Does good quality disclosure need good quality regulation? The case of 2014/95/ EU Directive

Adopted recently in the European Union (EU), the Non-Financial Reporting Directive (NFRD) requires companies with more than 500 employees to disclose the information they consider relevant to their business relating to environmental matters, social aspects, anti-corruption, and human rights issues, diversity on board of directors, etc. This study investigates the consequences of the directive adoption by exploring its impact on both corporate social responsibility (CSR) disclosure and information asymmetry (IA). The sample consists of 832 publicly listed companies in the EU for the period 2014-2018. The Bloomberg ESG disclosure score is used as a proxy for CSR disclosure. Relative bid-ask spreads, the Amihud illiquidity metric, and the proportion of zero daily stock returns are used as proxies for IA. Based on a difference-in-differences estimation, the results show that the NFRD adoption positively impacted CSR disclosure as a whole and environmental, social, and governance disclosure considered individually. The results also show that increased CSR disclosure due to the NFRD adoption is associated with decreased information asymmetry. This suggests that the NFRD adoption was truly beneficial to market participants. Additional investigations show that countries with more stringent disclosure requirements than the NFRD requirements exhibit higher growth in CSR disclosures. Lastly, the NFRD adoption's impact is stronger for firms that used to disclose less non-financial information before NFRD adoption than high disclosing firms prior to the adoption. The results further reveal that high disclosing firms before the NFRD adoption lowered their environmental and governance disclosure after adopting NFRD to match the directive requirements.