Environmental and social disclosure, managerial entrenchment, and investment efficiency

Hong Kim Duong, Ying Wu, Eduardo Schiehll and Hong Yao

Journal of Contemporary Accounting and Economics, 2024, vol. 20, issue 3

Abstract: This study investigates the effect of environmental and social (E&S) disclosure and managerial entrenchment on investment efficiency. E&S disclosure increases not only capital accessibility but also external monitoring of entrenched managers’ actions. We develop a theoretical model that demonstrates how these benefits and costs of firms’ voluntary E&S disclosure affect investment efficiency. Using a large sample of U.S.-listed firms over the period 2016–2022, we test the model’s predictions and provide empirical evidence suggesting that E&S disclosure is positively associated with investment efficiency and that this effect is stronger for firms with lower managerial entrenchment or those disclosing more financially material E&S information. Our study contributes to the investment efficiency literature by demonstrating the relevance of an incentive-compatible mechanism reflecting managers’ choice of E&S voluntary disclosure to the efficient capital allocation.

Keywords: Investment efficiency; Sustainability reporting; Managerial entrenchment; Financial materiality; Agency theory; E&S disclosure (search for similar items in EconPapers)
JEL-codes: G30 M14 M42 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:20:y:2024:i:3:s1815566924000353

DOI: 10.1016/j.jcae.2024.100435

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