Mandatory versus voluntary non-financial reporting: reporting practices and economic consequences

Non-financial reporting mandates are considered in many jurisdictions, with the European Union (EU) already having a mandate in place: Directive 2014/95/EU (“the Directive,” henceforth). Previous studies indicate that the Directive has achieved its goal of enhancing non-financial transparency, resulting in declines in firm value. We find that the transparency enhancements are concentrated in firms that voluntarily start non-financial reporting in anticipation of the Directive's entry-into-force date, without these firms facing net costs associated with reporting. In contrast, firms that only report when mandated are more likely to provide boilerplate disclosures, consistent with facing a negative cost–benefit trade-off of reporting, leading them to experience increased information asymmetries. Our results suggest that the flexibility embedded in and lack of enforcement of the Directive renders it ineffective in promoting non-financial transparency among firms with weak incentives to disclose meaningful information.