Positive and Negative Peer Effects of ESG Disclosure: Evidence from China’s Selective Mandatory Disclosure Regime

Synopsis The research problem This study examined industry peer effects under China’s selective mandatory environmental, social, and governance (ESG) disclosure regime, where a subset of firms is required to provide ESG disclosures. Motivation Prior research has shown that peer firms influence a firm’s disclosure decisions in varying ways, with both positive and negative peer effects documented. The mixed findings in the literature may be attributed to the examination of different types of disclosures. By focusing on China’s selective mandatory ESG disclosure regime, this study aimed to investigate whether both positive and negative peer effects exist when analyzing the same type of disclosure, thereby addressing a gap in the existing literature. The test hypotheses We examined whether there is a positive (negative) association between the proportion of industry peers making mandatory ESG disclosures and the propensity of nonmandated firms to initiate (continue) their own voluntary ESG disclosures. Target population We utilized a sample of Chinese A-share firms from 2010[Formula: see text]to 2019, including both mandated and nonmandated firms under the selective mandatory ESG disclosure regime. Adopted methodology We employed logit regressions, ordinary least squares (OLS) regressions, and a combination of propensity score matching (PSM), entropy balancing (EB), and difference-in-differences (DID) estimation. Analyses We investigated the relationship between the proportion of mandatory disclosers in an industry and the propensity of nonmandated peers to initiate voluntary ESG disclosure. We also examined whether nonmandated firms that already provide ESG disclosures voluntarily are more likely to discontinue these disclosures when the proportion of mandatory disclosers in their industry is high. Additionally, we conducted several cross-sectional tests, consequences tests, and robustness tests. Findings We found that nonmandated firms increase their propensity to initiate ESG disclosure voluntarily when the proportion of firms making mandatory ESG disclosures in the same industry is greater, consistent with a positive peer effect. Further, the positive peer effect is stronger for firms with low political legitimacy, poor information environment, or high idiosyncratic risk. As the proportion of mandatory industry peers increases, firms that already provide ESG disclosures voluntarily are more likely to discontinue their disclosure, consistent with a negative peer effect, where the discontinuing firms free ride on the mandatory ESG disclosures of their peers. Overall, our evidence suggests that mandatory ESG disclosure is associated with both positive and negative peer effects.