Value Relevance of Non-Financial Information: Evidence from Environmental Social Governance Disclosure Worldwide

Abstract

This study investigates the value relevance of disclosure of non-financial information (NFI) worldwide, specifically, information on environmental (E), social (S) and governance (G) factors both in aggregate ESG form and its individual components. Value relevance is tested using the modified version of the Ohlson (1995) model developed by Collins, Pincus, and Xie (1999). The study uses a new dataset drawn from the Bloomberg database for the period 2008-2012 producing a sample of 10,186 firm year observations.

The results of the study indicate that disclosure of aggregate ESG and its components have a significant positive relationship with market value. The results are stronger in common law countries except for the social factor, which is stronger in code law countries. The evidence thus indicates that globally, investors benefit from disclosure of aggregate ESG and its components. This evidence supports regulators globally in encouraging companies to provide additional ESG information.

This study, thus, contributes to the literature in a number of respects. Earlier research in this area has focused on single countries or cross-country comparisons on small sets of countries of developed regions such as the European Union. The earlier studies have addressed individual components of ESG or grouping such as corporate social responsibility (CSR). The present study extends the cross-country comparisons to a set of 38 countries and investigates the value relevance of disclosure of information in both aggregate ESG form and as its individual components for developed and developing regions. This study controls for ESG performance and also for the form of law - common law and code law - which reduces the potential for misspecification errors arising from differences in performance and the disclosure regimes across the set of companies. Finally, this is also the first comprehensive study employing the ESG disclosure scores provided by Bloomberg.