Does the market react to mandating ESG disclosure? A regression discontinuity based evidence

This study examines the stock market reaction to the recently adopted European Union Directive 95/2014 on mandating certain entities to disclose nonfinancial information, commonly termed environment, social and governance (ESG) disclosure. Owing to the cost burden of small and medium-sized enterprises, previously voluntarily disclosed information is now mandated only for large undertakings. This size-based directive provides an opportunity to apply a regression discontinuity design, the quasi-experimental research approach. Using a sample of European firms, the study finds that firms on both sides of the threshold react negatively to the directive, with an insignificant difference in these negative market reactions. These findings potentially contribute to the existing literature by documenting new evidence of size-based regulations using a unique approach, indicating that a wider market reacts negatively, irrespective of size, which the directive considered as the basis for compliance. The novelty of this study refers to the application of the unique regression discontinuity design for an event study to exploit the size-based nature of the directive.