Based on a sample of 238,0000 firm-year observations, representing 31,000 companies in 60 countries between 1996 and 2023, researchers found that mandatory ESG disclosure “significantly reduces” the risk of future stock price crashes.
The study was authored by Md Al Mamun (La Trobe University), Balasingham Balachandran (Monash University Malaysia), Darniya Prabu (Monash University Malaysia), Shruti R (Indian Institute of Management Kozhikode) and Han Zhou (Monash University Malaysia).
They write: “Mandatory ESG adoption reduces tax avoidance and improves ESG performance, consistent with enhanced transparency and stronger monitoring as mechanisms through which mandatory disclosure mitigates crash risk.”
“Overall our findings suggest that the effectiveness of mandatory ESG disclosure depends on both the institutional environment and regulatory design, highlighting the complementary roles of disclosure mandates and credible enforcement in reducing the risk of future stock price crashes across diverse institutional settings,” the report concludes.