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ESG disclosure and investor welfare under asymmetric information and imperfect competition

Author

Listed:
  • Ji, Yucheng
  • Xu, Weijun
  • Zhao, Qi
  • Jia, Zecheng

Abstract

We study the welfare effect of ESG disclosure in a market with information asymmetry and imperfect competition. We develop a rational expectations equilibrium in which small and large investors have heterogeneous valuations of a risky asset. More precise ESG disclosure would result in small investors providing less liquidity and, in turn, less aggressive trading by larger investors. This interaction between different classes of investors triggered by ESG disclosures leads to some novel results in this paper. First, improving the precision of ESG disclosures makes small investors worse off. Second, the welfare of the large investors is hump-shaped in ESG disclosure precision. Third, although the disclosure policy that maximizes liquidity also maximizes the welfare of small investors, it is not efficient because it may harm the welfare of large investors.

Suggested Citation

  • Ji, Yucheng & Xu, Weijun & Zhao, Qi & Jia, Zecheng, 2023. "ESG disclosure and investor welfare under asymmetric information and imperfect competition," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:pacfin:v:78:y:2023:i:c:s0927538x23000483
    DOI: 10.1016/j.pacfin.2023.101982
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    References listed on IDEAS

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    1. Mingyao Cao & Keyi Duan & Haslindar Ibrahim, 2023. "Local Government Debt and Its Impact on Corporate Underinvestment and ESG Performance: Empirical Evidence from China," Sustainability, MDPI, vol. 15(14), pages 1-18, July.

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    More about this item

    Keywords

    ESG disclosure; Heterogeneous valuations; Liquidity; Welfare;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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