The Impact of Negative ESG Disclosure on Firm Value: Enhancing or Diminishing?

Abstract

China has not established a regulatory framework for the disclosure of negative information related to ESG. As a result, firms face a dilemma when confronted with ESG-related adverse events: withholding disclosure risks reputational damage upon exposure, while disclosing may invite legitimacy concerns. To address this dilemma, a study is conducted using A-share listed firms that disclose ESG-related negative information between 2020 and 2021. By setting an event window spanning ten trading days before and after the announcement of negative events, the research reveals that disclosing ESG negative information leads to significant short-term negative market effects. Although the adverse market impact is less pronounced when firms voluntarily disclose negative ESG information compared to when it is disclosed passively, this does not suffice to encourage proactive disclosure. Further regression analysis is conducted to examine the long-term value effect of disclosing ESG negative information, showing that the level of disclosure significantly enhances the long-term value of the firm. The stark contrast between the two effects suggests that, first, ESG is fundamentally a concept rooted in sustainable development, and the long-term value effect of disclosing negative information aligns with this principle. Second, ESG is a practice, and negative information is an objective reality within such practice. Choosing to disclose ESG negative information appropriately reflects a positive attitude, proving beneficial in the long run. Therefore, it is recommended that government regulatory bodies establish a mandatory framework for ESG negative information disclosure and incorporate such disclosures into the ESG rating system.