Events

Prof. Henry Friedman
Professor in Accounting
UCLA Anderson School of Management
University of California-Los Angeles

Firms and jurisdictions are increasingly adopting ESG reporting, driving a growing empirical literature on the consequences of ESG reporting for investors, firms, and other stakeholders. We develop a model to understand the nuanced effects of the introduction of ESG reporting. In our model, a firm provides ESG and financial reports, which investors use to price the firm’s stock, influencing management’s real and reporting incentives. We characterize how investors respond to new ESG reporting; how the introduction of ESG reports affects corporate performance, stock prices, and market responses to financial disclosures; and trace these effects to ESG performance, expected cash flows, and financial misreporting. We provide conditions under which the introduction of ESG reporting discourages corporate ESG, and under which it encourages corporate ESG but lowers equity price at the same time. Comparative statics show how investor preferences (e.g., concern for ESG) and ESG efforts’ cash flow implications (e.g., penalties, subsidies, physical or transition risk) affect market responses to reports, misreporting, and outcomes, suggesting effect heterogeneity in empirical tests. Finally, we discuss how our model can be applied to other settings involving non-ESG disclosures.