Enhancing environmental reporting: A study on the role of narrative disclosure, firm‐ and country‐level incentives

Abstract Moving from the ongoing debate on the benefits of mandating environmental reporting, this paper provides an analysis of the role of narrative information quality in enhancing environmental reporting, considering the moderating effect of firm‐level and country‐level incentives. We examine an international sample of listed firms belonging to an environmental‐sensitive industry and construct disclosure indices based on a content analysis of the company's reporting. Results reveal that mandatory narrative information quality is positively associated with the quality of environmental reporting displaying a credibility effect beyond earnings quality. Country‐level factors that increase the demand for environmental information weaken this relation by reducing the marginal benefit of disclosing environmental information. Our approach advances existing literature on the link between CSR and financial reporting and highlights the unintended consequences of mandating environmental reporting.