted from news reports.Adopted methodologyWe utilized ordinary least squares regressions, a difference-in-differences model, and machine learning.AnalysisOur study employed large language models and text analysis techniques to identify corporate supply chain digitalization practices. Simultaneously, we constructed a media-based corporate climate risk index using machine learning methods.FindingsWe found that supply chain digitalization enhances firms' dynamic capabilities, thereby reducing their exposure to climate risks. This mitigating effect operates primarily through improved climate compliance and the promotion of green supply chain transformation. Further analysis revealed that the impact is more pronounced among firms with technically experienced executives, in tightly integrated supply chains, in pollution-intensive industries, in highly competitive industries, and in regions with greater climate awareness and more advanced supply chain infrastructures.
SynopsisThe research problemThis paper investigated the impact of language diversity in corporate tweets on the information asymmetry of firms to ascertain whether communication in different languages would cause noise and increase information asymmetry, or inform and reduce information asymmetry.MotivationAkin to the Rosetta Stone of ancient Egypt, current-day corporate tweets are written in more than one language to communicate with audiences of different languages. This leads to the question of whether the use of multiple languages assists in reducing information asymmetry between the company and its investors.The test hypothesisWe hypothesized that a negative association exists between information asymmetry, proxied by cost of equity and bid-ask spread, and language diversity, proxied by a measure that accounts for both the number of languages used and the lexical distance of the most commonly used language in the tweets and the other languages used. We also examined the influence of emojis in corporate tweets.Target populationWe identified a data collection set of 1,420 major companies, consisting of 33 indices of 32 global exchanges and covering 36 countries from the year 2018. Of those, 758 companies from 34 countries have tweets. The language and emoji data from 1,671,030 corporate tweets in 95 different languages comprised the base data for our analysis.Adopted methodologyThe proxy for language diversity is based on the lexical distances between languages as proposed by Beaufils & Tomin (2020). A higher distance between the most used language and the other languages used for tweets is widely seen as a company's attempt to reach an audience in a language group that is not familiar with the company's primary language. If this approach lowers information asymmetry, then it would improve communication effectiveness. The sum of lexical distances for those languages constituted the language diversity score for each company. We also analyzed the percentage of tweets with emojis.AnalysesData were collected from tweets, corporate websites, and websites of relevant institutions using Python programs and processed using virtual machines rented from Amazon Elastic Compute Cloud. Ordinary least squares were used for the multivariate tests between the information asymmetry proxies (cost of equity and bid-ask spread) and language diversity and emojis. We controlled for other Twitter, firm, industry, and country variables that can affect information asymmetry. We also ran tests to account for the endogeneity of language diversity in the research models.FindingsThe costs of equity and bid-ask spreads of firms are negatively associated with language diversity and emoji use. The results of tests accounting for endogeneity and additional tests to gain further insights into the use of other languages supported the main test resultsImplicationsThe study informs managers, policymakers, and researchers about the benefits of language diversity in corporate communication in a global setting. It also contributes to the nascent literature on multiple language use for external reporting and communication in accounting and business.
The research problem We examined whether corporate governance information, as nonfinancial information, is useful to regulators-a crucial yet underexplored information user-for accounting fraud detection. Motivation or theoretical reasoning Detecting accounting fraud has significant implications for all participants in the financial market. Given the economic significance of China's financial market as the second largest economy and the prevalence of accounting fraud in China due to its relatively weaker institutional environment, efficient and accurate detection of accounting fraud is of paramount importance to regulators as well as other participants in the Chinese capital market. While numerous empirical studies have underscored the importance of examining financial information in detecting accounting fraud, it remains unclear whether nonfinancial information, specifically corporate governance information, has incremental value in helping regulators with accounting fraud detection in China. The test hypothesis Based on the corporate governance literature, we hypothesize that incorporating corporate governance information alongside financial information enhances regulators' ability to detect accounting fraud. Target population We studied a sample of Chinese listed firms from 2007 to 2019. Analyses Using accounting fraud data from 2007 to 2019, we examined whether corporate governance information, on top of raw financial information, can help regulators improve the accuracy and efficiency of accounting fraud detection. We obtained accounting fraud cases for Chinese listed firms from the China Securities Regulatory Commission (CSRC), and raw financial and governance variables from China Stock Market & Accounting Research (CSMAR). Findings Using machine learning techniques, we found that incorporating corporate governance information with raw financial information improves accounting fraud detection. Specifically, across the five corporate governance categories, board structure and the personality traits of executives are crucial for identifying fraudulent activity. Moreover, chairperson age, performance-based composition, and ownership concentration are particularly relevant corporate governance factors when it comes to accounting fraud detection. Our findings suggest that nonfinancial information, such as corporate governance factors, provides incremental value beyond financial statements that can be particularly useful to regulators, who are important yet ignored information users in the capital market.
The research problem We investigated how income smoothing in Japan has changed over time and whether this change is associated with changes in its financing system. Motivation International accounting research predicts that a country's financing system determines its accounting practice-that is, as a country changes its financing system, especially from an insider to an equity-outsider financing system, its accounting practice changes accordingly. In Japan, the financing system has traditionally been bank-oriented (an insider system). After the collapse of the bubble economy starting around 1990, it moved toward an equity-outsider system, open to international investment with the introduction of more transparent accounting standards similar to U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. We exploit the setting of Japan to examine our prediction regarding accounting changes. The test hypothesis We hypothesized that the degree of income smoothing in Japan has decreased in response to the change from a bank-based toward an equity-outsider financing system. Target population This study is relevant to researchers evaluating the impact of country-level financing system transitions on financial reporting practices and other firm behaviors. It is also of interest to policymakers facing such transitions and considering a reform of economic regulations. Adopted methodology We performed multivariate analyses using ordinary least squares regressions. Analyses The sample period is from 1976 to 2020 (45 years). The main proxy for the insider system is country-level bank ownership, which is complemented by country-level foreign ownership (i.e., a proxy for the equity-outsider system). Findings The degree of income smoothing decreased through the 1990s and early 2000s. This change is associated with lower levels of bank ownership, a proxy for an insider system, and higher levels of foreign ownership, which reflect arm's-length investment forces. Together, these findings provide evidence of the impact of Japan's transition from a bank-based toward an equity-outsider financing system on accounting practices.
SynopsisThe research problemWe investigate whether family ownership affects the accrual anomaly, a well-documented phenomenon where accounting accruals negatively predict future earnings and stock returns. While the anomaly has been extensively studied, the role of ownership structure, particularly family ownership, remains unexplored. This research addresses whether family ownership magnifies the anomaly and through what channels.Motivation or theoretical reasoningFamily firms differ in their governance, incentive alignment, and disclosure practices. These features may increase agency concerns or limit market efficiency, potentially amplifying the accrual anomaly. Understanding whether family ownership affects the anomaly contributes to the debates on ownership structure, earnings quality, and market pricing.The test hypothesesWe hypothesize that (a) the accrual anomaly is stronger in family firms, (b) this effect is driven by lower persistence of discretionary accruals, and (c) mispricing is sustained due to stronger limits to arbitrage in family firms.Target populationOur sample comprises 27,117 firm-year observations from 34 countries between 2007 and 2017.Adopted methodologyWe employ cross-sectional regressions and portfolio-based analyses to compare the accrual anomaly across family and nonfamily firms. We decompose accruals into discretionary and nondiscretionary components and use proxies such as institutional ownership, idiosyncratic volatility, illiquidity, and changes in free float to assess investor sophistication and arbitrage constraints.AnalysesAccruals are less persistent and more negatively priced in family firms. Hedge portfolios earn 18.7% annually among family firms versus an insignificant 3.4% among nonfamily firms. The anomaly in family firms is primarily driven by discretionary accruals. We find no evidence that investor sophistication explains these results. However, limits to arbitrage are significantly more prevalent in family firms, constraining market correction.FindingsFamily ownership amplifies the accrual anomaly through lower accrual persistence and stronger arbitrage constraints. These findings are robust across multiple family firm definitions and institutional settings. The results highlight family ownership as a key factor in understanding earnings quality and market pricing, with implications for investors, regulators, and scholars.
We would like to thank Davide Rizzotti for his thorough and constructive discussion of our paper. His comments raised several important points regarding both the methodological design and the broader implications of our findings in the Chinese institutional context. We offer our detailed responses to Davide Rizzotti’s discussion of our study (this issue), following the sequence presented in his discussion.
This editorial commentary synthesizes conceptual frameworks and empirical research on environmental, social, and governance (ESG) reporting and integration, aiding us in better understanding the evolution of ESG and the inception of regulatory responses aspiring to advance ESG’s relevance and credibility, and how ESG improves firm value. We review a number of theories that explain the advancement and evolution of ESG, offering distinct insights into the drivers and consequences of corporate sustainability initiatives. Recent trends suggest a transition of ESG from a peripheral narrative element to a more integrated component of capital market operations. Within this landscape, there is a growing opportunity for accounting research to contribute to the development of robust measurement, verification, and assurance mechanisms for ESG-related disclosures.
Synopsis The research problem This study examines whether the environmental, social, and governance (ESG) disclosure mandate enacted in Hong Kong in 2016 has affected the ESG performance of Chinese firms cross-listed in Hong Kong. Motivation Empirical evidence on the real effects of ESG reporting, especially in emerging countries, remains relatively scant. Our study extends previous studies on the real effects of ESG reporting, which predominantly focused on developed countries, to an emerging country in a cross-listing setting. The test hypotheses Drawing on stakeholder theory, we hypothesized that the Hong Kong ESG disclosure mandate positively affects the ESG performance of cross-listed Chinese firms ([Formula: see text]). We also tested whether this effect is more pronounced for firms under greater pressure from the media, analysts, and customers ([Formula: see text], [Formula: see text], and [Formula: see text]), and for politically connected firms and non-SOEs ([Formula: see text] and [Formula: see text]), than for their counterparts. We further tested whether the Hong Kong ESG disclosure mandate positively affects the ESG performance of non-cross-listed Chinese firms that operate in the same industry or are located in the same city as cross-listed Chinese firms ([Formula: see text] and [Formula: see text]). Targeted population Our sample consists of 2,434 firm-year observations between 2011 and 2021 (excluding 2016). Adopted methodology The study employed a difference-in-differences approach along with propensity score matching. Analyses We performed tests to assess the validity of the parallel trend assumption and conducted a battery of robustness checks, including the use of different fixed effects, alternative samples, alternative measures of ESG performance, and different PSM approaches. Findings The results show that the Hong Kong ESG disclosure mandate has a positive effect on the ESG performance of cross-listed Chinese firms. This effect is particularly evident in the governance and environmental aspects of ESG, but not observed in the social dimension. Further, we found that firms under greater pressure from the media, analysts, and customers experience a stronger positive effect of the mandate. The effect is also more pronounced for politically connected firms and non-SOEs than for their counterparts. Additionally, non-cross-listed firms operating in the same industry or in the same city also show improvements in ESG performance following the mandate, suggesting a spillover effect. However, further analyses show that the ESG performance of cross-listed Chinese firms is still lower than that of local Hong Kong firms, which suggests that the mandate does not completely supplant the effects of the regulatory environment in mainland China.
Synopsis The research problem This study examined industry peer effects under China’s selective mandatory environmental, social, and governance (ESG) disclosure regime, where a subset of firms is required to provide ESG disclosures. Motivation Prior research has shown that peer firms influence a firm’s disclosure decisions in varying ways, with both positive and negative peer effects documented. The mixed findings in the literature may be attributed to the examination of different types of disclosures. By focusing on China’s selective mandatory ESG disclosure regime, this study aimed to investigate whether both positive and negative peer effects exist when analyzing the same type of disclosure, thereby addressing a gap in the existing literature. The test hypotheses We examined whether there is a positive (negative) association between the proportion of industry peers making mandatory ESG disclosures and the propensity of nonmandated firms to initiate (continue) their own voluntary ESG disclosures. Target population We utilized a sample of Chinese A-share firms from 2010[Formula: see text]to 2019, including both mandated and nonmandated firms under the selective mandatory ESG disclosure regime. Adopted methodology We employed logit regressions, ordinary least squares (OLS) regressions, and a combination of propensity score matching (PSM), entropy balancing (EB), and difference-in-differences (DID) estimation. Analyses We investigated the relationship between the proportion of mandatory disclosers in an industry and the propensity of nonmandated peers to initiate voluntary ESG disclosure. We also examined whether nonmandated firms that already provide ESG disclosures voluntarily are more likely to discontinue these disclosures when the proportion of mandatory disclosers in their industry is high. Additionally, we conducted several cross-sectional tests, consequences tests, and robustness tests. Findings We found that nonmandated firms increase their propensity to initiate ESG disclosure voluntarily when the proportion of firms making mandatory ESG disclosures in the same industry is greater, consistent with a positive peer effect. Further, the positive peer effect is stronger for firms with low political legitimacy, poor information environment, or high idiosyncratic risk. As the proportion of mandatory industry peers increases, firms that already provide ESG disclosures voluntarily are more likely to discontinue their disclosure, consistent with a negative peer effect, where the discontinuing firms free ride on the mandatory ESG disclosures of their peers. Overall, our evidence suggests that mandatory ESG disclosure is associated with both positive and negative peer effects.
