Compulsory disclosure regulation: the effect of ESG on extreme risk

We examined the impact of compulsory disclosure regulations on the relationship between the Environmental, Social and Governance (ESG) and firm-specific extreme risk. We used a difference-in-difference approach to solve endogenous concerns and found that the negative impact of the ESG score on extreme risk is more significant after announcing compulsory disclosure regulations. Additionally, we demonstrated that this effect becomes more substantial when firms issue green bonds. Finally, the subsample tests showed that the compulsory influence of the government is more evident in firms with high financial transparency and firms with low crash risk. Our empirical findings had policy implications for governments, regulators, and investors.

Automated summary

In this study, we examined the impact of compulsory disclosure regulations on the relationship between Environmental, Social, and Governance (ESG) factors and firm-specific extreme risk. By using a difference-in-difference approach, we found that the negative impact of ESG score on extreme risk becomes more significant after the announcement of compulsory disclosure regulations. Furthermore, our findings also showed that this effect is more pronounced when firms issue green bonds. Subsample tests revealed that the compulsory influence of the government is more evident in firms with high financial transparency and low crash risk. The empirical findings of our study have important policy implications for governments, regulators, and investors.