Corporate Finance and Environmental, Social, and Governance (ESG) Practices

Gherghina, Ştefan Cristian (Ed.) Book Corporate Finance and Environmental, Social, and Governance (ESG) Practices Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Gherghina, Ştefan Cristian (Ed.) (2024) : Corporate Finance and Environmental, Social, and Governance (ESG) Practices, ISBN 9783725819270, MDPI - Multidisciplinary Digital Publishing Institute, Basel, https://doi.org/10.3390/books978-3-7258-1928-7 This Version is available at: https://hdl.handle.net/10419/312697 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ mdpi.com/journal/jrfm Special Issue Reprint Corporate Finance and Environmental, Social, and Governance (ESG) Practices Edited by Ştefan Cristian Gherghina Corporate Finance and Environmental, Social, and Governance (ESG) Practices Corporate Finance and Environmental, Social, and Governance (ESG) Practices Editor S ,tefan Cristian Gherghina Basel •Beijing •Wuhan •Barcelona •Belgrade •Novi Sad •Cluj •Manchester Editor S ,tefan Cristian Gherghina Bucharest University of Economic Studies Bucharest Romania Editorial Office MDPI AG Grosspeteranlage 5 4052 Basel, Switzerland This is a reprint of articles from the Special Issue published online in the open access journal Journal of Risk and Financial Management (ISSN 1911-8074) (available at: https://www.mdpi.com/ journal/jrfm/special issues/YOP4UZRED3). For citation purposes, cite each article independently as indicated on the article page online and as indicated below: Lastname, Firstname, Firstname Lastname, and Firstname Lastname. Article Title. Journal Name Year, Volume Number, Page Range. ISBN 978-3-7258-1927-0 (Hbk) ISBN 978-3-7258-1928-7 (PDF) doi.org/10.3390/books978-3-7258-1928-7 © 2024 by the authors. Articles in this book are Open Access and distributed under the Creative Commons Attribution (CC BY) license. The book as a whole is distributed by MDPI under the terms and conditions of the Creative Commons Attribution-NonCommercial-NoDerivs (CC BY-NC-ND) license. Contents About the Editor .............................................. vii S ,tefan Cristian Gherghina Corporate Finance and Environmental, Social, and Governance (ESG) Practices Reprinted from: J. Risk Financial Manag. 2024,17, 308, doi:10.3390/jrfm17070308 .......... 1 Banu Dincer and Caner Dincer Insights into Sustainability Reporting: Trends, Aspects, and Theoretical Perspectives from a Qualitative Lens Reprinted from: J. Risk Financial Manag. 2024,17, 68, doi:10.3390/jrfm17020068 .......... 7 Nguyen La Soa, Do Duc Duy, Tran Thi Thanh Hang and Nguyen Dieu Ha The Impact of Environmental Accounting Information Disclosure on Financial Risk: The Case of Listed Companies in the Vietnam Stock Market Reprinted from: J. Risk Financial Manag. 2024,17, 62, doi:10.3390/jrfm17020062 .......... 23 Sun-Keun Yoo and Se-Hak Chun The Effects of Corporate Financial Disclosure on Stock Prices: A Case Study of Korea’s Compulsory Preliminary Earnings Announcements Reprinted from: J. Risk Financial Manag. 2023,16, 504, doi:10.3390/jrfm16120504 .......... 41 Ahmed Saber Moussa and Mahmoud Elmarzouky Does Capital Expenditure Matter for ESG Disclosure? A UK Perspective Reprinted from: J. Risk Financial Manag. 2023,16, 429, doi:10.3390/jrfm16100429 .......... 50 Ghouma Ghouma, Hamdi Becha, Maha Kalai, Kamel Helali and Myriam Ertz Do IFRS Disclosure Requirements Reduce the Cost of Equity Capital? Evidence from European Firms Reprinted from: J. Risk Financial Manag. 2023,16, 374, doi:10.3390/jrfm16080374 .......... 69 Laila Mohamed Alshawadfy Aladwey and Raghad Abdulkarim Alsudays Does the Cultural Dimension Influence the Relationship between Firm Value and Board Gender Diversity in Saudi Arabia, Mediated by ESG Scoring? Reprinted from: J. Risk Financial Manag. 2023,16, 512, doi:10.3390/jrfm16120512 .......... 88 Balamuralikrishnan Chakkravarthy, Francis Gnanasekar Irudayasamy, Arul Ramanatha Pillai, Rajesh Elangovan, Natarajan Rengaraju and Satyanarayana Parayitam The Relationship between Promoters’ Holdings, Institutional Holdings, Dividend Payout Ratio and Firm Value: The Firm Age and Size as Moderators Reprinted from: J. Risk Financial Manag. 2023,16, 489, doi:10.3390/jrfm16110489 ..........109 Jagjeevan Kanoujiya, Pooja Jain, Souvik Banerjee, Rameesha Kalra, Shailesh Rastogi and Venkata Mrudula Bhimavarapu Impact of Leverage on Valuation of Non-Financial Firms in India under Profitability’s Moderating Effect: Evidence in Scenarios Applying Quantile Regression Reprinted from: J. Risk Financial Manag. 2023,16, 366, doi:10.3390/jrfm16080366 ..........124 Mochamad Roland Perdana, Achmad Sudiro, Kusuma Ratnawati and Rofiaty Rofiaty Does Sustainable Finance Work on Banking Sector in ASEAN?: The Effect of Sustainable Finance and Capital on Firm Value with Institutional Ownership as a Moderating Variable Reprinted from: J. Risk Financial Manag. 2023,16, 449, doi:10.3390/jrfm16100449 ..........144 v Vinay Khandelwal, Prasoon Tripathi, Varun Chotia, Mohit Srivastava, Prashant Sharma and Sushil Kalyani Examining the Impact of Agency Issues on Corporate Performance: A Bibliometric Analysis Reprinted from: J. Risk Financial Manag. 2023,16, 497, doi:10.3390/jrfm16120497 ..........163 Ainulashikin Marzuki, Fauzias Mat Nor, Nur Ainna Ramli, Mohamad Yazis Ali Basah and Muhammad Ridhwan Ab Aziz The Influence of ESG, SRI, Ethical, and Impact Investing Activities on Portfolio and Financial Performance— Bibliometric Analysis/Mapping and Clustering Analysis Reprinted from: J. Risk Financial Manag. 2023,16, 321, doi:10.3390/jrfm16070321 ..........185 Maria Richert and Marek Dudek Selected Problems of the Automotive Industry—Material and Economic Risk Reprinted from: J. Risk Financial Manag. 2023,16, 368, doi:10.3390/jrfm16080368 ..........204 vi About the Editor S ,tefan Cristian Gherghina S ,tefan Cristian Gherghina, PhD. Habil., is a Professor at the Department of Finance, the Faculty of Finance and Banking, and a PhD. supervisor at the Finance Doctoral School, the Bucharest University of Economic Studies, Romania. His areas of interest pertain to corporate finance and governance, quantitative finance, portfolio management, and sustainable development. He has authored and co-authored several books and articles published in top journals and has discussed his studies at many international conferences. He serves as a referee for various leading journals while also being an Editorial Board Member of Economies and the Journal of Risk and Financial Management, among other journals indexed by Clarivate Analytics, the Web of Science, the Social Sciences Citation Index (SSCI), the Science Citation Index Expanded (SCIE), the Emerging Sources Citation Index (ESCI), and other reputed international databases. vii J. Risk Financial Manag. 2024,17, 308 Veltri, Stefania, Maria Elena Bruni, Gianpaolo Iazzolino, Donato Morea, and Giovanni Baldissarro. 2023. Do ESG factors improve utilities corporate efficiency and reduce the risk perceived by credit lending institutions? An empirical analysis. Utilities Policy 81: 101520. [CrossRef] Wang, Haijun, Shuaipeng Jiao, and Chao Ma. 2024. The impact of ESG responsibility performance on corporate resilience. International Review of Economics & Finance 93: 1115–29. [CrossRef] Wong, Jin Boon, and Qin Zhang. 2024. ESG reputation risks, cash holdings, and payout policies. Finance Research Letters 59: 104695. [CrossRef] Xue, Qinyuan, Yifei Jin, and Cheng Zhang. 2024. ESG rating results and corporate total factor productivity. International Review of Financial Analysis 95: 103381. [CrossRef] Xue, Rui, Hongqi Wang, Yuhao Yang, Martina K. Linnenluecke, Kaifang Jin, and Cynthia Weiyi Cai. 2023. The adverse impact of corporate ESG controversies on sustainable investment. Journal of Cleaner Production 427: 139237. [CrossRef] Zhang, Cong, Umar Farooq, Dima Jamali, and Mohammad Mahtab Alam. 2024a. The role of ESG performance in the nexus between economic policy uncertainty and corporate investment. Research in International Business and Finance 70: 102358. [CrossRef] Zhang, Hua, Huaqing Zhang, Li Tian, Shengli Yuan, and Yongqian Tu. 2024b. ESG performance and litigation risk. Finance Research Letters 63: 105311. [CrossRef] Zhang, Yingying, Dongqi Wan, and Lei Zhang. 2024c. Green credit, supply chain transparency and corporate ESG performance: Evidence from China. Finance Research Letters 59: 104769. [CrossRef] Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content. 6 Citation: Dincer, Banu, and Caner Dincer. 2024. Insights into Sustainability Reporting: Trends, Aspects, and Theoretical Perspectives from a Qualitative Lens. Journal of Risk and Financial Management 17: 68. https://doi.org/10.3390/ jrfm17020068 Academic Editor: ¸Stefan Cristian Gherghina Received: 14 December 2023 Revised: 2 February 2024 Accepted: 7 February 2024 Published: 10 February 2024 Copyright: © 2024 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). Journal of Risk and Financial Management Article Insights into Sustainability Reporting: Trends, Aspects, and Theoretical Perspectives from a Qualitative Lens Banu Dincer and Caner Dincer * Department of Business Administration, Faculty of Economic and Administrative Sciences, Galatasaray University, Çıragan Cad. No: 36, Ortaköy, Istanbul 34349, Turkey; [email protected] *Correspondence: [email protected] Abstract: This review aims to provide a comprehensive synthesis of the coverage of sustainability reporting (SR) aspects within the corpus of qualitative SR literature. It seeks to elucidate the theoretical and conceptual foundations that have guided the trajectory of the sustainability field and illuminate the qualitative methodologies used in this body of literature. Employing a systematic review methodology, this study undertakes an exhaustive examination of 242 selected empirical studies on sustainability reporting conducted during the period spanning from 2001 to 2022. The noteworthy contribution of this review to the realm of sustainability research lies in its identification of unexplored and underexplored domains that merit attention in forthcoming investigations. These include but are not limited to employee health and safety practices, product responsibility, and gender dynamics. While stakeholder theory and institutional theory have been dominant theories within the selected literature, the exploration of moral legitimacy remains largely underinvestigated. It is essential to underscore that this review exclusively encompasses qualitative studies, owing to the richness and versatility inherent in qualitative research methods. This deliberate selection enables researchers to employ diverse methodological and theoretical frameworks to gain a profound understanding of engagement within the practice of sustainability reporting. This review introduces an interesting approach by considering the thematic scope, as well as theoretical and methodological choices, observed across the selected studies. Keywords: sustainability reporting; non-financial reporting; systematic review; sustainability accounting; legitimacy theory; stakeholder theory 1. Introduction The multitude of environmental, economic, and social crises spanning the last 40 years has precipitated a heightened call for research in the field of SR (Carnegie 2012; Humphrey and Gendron 2015; Unerman and Bennett 2004; Qian et al. 2021). Sustainability reporting (SR) research has gained substantial momentum due to its consequential implications in social, economic, and political domains (Antonini et al. 2020; Cho and Giordano-Spring 2015; Joseph 2012). Originally based on environmental effects (Arunachalam et al. 2016; Birchall et al. 2015; Michelon and Rodrigue 2015), SR expanded rapidly to cover multiple areas. One such pioneering step in this regard is the triple bottom line (TBL), which advocates for the incorporation of planet, people, and profit as focal themes for achieving comprehensive and transparent reporting practices (Javed et al. 2021; Dumay et al. 2016). Accordingly, scholars have profited from these three dimensions in their works conducted from many perspectives (O’Sullivan and O’Dwyer 2015; Solomon et al. 2011; Williams and Adams 2013). This review aims to offer a perspective on the aspects of sustainability reporting that have been addressed within a designated body of literature and elucidates the qualitative methodologies that have been harnessed to tackle these scholarly inquiries. Sustainability reporting is driven by the interconnectedness of environmental, social, and economic factors. It encompasses preserving ecosystems, mitigating climate change, J. Risk Financial Manag. 2024,17, 68. https://doi.org/10.3390/jrfm17020068 https://www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2024,17,68 and responsible resource management. Social equity, economic stability, and global collaboration are integral aspects. Prioritizing human health, regulatory adherence, consumer preferences for sustainability, and a focus on long-term viability collectively define the ethos of sustainability, ensuring a resilient and thriving future. However, potential drawbacks include the risk of greenwashing, where organizations may provide misleading information, undermining the credibility of reporting (Hahn and Kühnen 2013). The lack of a universal standard can result in inconsistencies, hindering meaningful comparisons. Selective reporting, resource intensity, and limited stakeholder engagement also pose challenges. A short-term focus and the complexity of reporting may contribute to incomplete or confusing narratives. In essence, while sustainability reporting offers advantages, addressing issues such as greenwashing and improving standardization are crucial in order to maximize its effectiveness (Dunbar et al. 2021). Accordingly, sustainability reporting, despite enhancing transparency, brings inherent risks that can cause reputational damage, legal consequences, financial impacts, and stakeholder discontent. Operational challenges, inconsistency in reporting frameworks, and data security concerns further complicate the landscape. The complexity of reporting can overwhelm organizations, leading to errors (Gray 2006). Mitigating these risks requires careful consideration, adherence to standards, and a commitment to authenticity in reporting (Ioannou and Serafeim 2017). Therefore, while prior reviews have concentrated on diverse aspects such as sustainability performance, measurement, and theoretical frameworks (Chung and Cho 2018); drivers for SR adoption and the quality of reporting (Hahn and Kühnen 2013); different formats and determinants of SR (Dienes et al. 2016); the influence of management control on SR (Traxler et al. 2020) ; and the extent of integrated reporting (IR), this review distinguishes itself by adopting a unique approach. Rather than focusing exclusively on synthesizing various antecedents or a singular facet of SR, this review aims to investigate sustainability reporting’s key themes, aspects, theoretical foundations, and methodological choices. This epistemological emphasis facilitates the coherent formulation of research inquiries within a logical framework, thereby aiding researchers in comprehending the nature and scope of sustainability aspects and guiding their methodological decisions. In recent years, the landscape of sustainability reporting has witnessed significant regulatory changes. Governments and international bodies have recognized the vital role of transparent reporting in achieving global sustainability goals. These changes include, for instance, the implementation of stricter environmental standards, mandates for corporate social responsibility disclosures, and an emphasis on ethical business practices. This study is motivated by the necessity of analyzing the impact of these regulatory shifts on the methodologies and focus of sustainability reporting research. Despite the growing body of SR literature, there remain notable gaps that require attention. Prior reviews have concentrated on diverse aspects such as sustainability performance, measurement, and theoretical frameworks (Chung and Cho 2018). However, gaps persist in our understanding of the nuanced interactions between different dimensions of sustainability reporting, the effectiveness of emerging reporting formats, and the integration of sustainability into core business strategies. This study aims to address these gaps by adopting a holistic approach, synthesizing existing knowledge, and identifying avenues for further exploration. Moreover, emerging trends in sustainability reporting, such as the rise of integrated reporting (IR) and the increasing emphasis on social impact metrics, present new challenges and opportunities. This study is driven by a commitment to staying at the forefront of these trends, examining their implications for research methodologies, and contributing insights that can guide future practices. Furthermore, the ever-expanding scope of sustainability reporting, from its roots in environmental concerns to encompassing diverse dimensions like social responsibility and economic viability, highlights the need for a comprehensive examination. The dynamic nature of sustainability reporting, coupled with recent regulatory changes, gaps in previous research, and emerging trends, underscores the importance of this study. By delving into these aspects, this research aims to provide a comprehensive understanding of the 8 J. Risk Financial Manag. 2024,17,68 evolving landscape of sustainability reporting and its implications for academia, businesses, and policy makers and to explore not only what sustainability reporting includes but also why certain themes and aspects have gained prominence over time. This review takes into consideration only qualitative empirical studies published in peer-reviewed journals. This selective boundary is motivated by several considerations. First, the field of SR is characterized by a plethora of qualitative research methodologies (Adams and Larrinaga-Gonzalez 2019; Parker and Northcott 2016). Secondly, the abundant information inherent in qualitative research incites researchers to use a diverse range of approaches for a deeper and broader comprehension of SR engagement (Parker et al. 2011). Lastly, qualitative research affords the capacity to delve into the processes, contextual differences, and complex dynamics (Parker 2008; Parker 2011). The nature of qualitative research provides an opportunity to closely scrutinize the impact of SR. The remainder of this paper is organized as follows. In Section 2, we outline the research. Then, we report our findings, covering the aspects of sustainability reporting in the literature, theories used in the literature, and methodologies employed. Tin the final sections of the paper, we delve into a comprehensive discussion of the review findings, provide a conclusion, and suggest avenues for future research. 2. Materials and Methods The current review employed a systematic review approach to systematically detect, select, and evaluate the most pertinent studies aligned with the objectives of this review as suggested by many scholars in the field (Tranfield et al. 2003). Concerning the concept of sustainability, various terms, such as environmental, social, and governance (ESG) reporting; corporate citizenship, corporate social responsibility (CSR); and social accounting, are often utilized interchangeably (Parker 2008; Gray 2014). Despite the assortment of terminologies in use, all these operational definitions fundamentally share the same essence: the communication of information about an organization’s environmental, economic, and social performance to a diverse array of stakeholders. Another relatively recent trend in reporting is integrated reporting (IR), wherein both financial and non-financial forms of information are presented in a unified format. The non-financial facet of IR is the primary focal point of sustainability research (Gleeson-White 2014). The various terms used in the literature to define the diverse conceptualizations and applications of SR discussed above (CSR, social accounting, corporate citizenship, ESG reporting, integrated reporting, GRI, TBL, and sustainability) were incorporated into the search string used during the abstract keyword search. To broaden the search on sustainability reporting, the words reporting and disclosure were added to the other terms for possible combinations of terms including “corporate social responsibility”, “global reporting initiative”, “sustainable development”, “sustainability”, “triple bottom line”, “integrated”, “environmental”, “corporate citizenship”, “GRI”, “TBL”, “social accounting”, “IR”, “sustainable development”, “environment social governance”, and “ESG”. To narrow the area of the research, keywords such as “qualitative”, “exploratory study”, “explanatory study”, and “interpretive” were added to the search strings using the Boolean operator “and”, limiting the search only to qualitative research. The search was conducted in April 2023 across four distinguished citation databases: Scopus, Business Source Complete, ProQuest Business, and Web of Science. The selection of these databases adheres to the precedent set by previous systematic reviews in the field (Adams and Larrinaga-Gonzalez 2019; Hinze and Sump 2019) and provided us with a coherent sample of articles. Furthermore, our research is delimited to articles published in the English language during the last two decades (2001–2022). This temporal constraint was imposed because publications with a sustainability focus during the early 2000s had limited and inconsequential impacts. In all databases, approximately 6% of the articles were published between 2001 and 2010. This trend aligns with the observations made by (Tranfield et al. 2003) in their examination of engagement research on corporate social responsibility (CSR). As noted by (Qian et al. 2021; Javed et al. 2021), the most 9 J. Risk Financial Manag. 2024,17,68 substantial advancements in sustainability have occurred in the past two decades. Therefore, the exclusion of research published before 2001 is adequate to review the body of literature on sustainability reporting (SR). The consolidation of all articles in one list yielded a total of 852 articles. These articles underwent another elimination round to select the empirical studies, i.e., those grounded in experiences, real-life observations, phenomena, and empirical evidence. Consequently, articles categorized as reviews, prescriptive or descriptive pieces, commentary, or general discussions were determined to be non-empirical and excluded from the sample. Moreover, articles that did not primarily center on non-financial disclosures or sustainability were also excluded. Finally, duplicate papers in these four databases were eliminated, a total of 14 articles using mixed methods were added to the corpus for review, and the selection process resulted in a total of 242 articles for further review and investigation of theoretical frameworks and methodologies employed. Figure 1 shows the article selection process. Selected Databases WOS Scopus ProQuest Business SC 141 articles 290 articles 201 articles 220 articles Initial total number of articles after merging the results 852 Total number of articles after eliminating non-qualitative and irrelevant articles 253 Total number of articles after elimination of duplicate items 228 Total number of articles after adding articles using mixed methods 242 Figure 1. Article selection process. Accordingly, the aspects of sustainability reporting empirically explored in the selected literature, qualitative methodologies, and theoretical frameworks are the focus of this systematic review. By addressing these points, this review contributes substantive insights into the contemporary trends and diverse sustainability dimensions. Moreover, it offers guidance with respect to areas warranting further attention, benefiting practitioners and regulators by highlighting the domains where heightened practical and regulatory arrangements are needed (Dumay et al. 2016). 10 J. Risk Financial Manag. 2024,17,68 3. Descriptive Analysis The systematic review procedure resulted in the identification of a total of 242 articles. These articles underwent a subsequent screening phase to elucidate their findings. Initially, all articles were classified based on the disciplinary focus of the journals in which they were published. These focus areas included sustainability, finance, accounting, economics, and management. Further analysis provided a descriptive overview of sustainability reporting publications according to journal focus. Among the chosen articles, 33% (80) were published in journals that prioritize social and environmental accounting, such as “Sustainability”. Conversely, 32% (78) of the articles appeared in journals focused on accounting and related fields. This highlights the notable involvement of accounting scholars in advancing research on sustainability. Furthermore, other journals concentrating on business and management have also made substantial contributions to the development of sustainability research. The descriptive analysis categorized the studies into two broad economic groups: developed and developing economies. This analysis revealed that 64% (155) of the studies were conducted with a focus on developed European economies. Conversely, a relatively smaller portion of empirical studies, totaling 31% (75), focused on emerging economies. This focus on sustainability reporting in the research can be attributed to well-established and stringent regulatory frameworks in place in these countries. These regulations may mandate or encourage businesses to disclose information related to their environmental, social, and governance (ESG) practices. Moreover, developed economies generally have higher levels of awareness and adherence to corporate governance standards. As sustainability reporting is often linked to broader corporate governance practices, researchers may find more data and interest in this area within these economies. Investors and stakeholders in developed and European economies exhibit a higher demand for sustainability-related information. This demand is driven by factors such as socially responsible investing, ethical consumerism, and pressure from advocacy groups. Additionally, researchers may find it more feasible to conduct studies in developed economies due to better access to resources, data, and information. Developed nations typically have more established research institutions, databases, and networks that facilitate comprehensive studies on sustainability reporting. Researchers may prioritize studying these economies to understand and potentially shape global trends in sustainability reporting. Finally, developed and European economies have often been at the forefront of adopting sustainability reporting practices. The maturity of these practices provides a rich ground for researchers to analyze the evolution, effectiveness, and impact of sustainability reporting over time. While there is a predominant focus on developed and European economies, it is essential for future research to broaden its scope to include emerging markets and developing economies. This expansion would contribute to a more comprehensive understanding of the global landscape of sustainability reporting and address the need for inclusive and diverse perspectives. 3.1. Description of Aspects of Qualitative Sustainability Reporting Sustainability has garnered substantial attention within organizations since the beginning of the millennium, driven by global recognition of the enduring impact of business activities on both current and future generations (Bebbington and Unerman 2018). Consequently, the United Nations introduced a comprehensive definition of sustainability, stating that any decision that “meets the needs of the present without compromising the ability of future generations to meet their own needs” qualifies as a sustainable decision or action. Since the publication of this report, the concept of sustainability has expanded to encompass social, environmental, and economic dimensions significantly influenced by human decisions. At the organizational level, Elkington (Elkington 2004) developed the triple bottom line (TBL) framework, which is grounded in seven drivers of sustainability progress. The TBL concept offers valuable guidance and principles for defining environmental, social, and economic responsibilities within organizations (Gimenez et al. 2012; 11 J. Risk Financial Manag. 2024,17,68 Rambaud and Richard 2015). The TBL concept encompasses the social, environmental, and economic interactions of an organization (Gray 2014). The triple bottom line (TBL) approach offers organizations a comprehensive and well-organized framework for the implementation, reporting, and disclosure of various sustainability practices. One notable development stemming from the TBL is the people, planet, and profit (3Ps) reporting framework. The widespread acceptance of the TBL is shown by its adoption as a reference model by the Global Reporting Initiative (GRI). Existing research literature supports the notion that the GRI is recognized as the most rigorous guideline for sustainability reporting (SR) (Boiral 2013) and has become the standard framework for SR (Bananuka et al. 2019; Bananuka et al. 2022; Petcharat and Zaman 2019). The GRI’s classification of broader sustainability dimensions into specific categories and subcategories has brought precision to the focus of academic research, enabling researchers to contribute to specific sustainability dimensions. Accordingly, the review shows that researchers followed the TBL approach and that the environment (planet) was the frame used in 25% (60) of the selected literature, with a general focus on climate change, carbon accounting, water management, and biodiversity. The social (people) frame was used in 17% (41) of the articles, with a focus on employees, employee reporting, and social disclosures. Finally, the economic (profit) frame was used in 10% (24) of the works, taking into consideration mostly the tax issues related to sustainability and CSR. Other works (48%) were based on multiple aspects of sustainability reporting. 3.2. Main Theoretical Frameworks in the Literature A theoretical framework is the lens through which researchers view, explain, and comprehend reality (Anfara and Mertz 2014). It forms the foundation for a researcher’s methodological choices. Consequently, different theoretical perspectives exist to explain sustainability reporting (SR) as either an organizational change process or a stakeholder management process. The primary theoretical frameworks in the selected articles were legitimacy theory (LT), stakeholder theory (ST), and institutional theory (IT). The following section depicts the three important theories used in the selected literature. 3.2.1. Stakeholder Theory SR encompasses many groups, extending beyond just funding providers (Gray 2006). In the context of SR, stakeholders are “Entities, associations, and individuals that could be affected by the actions and decisions of the reporting organization. Stakeholders include employees, workers, suppliers, the community, activists, institutional investors, and civil society organizations” (Gray 2006). The complexity and dynamism associated with the identification of diverse stakeholders deal with five distinct organization–stakeholder relationships in environmental reporting: demanding, promoting, committing, donating, and preventing (Gray 2006; Onkila et al. 2014). Stakeholder theory facilitates communication between organizations and stakeholders through four facets: descriptive, instrumental, normative, and managerial aspects. 3.2.2. Legitimacy Theory This theory posits that an organization aligns its actions with socially desirable “norms, values, beliefs, and definitions” (Suchman 1995). Suchman (1995) affirmed that organizations seek legitimacy through pragmatic, moral, and cognitive rationales. This review synthesized the selected literature according to these three rationales. A considerable number of articles (36 articles, constituting 15%) employed LT as a foundational framework. Table 1 shows the main theories and related approaches in the literature. 12 J. Risk Financial Manag. 2024,17,68 Table 1. Main theories and related approaches in the literature. Theory Main Theoretical Approaches Research Subjects Examples from the Selected Literature Stakeholder Theory Descriptive Instrumental Current stakeholder management situation and needs (Michelon and Rodrigue 2015) Normative Managerial Stakeholder management framing and management issues (Antonini et al. 2020; Belal et al. 2015) (Finau et al. 2018; Onkila et al. 2014) Legitimacy Theory Pragmatic Relationships with third parties and the community Moral Communication (Killian and O’Regan 2016; Morrison and Lowe 2021) Cognitive Logistics and other system improvements for sustainability (Javed et al. 2021) Institutional Theory Coercive Mimetic Regulations and governments Corporate performance measurement (Cho and Giordano-Spring 2015; Chung and Cho 2018; Tranfield et al. 2003) Normative Accounting bodies, professions, and standards (Qian et al. 2021; Fraser 2012; Qian et al. 2011) Others Socio-political Employees, reforms, regulations, and mixed subjects (Biondi et al. 2020; Tanima et al. 2020) 3.2.3. Institutional Theory The escalating trend in sustainability reporting as a response to economic pressures is a subject of debate. Hahn and Kühnen (2013) showed mixed empirical findings regarding economic pressure as a determinant of SR. However, they also showed that social and cultural pressures may push organizations to adopt SR. Accordingly, organizations institutionalize specific sustainability norms, values, and beliefs in their operations. This institutionalization is often characterized by isomorphism, encompassing coercive, mimetic, and normative isomorphism, leading to a homogenization of organizational practices (DiMaggio and Powell 1983). 3.3. Methodological Approaches in Qualitative Sustainability Reporting Research Researchers employ various qualitative research methods in their sustainability studies, often selecting the approach based on their specific research areas (Creswell and Poth 2017) . Utilizing Suddaby and Greenwood’s (2008) methodological framework for examining institutional change, this review concentrates on three distinct techniques: interpretive, historical, and dialectical techniques. The multivariate methodology was excluded from consideration, as the review aimed to synthesize and identify gaps specifically in qualitative methodologies within SR research. The interpretive approach involves a detailed examination of stakeholders’ perceptions and interpretations of institutional practices and structures (Suddaby and Greenwood 2008). It seeks to uncover how and why structural changes emerge. This approach employs content analysis, case studies, investigation of documents and websites, a semiotic lens, and interviews to shed light on the intention and progress of sustainability reporting, stakeholders’ perception, stakeholders’ framing, and SR’s performance and institutionalization. The articles using this methodology accounted for 75% (180) of the selected literature, and the leading articles using this methodological framework are (e.g., Boiral 2013; Gray 2014; Dillard and Pullman 2017; Tanima et al. 2020; Cuckston 2013; Tweedie and Martinov-Bennie 2015 ). The historical approach considers institutions as outcomes of multiple phenomena influenced by many interacting causes (Brennan and Merkl-Davies 2014; Al Mahameed et al. 2020). This approach aims to determine various stages of change in organizations using historical data and phenomena to explain institutional and organizational arrangements. This approach is mainly based on document analysis and seeks historical evidence of 13 J. Risk Financial Manag. 2024,17,68 tensions in current SR practices. Many scholars (e.g., Albu et al. 2020; Khan and Ali 2023; Khan 2014) used this methodology in the selected literature. The dialectical approach adopts a critical perspective, assuming that organizations are formed by power relations in society (Al-Htaybat and von Alberti-Alhtaybat 2018). It delves into the influence of power dynamics on the formation and evolution of institutions. The articles in the sample using this approach deal with power and politics, carbon accounting, climate issues, and stakeholder management at times of crisis (e.g., Albu et al. 2020; Belal et al. 2015; Bowen and Wittneben 2011). They account for 15% (36) of the sample. Other works can be classified as using mixed methodologies. 4. Discussion This study sought to offer an overview of the extent to which sustainability aspects are investigated within a chosen body of qualitative literature. The theoretical approaches used in sustainability research, the qualitative research methods utilized within the literature, and major aspects in this line of research were examined. In the following section, we examine the findings and their significance. 4.1. Sustainability Reporting Aspects The review reveals that among the three dimensions of sustainability (environmental, social, and economic), the environmental dimension is the most extensively studied in the selected literature. Topics within the environmental dimension include climate change and carbon accounting (Boiral 2013), stakeholder influence in environmental standard setting, water accounting and management, and biodiversity governance and valuation (Gray 2006; Suddaby and Greenwood 2008). This heightened focus is likely a response to the increasing urgency to address environmental degradation and align business practices with sustainability goals. Conversely, the social and economic dimensions have received relatively less attention, although recent studies indicate a growing trend in these areas. For instance, social aspects explored in recent literature include community engagement in local environmental policy making, responsible investment decisions, social risk assessment related to the supply chain, and workplace community-focused CSR disclosure. Economic aspects include the institutionalization of ESG issues in investment decisions, sustainable product design, and the reconceptualization of multiple capitals (Ashraf and Uddin 2015; Ramya et al. 2020). Additionally, the review shows that a significant portion of the literature (50%, 121) views sustainability reporting as a concept incorporating all three dimensions. Sustainability reporting is viewed as a multifaceted instrument for organizational management and communication, serving the dual purposes of stakeholder engagement and legitimization. This approach aligns with the evolving expectations of stakeholders who seek comprehensive insights into organizational sustainability practices. Sustainability reporting is not merely a disclosure tool but is increasingly recognized as a strategic instrument for organizational management and communication. The integration of ethical concerns further emphasizes the need for companies to showcase their commitment to responsible and ethical business practices (Jámbor and Zanócz 2023). Recent studies, particularly those published after 2018, reveal a shift from an institutional perspective to a social–political paradigm. Contextualization, particularly in emerging economies, has become a prominent trend in SR research. This shift underscores SR’s global significance and the importance of fostering a shared understanding of the subject (Journeault et al. 2021). This shift indicates a broader recognition that sustainability reporting is not solely an institutional practice but is deeply embedded in societal and political contexts. Contextualization reflects a growing awareness of diverse global perspectives and the need for nuanced, culturally relevant approaches to sustainability. However, certain areas remain underexplored in recent literature. Indigenous people’s rights, despite UN emphasis on this issue, have received limited attention, with only a single article shedding light on this topic (Prinsloo and Maroun 2020; Scandurra and Thomas 2023; 14 J. Risk Financial Manag. 2024,17,68 Richard and Odendaal 2021). Moreover, there is a requirement for additional investigation in domains like employee health and safety measures, product responsibility, and gender dynamics. Addressing these gaps is crucial for a more inclusive and comprehensive understanding of the social implications of sustainability reporting. A deep dive into these findings highlights both the progress and the existing gaps in sustainability reporting research. Emphasizing the holistic nature of sustainability, understanding contextual influences, and addressing underexplored areas will contribute to a more robust and impactful sustainability reporting framework. Researchers and practitioners can use these insights to guide future studies, ensuring that sustainability reporting continues to evolve in tandem with global challenges and societal expectations. 4.2. Theories in Selected Literature This review identified the prevalent theories used in exploring various aspects of sustainability reporting (SR). There are two major theories used in the selected works: stakeholder theory (ST) and legitimacy theory (LT), which are used as fundamental theories in qualitative SR research. Approximately 33% (81) of the selected articles employed ST as a primary theoretical framework for their empirical investigations. ST is applied to elucidate how organizations perceive and interact with diverse stakeholder groups. The literature identifies a wide array of stakeholder groups, including social activists, employees, vulnerable societies, investors, suppliers, and indigenous people. For instance, Herremans and Nazari (2016), Belal et al. (2015), and Del Baldo (2017) raised questions about how world trade should embrace environmental responsibility, emphasizing the role of vulnerable societies. Khan and Ali (2023), Erin et al. (2022), and Esteban-Arrea and Garcia-Torea (2022) focused on information disclosure about employees’ rights. Finau et al. (2018) view stakeholder relationships as network peripherals, highlighting stakeholders’ efforts to gain power within organizations. The findings suggest that sustainability reporting is considered a tool for communicating sustainability practices to stakeholders, aligning with its instrumental aspect. The findings also acknowledge the complex and dynamic nature of organization– stakeholder interactions, resonating with sustainability reporting. Legitimacy theory is widely used in the literature. Among studies using LT, the pragmatic aspect is most prevalent, accounting for 87%. The pragmatic perspective interprets actions taken by organizations to address immediate stakeholders. Fraser (2012) and Killian and O’Regan (2016) describe social accounting as a pragmatic legitimacy practice employed by organizations to rebuild relationships with their communities. In summary, ST and LT are prominent theoretical frameworks employed in the selected literature to explore various facets and tensions of SR. ST emphasizes stakeholder interactions and relationships, while LT focuses on organizational efforts to maintain legitimacy through SR practices. These theories provide valuable insights, contributing to our understanding of how organizations perceive and respond to sustainability challenges and stakeholder expectations. This review also uncovers the usage of various aspects of the major theories in the selected literature, shedding light on how the structures and practices of organizations change according to different pressures and influences. These aspects include moral legitimacy, institutional theory (IT), and other critical and interdisciplinary perspectives. Moral legitimacy suggests that organizations undertake actions deemed ethically sound. Despite its alignment with the core purpose of sustainability reporting (SR), this facet has received limited attention in qualitative sustainability research. This review of existing literature underscores the significance of moral legitimacy as an underdeveloped dimension within the realm of sustainability reporting. Institutional theory, specifically coercive, mimetic, and normative pressures, plays a significant role in shaping organizational practices related to SR. Coercive pressures arise from regulatory sources, both formal and informal, and encompass internal and external factors of an organization. This review also shows that crises, whether instigated by human actions or natural events, can im15 J. Risk Financial Manag. 2024,17,68 Tanima, Farzana A., Judy Brown, and Jesse Dillard. 2020. Surfacing the political: Women’s empowerment, microfinance, critical dialogic accounting and accountability. Accounting, Organizations and Society 85: 101–41. [CrossRef] Tarquinio, Lara, and Chiara Xhindole. 2022. The institutionalisation of sustainability reporting in management practice: Evidence through action research. Sustainability Accounting, Management and Policy Journal 13: 362–86. [CrossRef] Tranfield, David, David Denyer, and Palminder Smart. 2003. Towards a methodology for developing evidence-informed management knowledge by means of systematic review. British Journal of Management 14: 207–22. [CrossRef] Traxler, Albert A., Daniela Schrack, and Dorothea Greiling. 2020. Sustainability reporting and management control–a systematic exploratory literature review. Journal of Cleaner Production 276: 122. [CrossRef] Tregidga, Helen. 2013. Biodiversity offsetting: Problematisation of an emerging governance regime. Accounting, Auditing and Accountability Journal 26: 806–32. [CrossRef] Tweedie, Dale, and Nonna Martinov-Bennie. 2015. Entitlements and time: Integrated reporting’s double-edged agenda. Social and Environmental Accountability Journal 35: 49–46. [CrossRef] Unerman, Jeffrey, and Marc Bennett. 2004. Increased stakeholder dialogue and the internet: Towards greater corporate accountability or reinforcing capitalist hegemony? Accounting, Organizations and Society 29: 685–707. [CrossRef] Williams, Sarah J., and Carol A. Adams. 2013. Moral accounting? Employee disclosures from a stakeholder accountability perspective. Accounting, Auditing and Accountability Journal 26: 449–95. [CrossRef] Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content. 22 Citation: La Soa, Nguyen, Do Duc Duy, Tran Thi Thanh Hang, and Nguyen Dieu Ha. 2024. The Impact of Environmental Accounting Information Disclosure on Financial Risk: The Case of Listed Companies in the Vietnam Stock Market. Journal of Risk and Financial Management 17: 62. https://doi.org/10.3390/ jrfm17020062 Academic Editor: ¸Stefan Cristian Gherghina Received: 29 December 2023 Revised: 20 January 2024 Accepted: 31 January 2024 Published: 6 February 2024 Copyright: © 2024 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). Journal of Risk and Financial Management Article The Impact of Environmental Accounting Information Disclosure on Financial Risk: The Case of Listed Companies in the Vietnam Stock Market Nguyen La Soa *, Do Duc Duy, Tran Thi Thanh Hang and Nguyen Dieu Ha School of Accounting and Auditing, National Economics University, Hanoi 100000, Vietnam; [email protected] (D.D.D.); [email protected] (T.T.T.H.); [email protected] (N.D.H.) *Correspondence: [email protected] Abstract: This research study aims to assess the impact of environmental accounting information disclosure on financial risk within the context of Vietnam’s stock market. The data collection process involved 60 non-financial companies, carefully selected from both the pool of 100 Sustainable Companies listed in the “Programme on Benchmarking and Announcing Sustainable Companies in Vietnam (CSI)”, as organized by VBCSD, and companies outside this list. The data span a timeframe from 2018 to 2022. Afterward, we utilize regression models to assess relationships and employ the t-test to evaluate differences. The results indicate that environmental accounting information disclosure has an inverse effect on the financial risk of the current year and the following year. This implies that companies that are more transparent and proactive in reporting their environmental performance are likely to experience decreased financial risk. Furthermore, the results also show differences in financial risk between the group of companies within the “100 Sustainable Companies” list and the group of companies outside this list. This disparity underscores the potential financial benefits of being recognized as a sustainable company. Based on the findings, the research team has provided several recommendations to enhance environmental accounting information disclosure and awareness. Keywords: environmental accounting; environmental accounting information disclosure; financial risk; sustainable companies; CSI 1. Introduction In recent years, issues related to sustainable development, economic development in parallel with social progress, and ensuring environmental sustainability have become significant global concerns. In this context, environmental accounting has emerged to support businesses in fulfilling their environmental responsibilities during their production and operations. Essentially, environmental accounting seeks and provides essential information on environmental-related issues, aiming to enhance the accountability of businesses in their use of resources. In addition, environmental accounting is also a part of accounting aimed at recording, analyzing, and reporting information about a company’s impacts on the environment. Information disclosure has become an indispensable part of public companies, as stakeholders use it to assess the business’s performance. Although there is no unified definition of environmental accounting, according to the International Federation of Accountants (IFAC), environmental accounting is a broad term with many implications, such as assessing and disclosing environmental information combined with financial information in accounting and financial reporting. From this, it can be seen that environmental accounting disclosure includes, first, general environmental information: presenting environmental J. Risk Financial Manag. 2024,17, 62. https://doi.org/10.3390/jrfm17020062 https://www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2024,17,62 policies, describing environmental issues the company may face, improvements the company has implemented, and the level of compliance with legally mandated protective measures; second, environmental accounting information: displaying business activities related to the environment such as assets, costs, liabilities, and environmental income in accounting reports such as financial statements and annual reports for information users, providing a basis for making relevant decisions. This will allow companies to allocate economic resources more reasonably in line with the environment to provide motivation to help the business achieve sustainable development goals. Vietnam is in a period of international economic integration, the disclosure of environmental accounting information and non-financial information is also a trend that Vietnam needs to embrace quickly. However, in practice, not many companies can provide a comprehensive set of environmental information to stakeholders (Linh 2013). When information for stakeholders is not adequately provided, it can pose risks for the company, such as reducing opportunities for collaboration and issues related to environmental legal compliance. Financial risks are risks arising from external environmental fluctuations and risks stemming from the choices and implementation of financial decisions within a business. These risks impact the profit-making capability and solvency of the business, with the worst-case scenario leading to the possibility of business bankruptcy. Pham and Duong (2022) conducted a study on the impact of disclosing information about environmental impacts on the financial performance of listed companies in Vietnam during the period 2016–2020. The research results showed that the extent of disclosing information about environmental impacts has a positive effect on the financial performance of companies. This is because the disclosure of environmental accounting information helps the business strengthen the trust of various stakeholders. Therefore, the lack of this information can have a negative impact on financial risk management within the company. So, it can be observed that there is a linkage between the disclosure of environmental accounting information and financial risks within a company. Therefore, the authors have chosen the topic “The Impact of Environmental Accounting Information Disclosure on Financial Risk: The Case of Listed Companies in the Vietnam Stock Market” for research. We particularly focus on companies participating in the “Programme on Benchmarking and Announcing Sustainable Companies in Vietnam (CSI)”. The research questions encompass how the disclosure of environmental accounting information affects the financial risk of businesses; and whether there is a difference in financial risk between the group of companies listed in the Top 100 Sustainable Companies and the group outside this list. After the research process, the main findings indicate that disclosing environmental accounting information helps mitigate the financial risks of businesses in the current year and the following year. Additionally, companies listed in the Top 100 Sustainable Companies have, on average, lower financial risks compared to those outside the list. From these findings, the authors propose several recommendations aimed at assisting businesses in enhancing the quality of environmental accounting information disclosure and minimizing financial risks. This research aspires to make contributions to the theoretical understanding of social responsibility information disclosure and the financial performance of businesses. This study could serve as a foundation for future in-depth research on environmental accounting and social responsibility, as well as related issues. Moreover, this research holds practical significance in exploring the relationship between environmental issues and the financial performance of businesses, providing valuable insights for managers in developing enterprises in an era focused on green and sustainable development. This study aims to achieve the following specific objectives: firstly, examine the factors influencing financial risks; secondly, investigate how environmental accounting information disclosure affects financial risks, positively or negatively, in the current year for non-financial companies listed on the Vietnam Stock Market; thirdly, explore the relationship between environmental accounting information disclosure and the financial risks of companies in the following year; fourthly, study the differences in financial risks among companies implementing environmental accounting information disclosure within differ24 J. Risk Financial Manag. 2024,17,62 ent target groups as categorized by the research team; fifthly, provide recommendations to improve financial risks, financial risk management, and the quality of environmental accounting information disclosure for companies. To address these objectives, the research team has designed research questions to find answers to: Question 1: What factors influence financial risk? Question 2: How does environmental accounting information disclosure impact financial risk in the current year? Question 3: How does environmental accounting information disclosure affect financial risk in the following year? Question 4: Are there differences in financial risk between the group of companies recognized as “Sustainable Enterprises in Vietnam” and the remaining group of companies? Question 5: What recommendations should be made to help companies improve financial risks, financial risk management, and the quality of environmental accounting information disclosure? 2. Literature Review and Theoretical Framework 2.1. Literature Review Environmental accounting has garnered significant attention from both academia and business practitioners in developed nations. Official guidelines on environmental accounting were established by the United Nations Sustainable Development Commission (UNDSD) in 2001 and the International Federation of Accountants (IFAC) in 2005. Despite this, research in environmental accounting dates back to the 1970s, with a surge in studies and literature emerging in the 1990s. The period from 1997 to the present is particularly notable for a boom in environmental accounting research, covering theoretical aspects, accounting practices, and the impact of environmental accounting and social responsibility on financial risks. This field has become a focal point for scientific inquiry, attracting increasing interest from researchers. Regarding the examination of the impact of environmental accounting disclosure in general and social responsibility on corporate risk, previous studies have predominantly identified an inverse relationship between the disclosure of environmental and social information and corporate risk (Liu and Lu 2021; Eriandani and Wijaya 2021; Cai et al. 2016; Jo and Na 2012; Minor and Morgan 2011; Luo and Bhattacharya 2009; Godfrey et al. 2009; Orlitzky and Benjamin 2001). The study by Liu and Lu (2021) focused on all publicly traded companies in Standard and Poor’s Compustat from 2004 to 2012, scoring social responsibility disclosure in aspects such as the environment, community, and corporate governance. The research results showed that companies with higher disclosure scores had significantly lower corporate risk. Additionally, the results implied that social responsibility disclosure partly reduces risk through the company’s reputation. The study by Eriandani and Wijaya (2021) sampled listed companies on the Indonesia Stock Exchange that disclosed social responsibility information from 2016 to 2019. It demonstrated that disclosure activities had an inverse relationship with corporate risk, as such activities could build reputation and enable effective resource management. Companies could minimize risk by disclosing social responsibility information as a way to demonstrate a balance between economic, social, and environmental aspects. The study by Cai et al. (2016) examined the relationship between environmental responsibility and a company’s risk. To test hypotheses related to risk reduction, resource constraints, and industry variations, the authors collected a sample comprising 1947 large U.S. companies from the period between 2003 and 2015 by combining various datasets. The research results indicated that companies with environmental responsibility may face lower risks. The discussion on studies examining the impact of environmental accounting disclosure in general and social responsibility on the risk of bankruptcy or financial distress is significant. Do (2022) conducted a study to explore the relationship between corporate social responsibility and bankruptcy risk, with a focus on conditional effects over different time periods. The results revealed an inverse relationship between social responsibility and 25 J. Risk Financial Manag. 2024,17,62 bankruptcy risk. Furthermore, the long-term impact of social responsibility was stronger than the short-term effect. Boubaker et al. (2020) investigated how corporate social responsibility affects the level of financial distress risk. The study sample consisted of 1201 publicly listed companies in the United States from 1991 to 2012. The research results indicated that companies with high-quality social responsibility have lower levels of financial distress risk and a better ability to access financial resources, aligned with the conclusion, the diversity of community, employee relationships, and environmental aspects of corporate social responsibility helps reduce financial distress risk for businesses (Attig et al. 2013). The study by Cooper and Uzun (2019) utilized a sample comprising 78 companies that filed for bankruptcy during the period from 2007 to 2014 and a corresponding group of companies that did not. Overall, the results indicated that companies with higher levels of social responsibility disclosure are less likely to face bankruptcy compared to companies with lower disclosure levels. The research conducted by Lin and Dong (2018) aimed to address the question of whether the financial distress of companies could be mitigated through a commitment to social responsibility. The study’s findings demonstrated that companies with a positive history of engaging in social responsibility were less likely to file for bankruptcy when facing financial difficulties and were more likely to recover quickly after a crisis. Additionally, some studies have highlighted an inverse relationship between social responsibility and systemic risk by increasing the disclosure of social responsibility, which helps enhance financial efficiency and reduce capital costs (El Ghoul et al. 2011; Oikonomou et al. 2012). Ding et al. (2022) investigated the role of environmental information disclosure in relation to borrowing costs. This study focused on manufacturing companies that had been penalized by the Chinese government for violating environmental rules and regulations. Based on the results, the authors found that regulatory penalties significantly increased a company’s borrowing costs in the following year through the adverse impact of environmental information disclosure. The study by Albuquerque et al. (2019) presented an industry equilibrium model in which companies have the choice to engage in social responsibility activities as an investment to enhance product differentiation, allowing them to benefit from higher profit margins. The research aims to capture the social, environmental, and corporate governance factors related to a company’s operations, financial performance, and risk management. The research results indicate that social responsibility activities affect a company’s systemic risk. Companies that disclose information on social responsibility will have lower capital costs, and investors including these companies’ stocks in their investment portfolios will help reduce the overall portfolio risk. Dutta and Nezlobin (2017) used data from companies in the S&P 500 to confirm that social responsibility has an inverse impact on systemic risk, which includes market risk. The study also indicated that companies with higher social responsibility tend to have lower capital costs. The research results further revealed that, all else being equal, current shareholders prefer maximum information disclosure, and the future benefits to shareholders will increase (decrease) depending on the accuracy of the disclosed information if the company’s growth rate is above (below) a certain threshold. Research on the impact of environmental accounting and environmental information disclosure has gained popularity in developed countries where the relationship between business activities and the environment has been recognized for an extended period. Environmental accounting is relatively new in Vietnam and primarily follows the general provisions of Circular 96/2020/TT-BTC or the Global Reporting Initiative (GRI) framework for implementation. In Vietnam, studies on corporate social responsibility and environmental accounting have only been conducted in recent years and have not been significantly practical. A few recent studies in this context include (Nguyen 2020, 2022; Nguyen et al. 2022, 2023; Anh-Tuan et al. 2022). In general, research in this field in Vietnam is not yet 26 J. Risk Financial Manag. 2024,17,62 diverse across various aspects and has not delved deeply into specific relationships. Additionally, the results of these studies may differ due to different national contexts and various time periods. Therefore, our research team embarks on this study with the intention of investigating and collecting information to fill the gaps in this field in Vietnam. 2.2. Theoretical Background To assess the level of environmental accounting information disclosure and its relationship with financial risk, we utilize the following theories: The theory of legitimacy posits that organizations must align their activities with societal values and standards. Failure to adhere to these social values and standards can lead to difficulties in gaining community support for their continued operation. The theory of legitimacy originates from the research on legitimacy in politics by the German economist and sociologist Weber (1922) in his work “Concepts in Sociology”. Given the increasing societal concern about the environment, the public expects that organizations will exhibit responsible and environmentally-friendly behavior. Failing to meet these societal expectations and demands could result in sanctions, such as the revocation of licenses, which can have long-term implications for the survival of the business (Deegan 2002). This theory explains the motivation behind using environmental accounting as a tool to fulfill social responsibility and ensure legal compliance. Therefore, the clearer the disclosure of environmental accounting information, the more it minimizes legal and ethical issues, reducing financial risks. Since its introduction, Resource Dependency Theory has become one of the most influential theories in organizational and strategic management. This theory emerged from the idea of organizations’ vulnerability to their external environment (Pfeffer and Salancik 1978). This theory asserts that organizations must recognize and identify the societal groups upon which they depend. They must then manage and align their actions and behaviors with the needs of these external societal groups to reduce the risks and potential reactions from them. Bhattacharyya (2016) applied this theory to examine the extent of environmental information disclosure. According to this framework, businesses need to secure support and consensus from society, especially from the entities that provide the primary resources to the organization. Therefore, disclosing environmental accounting information becomes a necessary and appropriate action aligned with societal demands, reducing the risks associated with external societal reactions and minimizing financial risks for the company. The stakeholder theory originated from Freeman’s (1984) research on organizational management and business ethics. This theory asserts that organizations have an obligation to treat their stakeholders fairly. The concept of accountability (information disclosure) requires businesses to be responsible for their activities. The responsibility to account for actions to stakeholders extends beyond that of accountability to shareholders. As the success of businesses depends on how they balance the diverse needs of stakeholders, enterprises need to respond and account for stakeholders. Freeman and Liedtka (1997) identified three reasons for accountability to stakeholders: (i) interest-based accountability; (ii) rights-based accountability; (iii) obligation-based accountability. Ullmann (1985) developed a conceptual model of corporate social responsibility. Ullmann concluded that the stakeholder theory provides a suitable framework for integrating strategic decisions into the examination of corporate social responsibility activities. Manini et al. (2016) used this theory to analyze the correlation between financial structure, company profitability, audit firm type, liquidity, the number of years in business, and environmental information disclosure. A company’s operations have an impact on both internal and external stakeholders. This theory is employed to explain why companies voluntarily adopt environmental accounting information disclosure to meet the increasing demand for environmental data from various stakeholders, including government agencies, credit organizations, investors, consumers, and the community. Conversely, the lack of transparent disclosure of environmental accounting information can lead to specific financial risks for the company. 27 J. Risk Financial Manag. 2024,17,62 2.3. Research Hypotheses 2.3.1. The Relationship between the Level of Environmental Accounting Information Disclosure and Financial Risk Elias (2004) argues that businesses are facing increasing pressure from stakeholders to establish ethics and transparent information systems. Today’s market economy demands that companies not only sell products and services but also create value and fulfill corporate social responsibility (CSR) towards the public. Regarding the relationship between CSR and business risks, various studies have found evidence supporting the beneficial impact of engaging in CSR on business risks from different perspectives (Cheung 2016; Albuquerque et al. 2019). Companies with higher CSR effectiveness tend to be perceived as less risky by investors. According to the stakeholder theory, for a business to sustain and thrive, it needs to balance the interests of various stakeholders, such as shareholders, employees, and customers (Freeman 1984; Mishra and Modi 2013). CSR activities can help companies mitigate the risk of losing support from one or more stakeholders, enhancing the reputation of these companies. Strong relationships with stakeholders can improve the ability to reduce risk by reducing market uncertainty, thus eliminating or mitigating any disruptions, losses, or damages to a company’s profits and minimizing the impact of unforeseen events (Kytle and Ruggie 2005). With efforts to improve the financial market in Vietnam, the disclosure of information related to social responsibility is gradually becoming a near-obligatory element in annual reports, as emphasized in Circular 96/2020/TT-BTC, affirming the concern of stakeholders on this matter. Therefore, it can be seen that the disclosure of environmental accounting information has an impact on the financial risks of companies, hence the research hypothesis (H1) is formulated as follows: H1a. The level of environmental accounting information disclosure has an inverse effect on the financial risk of the company in the current year. H1b. The level of environmental accounting information disclosure has an inverse effect on the financial risk of the company in the following year. 2.3.2. Assessing the Differences in Financial Risk between Listed Companies Included in the List of the Top 100 Sustainable Companies in Vietnam and Those Not on This List According to the stakeholder theory, businesses should address the interests of all stakeholders rather than just their own. Freeman (1984) noted that when there is consensus among stakeholders, interests are enhanced, and cooperation is promoted. Therefore, many businesses have adopted various strategies to encourage consensus among stakeholders. In Vietnam, to enhance the trust and satisfaction of stakeholders, many companies have chosen to participate in the “Programme on Benchmarking and Announcing Sustainable Companies in Vietnam (CSI)”. The CSI program helps raise awareness among businesses and society about the importance and benefits of sustainable development in the new context, as well as encourages businesses to engage in sustainable business practices and sustainable corporate management. Simultaneously, this recognition also provides businesses with the opportunity to enhance their reputation, brand, and attract human resources. It opens doors to new business opportunities by increasing the trust of partners, investors, and shareholders. It contributes to the development of sustainable business, thereby improving the competitive capabilities of businesses in the current international economic integration context. With these positive impacts, when recognized among the top 100 companies in the CSI program, the financial risks of these companies are likely to be significantly reduced. Therefore, the research group formulates hypothesis (H2) as follows: 28 J. Risk Financial Manag. 2024,17,62 H2. There is a difference in financial risk between companies listed in the top 100 Sustainable Companies in Vietnam and companies not included in this list. 3. Research Methodology 3.1. Data Collection Group 1: Listed companies meeting two criteria: (i) Have published financial reports and annual reports (or sustainability reports) from 2018 to 2022, and (ii) are included in the list of the top 100 Sustainable Companies in the “Programme on Benchmarking and Announcing Sustainable Companies in Vietnam (CSI)” for at least 3 out of 5 years from 2018 to 2022. Group 2: Listed companies not included in the list of the top 100 Sustainable Companies from 2018 to 2022 but meeting two criteria: (i) Have published financial reports and annual reports (or sustainability reports) from 2018 to 2022, and (ii) have business size and sector corresponding to Group 1. After screening the list of 100 Sustainable Companies over the course of 5 years, only a total of 30 companies meet the criteria for Group 1. Next, 30 suitable companies for Group 2 companies are selected (both in terms of quantity and quality, matching those of Group 1). The sample comprises 300 observations, in line with the conditions for analysis (Tauchen 1986; Hair et al. 2011). The final research sample is presented in Table 1. Table 1. Sample allocation by industry. Industry Number of Companies Observations Manufacturing 42 210 Utilities 8 40 Construction and Real Estate 6 30 Transportation and Warehousing 2 10 Wholesale 2 10 Total 60 300 3.2. Variable Measurements 3.2.1. Dependent Variable: Financial Risk (FR) In this study, the financial risk measurement model developed by Alexander Bathory (Bathory 1984) is utilized. The formula is as follows: FRit = SZLit +SY it +GL it +YF it +YZ it (1) where SZLit = (profit before tax + depreciation + deferred tax)/current liabilities. SYit = pre-tax profit/operating capital. GLit = shareholders’ interests/current liabilities. YFit = net tangible assets/total liabilities. YZit = working capital/total assets. Bathory’s model suggests that a higher value of FRit indicates lower financial risk, and vice versa. 3.2.2. Independent Variable: The Level of Environmental Accounting Disclosure (ENVI) We calculate the variable ENVI based on the 2016 GRI (Global Reporting Initiative (GRI) 2016) Sustainability Reporting Standards, specifically with the environmental criteria (GRI 300) as presented in Table 2. 29 J. Risk Financial Manag. 2024,17,62 Table 2. Environmental items. No. Field Number of Items Referencing to GRI 1 Materials 4 301 2 Energy 6 302 3 Water 4 303 4 Biodiversity 5 304 5 Emissions 8 305 6 Effluents and Waste 6 306 7 Environmental Compliance 2 307 8 Supplier Environmental Assessment 3 308 Each item is scored depending on the level of environmental accounting disclosure in the annual report (or sustainability report) of the company. The scoring scale is presented in Table 3. Table 3. The method for assessing the level of environmental information disclosure. The Level of Information Disclosure Score Full disclosure of required information through quantitative data or qualitative information 2 Partial disclosure of required information but not complete 1 Non-disclosure of required content or disclosure of irrelevant information 0 After scoring the items, the score represents the level of environmental accounting information disclosure of the company, calculated according to the formula: ENVIit =∑Xnt (2) where Xnt is the score of item n disclosed by company i in year t. To illustrate the calculation method of the variable ENVI, we provide an assessment and computation example in Table 4. The company in this example is Vietnam Dairy Products Joint Stock Company (VNM), one of the selected companies in the study sample. The table below presents the evaluation and computation of the level of environmental information disclosure for VNM in the year 2022. Table 4. Table assessing the level of environmental information disclosure of VNM in 2022. Item Content Score Item Content Score 301-0 Management approach 1 305-0 Management approach 1 301-1 Materials used by weight or volume 0 305-1 Direct (Scope 1) GHG emissions 1 301-2 Recycled input materials used 2 305-2 Energy indirect (Scope 2) GHG emissions 1 301-3 Reclaimed products and their packaging materials 0 305-3 Other indirect (Scope 3) GHG emissions 0 302-0 Management approach 1 305-4 GHG emissions intensity 1 302-1 Energy consumption within the organization 1 305-5 Reduction in GHG emissions 1 302-2 Energy consumption outside of the organization 0 305-6 Emissions of ozone-depleting substances (ODS) 0 30 J. Risk Financial Manag. 2024,17,62 Table 4. Cont. Item Content Score Item Content Score 302-3 Energy intensity 1 305-7 Nitrogen oxides (NOx), sulfur oxides (SOx), and other significant air emissions 0 302-4 Reduction in energy consumption 2 306-0 Management approach 1 302-5 Reduction in energy requirements of products and services 2 306-1 Water discharge by quality and destination 1 303-0 Management approach 1 306-2 Waste by type and disposal method 2 303-1 Water withdrawal by source 2 306-3 Significant spills 1 303-2 Water sources significantly affected by withdrawal of water 1 306-4 Transport of hazardous waste 1 303-3 Water recycled and reused 1 306-5 Water bodies affected by water discharges and/or runoff 1 304-0 Management approach 1 307-0 Management approach 0 304-1 Operational sites owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas 0 307-1 Non-compliance with environmental laws and regulations 0 304-2 Significant impacts of activities, products, and services on biodiversity 1 308-0 Management approach 1 304-3 Habitats protected or restored 1 308-1 New suppliers that were screened using environmental criteria 2 304-4 IUCN Red List species and national conservation list species with habitats in areas affected by operations 0 308-2 Negative environmental impacts in the supply chain and actions taken 1 Total score (X) = 34 3.2.3. Control Variables The control variables include business size (SIZE), financial leverage (LEV), return on assets (ROA), and current ratio (CR) as shown in Table 5. Table 5. Measurement of control variables. Code Control Variable Measurement References SIZE Business size Log(Total Assets) Ohlson (1980); De Jonghe et al. (2015); Al-Hadi et al. (2019) LEV Financial leverage Liabilities/Total Assets Ayadi et al. (2015); Benlemlih et al. (2018); Al-Hadi et al. (2019) ROA Return on assets (Net Income/Average Total Assets)*100 Altman (1968); Bhunia and Mukhuti (2012); Ahmed Sheikh and Wang (2013); Al-Hadi et al. (2019) CR Current ratio Current Assets/Current Liabilities Beaver (1966); Edmister (1972); Ohlson (1980); Bhunia and Mukhuti (2012) Based on theoretical background and previous studies, from constructing hypotheses H1a and H1b, we propose the research model as follows: FRit =β0+β1ENVIit +β2SIZEit +β3LEVit +β4ROAit +β5CRit +εit (3) 31 J. Risk Financial Manag. 2024,17,62 and are utilized by numerous businesses worldwide. The benefits for businesses using these standards are diverse, ranging from strengthening and enhancing the quality of their environmental accounting information disclosure to keeping pace with global trends, increasing the globalization and competitiveness of domestic enterprises in the world. Moreover, the results also indicate that, in addition to the level of environmental accounting disclosure, factors such as the scale of the company, financial leverage, return on assets, and current liquidity also impact the financial risk of the company. Therefore, to mitigate financial risks, companies need to coordinate and pay attention to these factors to achieve the optimal economic growth rate. This will also ensure sustainable development and enhance the company’s reputation in the market. The team has made efforts to accomplish the set objectives; however, limitations still exist. Firstly, this study only confines the measurement of financial risk and four control variables, while there are other factors that could be utilized to examine this relationship. Secondly, the research sample may not be sufficiently representative of all listed companies on the Hanoi Stock Exchange (HNX) and the Ho Chi Minh Stock Exchange (HOSE), and companies in Vietnam as a whole. Additionally, the level of environmental information disclosure in this study also carries a subjective aspect from the authors. Therefore, several topics are proposed for future research, such as expanding the investigation into the impact of environmental accounting information disclosure using different financial risk models; incorporating additional factors beyond the control variables used in this paper, possibly including perception factors. Extending the scope of the survey to ensure representativeness or delving into a specific industry to ensure specialization is also suggested. Author Contributions: Methodology, N.L.S. and D.D.D.; Software, D.D.D.; Validation, D.D.D.; Formal analysis, T.T.T.H.; Investigation, T.T.T.H.; Resources, T.T.T.H. and N.D.H.; Data curation, N.D.H.; Writing—original draft, N.D.H.; Writing—review & editing, N.L.S.; Visualization, N.L.S.; Supervision, N.L.S.; Project administration, N.L.S. All authors have read and agreed to the published version of the manuscript. Funding: This research received no external funding. Data Availability Statement: Not applicable. Conflicts of Interest: The authors declare no conflict of interest. References Ahmed Sheikh, Nadeem, and Zongjun Wang. 2013. The impact of capital structure on performance: An empirical study of non-financial listed firms in Pakistan. International Journal of Commerce and Management 23: 354–68. [CrossRef] Albuquerque, Rui, Yrjö Koskinen, and Chendi Zhang. 2019. Corporate social responsibility and firm risk: Theory and empirical evidence. Management Science 65: 4451–69. [CrossRef] Al-Hadi, Ahmed, Bikram Chatterjee, Ali Yaftian, Grantley Taylor, and Mostafa Monzur Hasan. 2019. Corporate social responsibility performance, financial distress and firm life cycle: Evidence from Australia. Accounting & Finance 59: 961–89. Altman, Edward I. 1968. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance 23: 589–609. [CrossRef] Anh-Tuan, Le, Nguyen Thi Huyen-Tram, Nguyen Xuan-Hung, and Nguyen Vuong Thanh-Long. 2022. Disclosure of environmental accounting information at business enterprises in the hotel sector: Case study in Vietnam. Geo Journal of Tourism and Geosites 42: 700–7. [CrossRef] Attig, Najah, Sadok El Ghoul, Omrane Guedhami, and Jungwon Suh. 2013. Corporate social responsibility and credit ratings. Journal of Business Ethics 117: 679–94. [CrossRef] Ayadi, Mohamed, Martin I. Kusy, Minyoung Pyo, and Samir Trabelsi. 2015. Corporate social responsibility, corporate governance, and managerial risk-taking. SSRN Electronic Journal. [CrossRef] Bathory, Alexander. 1984. Predicting Corporate Collapse: Credit Analysis in the Determination and Forecasting of Insolvent Companies. London: Financial Times Business Information Ltd. Beaver, William H. 1966. Financial ratios as predictors of failure. Journal of Accounting Research 4: 71–111. [CrossRef] Benlemlih, Mohammed, Amama Shaukat, Yan Qiu, and Grzegorz Trojanowski. 2018. Environmental and social disclosures and firm risk. Journal of Business Ethics 152: 613–26. [CrossRef] Bhattacharyya, Asit. 2016. Factors associated with the social and environmental reporting of Australian companies. Australasian Accounting, Business and Finance Journal 8: 25–50. [CrossRef] 38 J. Risk Financial Manag. 2024,17,62 Bhunia, Amalendu, and Somnath Mukhuti. 2012. Financial risk measurement of small and medium-sized companies listed in Bombay Stock Exchange. International Journal of Advances in Management and Economics 1: 27–34. [CrossRef] Boubaker, Sabri, Alexis Cellier, Riadh Manita, and Asif Saeed. 2020. Does corporate social responsibility reduce financial distress risk? Economic Modelling 91: 835–51. [CrossRef] Cai, Li, Jinhua Cui, and Hoje Jo. 2016. Corporate environmental responsibility and firm risk. Journal of Business Ethics 139: 563–94. [CrossRef] Cheung, Adrian. 2016. Corporate social responsibility and corporate cash holdings. Journal of Corporate Finance 37: 412–30. [CrossRef] Cooper, Elizabeth, and Hatice Uzun. 2019. Corporate social responsibility and bankruptcy. Studies in Economics and Financ 36: 130–53. [CrossRef] De Jonghe, Olivier, Maaike Diepstraten, and Glenn Schepens. 2015. Banks’ size, scope and systemic risk: What role for conflicts of interest? Journal of Banking & Finance 61: S3–S13. Deegan, Craig. 2002. Introduction: The legitimising effect of social and environmental disclosures—A theoretical foundation. Accounting, Auditing & Accountability Journal 15: 282–311. Ding, Xiangan, Andrea Appolloni, and Mohsin Shahzad. 2022. Environmental administrative penalty, corporate environmental disclosures and the cost of debt. Journal of Cleaner Production 332: 129919. [CrossRef] Do, Trung K. 2022. Corporate social responsibility and default risk: International evidence. Finance Research Letters 44: 102063. [CrossRef] Dutta, Sunil, and Alexander Nezlobin. 2017. Information disclosure, firm growth, and the cost of capital. Journal of Financial Economics 123: 415–31. [CrossRef] Edmister, Robert O. 1972. An empirical test of financial ratio analysis for small business failure prediction. Journal of Financial and Quantitative Analysis 7: 1477–93. [CrossRef] El Ghoul, Sadok, Omrane Guedhami, Chuck C. Y. Kwok, and Dev R. Mishra. 2011. Does corporate social responsibility affect the cost of capital? Journal of Banking & Finance 35: 2388–406. Elias, Rafik Z. 2004. The impact of corporate ethical values on perceptions of earnings management. Managerial Auditing Journal 19: 84–98. [CrossRef] Eriandani, Rizky, and Liliana Inggrit Wijaya. 2021. Corporate Social Responsibility and Firm Risk: Controversial Versus Noncontroversial Industries. The Journal of Asian Finance, Economics and Business 8: 953–65. Freeman, Edward, and Jeanne Liedtka. 1997. Stakeholder capitalism and the value chain. European Management Journal 15: 286–96. [CrossRef] Freeman, R. Edward. 1984. Strategic Management: A Stakeholder Approach. Cambridge: Cambridge University Press. Global Reporting Initiative (GRI). 2016. Sustainability Reporting Guidelines. Boston: GRI. Godfrey, Paul C., Craig B. Merrill, and Jared M. Hansen. 2009. The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal 30: 425–45. [CrossRef] Hair, Joe F., Christian M. Ringle, and Marko Sarstedt. 2011. PLS-SEM: Indeed a silver bullet. Journal of Marketing Theory and Practice 19: 139–52. [CrossRef] Jo, Hoje, and Haejung Na. 2012. Does CSR reduce firm risk? Evidence from controversial industry sectors. Journal of Business Ethics 110: 441–56. [CrossRef] Kytle, Beth, and John Gerard Ruggie. 2005. Corporate Social Responsibility as Risk Management. Working Paper No. 10. Cambridge, MA: John F. Kennedy School of Government, Harvard University. Lin, K. C., and Xiaobo Dong. 2018. Corporate social responsibility engagement of financially distressed firms and their bankruptcy likelihood. Advances in Accounting 43: 32–45. [CrossRef] Linh, Hoang Thuy. 2013. Environmental Financial Accounting and Application Orientation in Vietnam. Master’s thesis, University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam. Liu, Min, and Weijie Lu. 2021. Corporate social responsibility, firm performance, and firm risk: The role of firm reputation. Asia-Pacific Journal of Accounting & Economics 28: 525–45. Luo, Xueming, and Chitra Bhanu Bhattacharya. 2009. The debate over doing good: Corporate social performance, strategic marketing levers, and firm-idiosyncratic risk. Journal of Marketing 73: 198–213. [CrossRef] Manini, Muganda Munir, Umulkher Ali Abdillahi, Kadian W. Wanyama, and John Simiyu. 2016. Effect of Business Financing on the Performance of Small and Medium Enterprises in Lurambi Sub-County, Kenya. Available online: http://erepository.kibu.ac.ke/ handle/123456789/1017 (accessed on 1 October 2023). Minor, Dylan, and John Morgan. 2011. CSR as reputation insurance: Primum non nocere. California Management Review 53: 40–59. [CrossRef] Mishra, Saurabh, and Sachin B. Modi. 2013. Positive and negative corporate social responsibility, financial leverage, and idiosyncratic risk. Journal of Business Ethics 117: 431–48. [CrossRef] Nguyen, Canh Thi, Liem Thanh Nguyen, and Nhu Quynh Nguyen. 2022. Corporate social responsibility and financial performance: The case in Vietnam. Cogent Economics & Finance 10: 2075600. Nguyen, Thu Hien. 2022. Factors affecting the implementation of environmental management accounting: A case study of pulp and paper manufacturing enterprises in Vietnam. Cogent Business & Management 9: 2141089. 39 J. Risk Financial Manag. 2024,17,62 Nguyen, Thuy An, Phuoc Huong Le, Huu Dang Nguyen, Thi Cam Tu Luong, and My Tran Ngo. 2023. The effect of environmental accounting information disclosure on financial performance of Vietnamese listed industrial firms: The moderating role of Leverage and Big4. CTU Journal of Innovation and Sustainable Development 15: 126–38. [CrossRef] Nguyen, Tung Dao. 2020. Factors influencing environmental accounting information disclosure of listed enterprises on Vietnamese stock markets. The Journal of Asian Finance, Economics and Business (JAFEB) 7: 877–83. [CrossRef] Ohlson, James A. 1980. Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research 18: 109–31. [CrossRef] Oikonomou, Ioannis, Chris Brooks, and Stephen Pavelin. 2012. The impact of corporate social performance on financial risk and utility: A longitudinal analysis. Financial Management 41: 438–515. [CrossRef] Orlitzky, Marc, and John D. Benjamin. 2001. Corporate social performance and firm risk: A meta-analytic review. Business & Society 40: 369–96. Pfeffer, Jeffrey, and Gerald Salancik. 1978. The External Control of Organizations: A Resource Dependence Perspective. Urbana, IL: University of Illinois at Urbana-Champaign’s Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship. Pham, Minh Vuong, and Phuong Trang Duong. 2022. Impact of the Environmental Information Disclosure on the Financial Performance of Listed Companies in Vietnam. Vietnam Trade and Industry Review, Research and Application of Scientific Results and Technology, Issue 5. Available online: https://tapchicongthuong.vn/bai-viet/anh-huong-cua-cong-bo-thong-tin-ve-tac-dongmoi-truong-len-hieu-qua-tai-chinh-cua-cac-cong-ty-niem-yet-tai-viet-nam-90106.htm (accessed on 1 October 2023). Tauchen, George. 1986. Finite state markov-chain approximations to univariate and vector autoregressions. Economics Letters 20: 177–81. [CrossRef] Ullmann, Arieh A. 1985. Data in search of a theory: A critical examination of the relationships among social performance, social disclosure, and Economic Performance of U.S. Firms. Academy of Management 10: 540–57. [CrossRef] Weber, Max. 1922. Economy and Society. Berkeley: University of California Press. Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content. 40 Citation: Yoo, Sun-Keun, and Se-Hak Chun. 2023. The Effects of Corporate Financial Disclosure on Stock Prices: A Case Study of Korea’s Compulsory Preliminary Earnings Announcements. Journal of Risk and Financial Management 16: 504. https://doi.org/10.3390/ jrfm16120504 Academic Editor: ¸Stefan Cristian Gherghina Received: 12 October 2023 Revised: 13 November 2023 Accepted: 22 November 2023 Published: 6 December 2023 Copyright: © 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). Journal of Risk and Financial Management Article The Effects of Corporate Financial Disclosure on Stock Prices: A Case Study of Korea’s Compulsory Preliminary Earnings Announcements Sun-Keun Yoo and Se-Hak Chun * Department of Business Administration, Seoul National University of Science and Technology, 232 Gongneung-ro, Nowon-gu, Seoul 01811, Republic of Korea; [email protected] *Correspondence: [email protected]; Tel.: +82-2-970-6487; Fax: +82-2-973-1349 Abstract: This paper examines the effects of Korea’s compulsory preliminary earnings announcements on stock prices using individual corporate financial disclosure data. Korea’s compulsory preliminary earnings announcements are similar to the US’s fair disclosures in that they are preliminary settlement disclosures. Disclosure regulation aims to prevent insider trading and resolve information asymmetry among investors by promptly disclosing unconfirmed internal settlement information prior to an external audit. The disclosure of such changes in profit or loss is generally expected to affect stock prices. Many studies have analyzed the relationship between accounting profit disclosure and stock prices, but most have focused on the relationship between net profit disclosure and stock price without considering other disclosure information such as sales and operating profit. In addition, previous studies analyzed the information effect of accounting profits based on annual reports, which are based on analysts’ predicted values and limited datasets. This study investigates the impact of Korea’s compulsory disclosure on stock prices through a multiple regression analysis, considering three types of accounting information, including sales, operating profit, and net profit, based on actual announcement data and daily trading volumes. The effect of corporate financial disclosure might vary with stock market type and industry sector. For this reason, we analyze the relationship between financial disclosure and stock prices for different stock market types and industry sectors. Results show that sales information affected KOSPI-listed companies’ stock prices, and operating profit information affected KOSDAQ-listed companies’ stock prices. In terms of financial market efficiency, the results show weak-form efficiency for both the KOSPI and KOSDAQ markets in general. However, this implies that there is still information asymmetry in sales information for the KOSPI, which consists of large and valued stocks and is not completely efficient, whereas information asymmetry might occur in operating profit information for the KOSDAQ, which consists of relatively small-to-medium innovative growing companies. In addition, results show that operating profits affect manufacturing industries’ stock prices, and that trading volumes significantly impact stock prices for all markets and industries. Keywords: compulsory disclosure; fair disclosure; preliminary earnings announcement; profit and loss structure change disclosure 1. Introduction Many studies have investigated the information effect of annual report accounting profits on stock prices since Beaver (1968). They focused on the impact of compulsory earnings announcements on stock prices to find the relationship between unexpected earnings (net profit minus analyst-predicted net profit) and stock prices. They depended on a small sample size for unexpected earnings because analysts do not report all stocks. In addition, there is debate regarding whether an annual report is informative, because accounting profits can be predicted in the market through provisional settlement disclosure, which is a voluntary fair disclosure. J. Risk Financial Manag. 2023,16, 504. https://doi.org/10.3390/jrfm16120504 https://www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2023,16, 504 We investigate the impact of Korea’s compulsory preliminary earnings announcements on stock prices using actual disclosure announcement data. Unlike those in the United States, listed corporations in Korea are obliged to immediately disclose changes in profit and loss structure before making their annual reports when major changes in their financial structure occur. Korean firms should immediately disclose changes in their profit and loss structure if any indicators of sales, operating profit, or net profit increase or decrease by 30% or more compared to the same period in the previous year. This regulation was adopted on 24 March 2000 to prevent insider trading and to resolve information asymmetry between investors by promptly disclosing unconfirmed internal settlement information prior to an external audit. After this regulation was adopted, many studies were conducted in Korea regarding the effect of such disclosures of profit and loss changes on stock prices (Jang and Cheon 2003; Sohn and Lee 2005; Lee and Jung 2008; Jeong and Jeong 2014). Some studies showed that accounting information affected stock prices (Jang and Cheon 2003; Sohn and Lee 2005; Jeong and Jeong 2014), but others showed that accounting information did not affect stock prices (Lee and Jung 2008). However, these studies relied only on analysts’ forecasts instead of actual data. In addition, they used only net profit information, but not other important accounting information, such as sales and operating profit. This study analyzes the impact of Korean compulsory disclosure on stock prices by considering three types of accounting information (sales, operating profit, and net profit) based on actual announcement data. Moreover, this study analyzes the relationship between disclosure and stock prices using daily trading volumes for different market types and sectors. This study contributes to the existing literature as follows: First, we overcame the limitations of existing research by analyzing the effect of Korean compulsory disclosure announcements that are provisional, such as fair disclosures, and compulsory, such as annual reports. Second, we comprehensively analyzed and reflected on disclosure effects using actual sales, operating profit, and net profit information instead of unexpected earnings based on analysts’ net profit forecasts. Third, we measured the disclosure effect using the change in stock price on the day of disclosure. The structure of this paper is as follows: Section 2 reviews previous studies; Section 3 describes data used in this study; analysis and results are presented in Section 4; Section 5 provides conclusions and directions for further studies. 2. Literature Review 2.1. Earnings Reports and Stock Prices Earnings surprises impact stock prices. In the efficient market hypothesis (EMH), as described by Fama (1970), all publicly available information is instantaneously reflected in the stock price; as a result, no investors expect abnormal excess returns in the long run. To verify the well-established EMH, many studies have investigated the information effect of annual report net profit information on stock prices. However, these studies have shown conflicting results. Since Beaver (1968), many studies related to the information effect of accounting profits have been conducted; most analyzed the relationship between unexpected earnings (actual income minus expected income) and stock prices using annual reports (Wilson 1987; Cready and Mynatt 1991; Lobo and Song 1989). Some studies found that an annual report’s unexpected earnings could have an information effect, because investors predict net profit based on analysts’ net profit forecasts, showing that unexpected earnings affect stock prices (Wilson 1987; Lobo and Song 1989; Ball and Brown 1968; Busse and Green 2002; Chordia et al. 2005; Chordia et al. 2005). Chordia et al. (2005) analyzed the short-term effect of announcements using intraday returns for 150 NYSE stocks during the calendar years 1996, 1999, and 2002; they found that weak-form efficiency appeared to prevail over intervals from five minutes to one day. Lee and Choi (2009) analyzed a sample of fair disclosures announced from January 2003 to September 2004 using intraday data to verify the effectiveness of real-time information. They showed that stock prices reacted immediately to fair disclosures announced in real time in the Korean stock market, and argued that when there was an intraday disclosure, 42 J. Risk Financial Manag. 2023,16, 504 the information was fully reflected in the stock price at the end of the day, with no information delay until the next business day. Olibe et al. (2022) found that significant price and trading volume responses accompanied earnings information in the days immediately surrounding earnings announcements. However, some studies failed to detect such a price response. Cready and Mynatt (1991) examined price and trading responses to the release of annual reports of US companies that had already made preliminary earnings announcements. They found that the price response was insignificantly different from zero for each of the event days examined. Bänziger et al. (2023) found a semi-strong efficient market between earnings announcements of Swiss companies and stock prices, and suggested that preand postannouncement abnormal returns were modest and generally not statistically significant. Fink (2021) also found that an earnings surprise did not lead to a full, instantaneous stock price adjustment, but rather to a low, predictable drift. 2.2. Voluntary Fair Disclosure in the U.S. and Compulsory Disclosure in Korea In the United States, the fair disclosure system was first introduced in October 2000 to establish fair provisional settlement disclosure. A little earlier, in March 2000, Korea introduced the profit and loss structure change, which required companies to immediately disclose any indicators of sales, operating profit, or net profit that increased or decreased by 30% or more compared to the same period in the previous year. The intent in doing so was to prevent insider trading and resolve information asymmetry between investors by promptly disclosing unconfirmed internal settlement information prior to an external audit. Such disclosure of changes in profit and loss was generally expected to affect stock prices. Heflin et al. (2003) argued that fair disclosure played a role in narrowing the information gap between investors; they found smaller deviations between preand postannouncement stock prices. However, Bailey et al. (2003) found no significant change in return volatility after fair disclosure regulation. Ahmed and Schneible (2007) reported limitations, including selective disclosures regarding disclosure details, and companies that chose whether or not to disclose; however, the information gap between investors had been largely resolved by the introduction of fair disclosure. Sidhu et al. (2008) reported a negative aspect, that inaccurate information might be provided to the market as companies became more arbitrary in their disclosure process. Since the adoption of compulsory disclosure in Korea, many studies have shown that fair disclosure has information effects (Jang and Cheon 2003; Lee and Choi 2009; Jeong and Jeong 2014; Kim 2018). Some studies have found that accounting information affected stock prices (Jang and Cheon 2003; Sohn and Lee 2005; Jeong and Jeong 2014; Sohn et al. 2015; Lee 2020). Sohn and Lee (2005) showed a relationship between unexpected net profit and stock price using analysts’ forecasts. Lee and Choi (2009) analyzed a sample of fair disclosures announced from January 2003 to September 2004 using intraday data to verify the effectiveness of real-time information. They showed that stock prices immediately reacted to fair disclosures announced in real time in the Korean stock market, and argued that when there was an intraday disclosure, the information was fully reflected in the stock price at the end of the day, and that there was no information delay until the next business day. However, Lee and Jung (2008) found no relationship between unexpected net profit and stock price when they used analysts’ forecasts; this implies that researchers need to analyze the relationship between net profit and stock price based on actual data instead of analysts’ forecasts. These controversial results motivated us to examine the following questions: Why were the results different? Why did researchers rely on only net profit information to find the relationship between disclosure information and stock price? Why did they use analysts’ forecast information instead of using actual data? Thus, we tried to fill the gaps left by the limitations of previous studies and investigated how the disclosure of profit and loss structure changes affected stock prices for different market types and sectors. 43 J. Risk Financial Manag. 2023,16, 504 3. Materials and Methods 3.1. Data Description We used web crawling to collect disclosure information from the Korea Exchange’s electronic disclosure system (KIND) for January to March 2021 for listed corporations on the KOSPI and the KOSDAQ that disclosed changes in their profit and loss structure. There are approximately 800 companies listed on the KOSPI and approximately 1400 companies listed on the KOSDAQ; approximately 80% of these companies disclose changes in profit and loss structure at the beginning of each year. We obtained 932 records from 2139 disclosures after removing 556 corrective disclosures and 652 records of non-numerical information regarding surplus and deficit conversion. Sohn et al. (2015) analyzed corrective announcements and reported that they have no information effect, so we excluded them from the sample. 3.2. Methodology We used the following regression model to investigate how disclosure information regarding profit and loss structure changes affected stock prices for different market types and market sectors. AR =b0+b1SR +b2OPR +b3NPR +b4VR +e Table 1 describes the regression model’s independent and dependent variables. Table 1. Variables description. No Category Variable Symbols Description References 1 Dependent variable Abnormal returns (AR) Rit −Rmt = Pit−Pit−1 Pit−1− n ∑ i=1 (pit−pit−1 pit−1)/n Sohn and Lee (2005), Chordia et al. (2005), Kim (2018), Gregoire and Martineau (2022), Bänziger et al. (2023) 2 Independent variable Change rate of sales (SR) SRit−SRit−1 SRit−1where tis the year, and binned from −5to5 Lee and Yoo (2012), Kim (2021) 3 Independent variable Change rate of operating profit (OPR) OPRit−OPRit−1 OPRit−1where tis the year, and binned from −5to5 Hue and Yoo (2009), Kang and Choi (2014), Kim (2021) 4 Independent variable Change rate of net profit (NPR) NPRit−NPRit−1 NPRit−1where tis the year, and binned from −5to5 Beaver et al. (1979), Kothari (2001), Bradshaw et al. (2012), Kim (2018), Gregoire and Martineau (2022) 5 Independent variable Change rate of volume (VR) ln(VRit)−ln(VRit−1) ln(VRit−1)where tis the day Westerfield (1977), Epps (1977), Gallant et al. (1992), An et al. (2006), Jeong and Jeong (2014), Choi (2019), Park (2021) We used a dependent variable as the abnormal returns by subtracting the average stock price change rate of the sector to which each company belonged from the individual company’s stock price change rate (Sohn and Lee 2005; Chordia et al. 2005; Kim 2018; Gregoire and Martineau 2022; Bänziger et al. 2023). Thus, abnormal returns were denoted by ARit =Rit −Rmt Here, Rit =Pit−Pit−1 Pit−1 , where Pit is the individual stock price and Pit−1 is the stock price of the previous day, and Rmt =n ∑ i=1 (pit−pit−1 pit−1)/n , where mis the market sector to which each company belongs, and nis the total number of firms in the market sector. We used three disclosures as independent variables: percentage change in sales, percentage change in profit, and percentage change in net profit. We divided each of these three independent variables into 10 bins because the linear relationship between excess returns and unexpected 44 J. Risk Financial Manag. 2023,16, 504 earnings diminishes when the numerical volatility of unexpected earnings is high (Beaver et al. 1979; Kothari 2001; Kimbrough 2005; Khan and Watts 2009; Kim 2018). Thus, if the percentage change in sales, profit, and net profit increased by 30% or less year-over-year, we categorized it as 1; a 30–60% change in sales, profit, and net profit was categorized as 2; a 60–90% change was categorized as 3; 90–120% as 4; and 120% or more as 5. We categorized decreases the same way, as − 1, − 2, − 3, − 4, and − 5, respectively; altogether we formed 10 bins, from − 5 to 5. In addition, we considered the volume change rate as an independent variable because it played a role in investors’ decisions and has been positively related to price changes (Park 2021; Choi 2019; Jeong and Jeong 2014; An et al. 2006; Westerfield 1977; Epps 1977; Gallant et al. 1992). Park (2021) found that an abnormal increase in the trading volume of an individual stock had a significant positive (+) relationship with the stock’s excess return. Gallant et al. (1992) suggested that it is effective to simultaneously consider various data, including trading volume, for a more accurate stock price prediction. Therefore, we obtained the volume change rate using the logarithm of the volume on the disclosure day minus the logarithm of the volume on the day before disclosure day, which is ln(VRit)−ln(VRit−1) ln(VRit−1). Next, we examined the effect of disclosure information for two markets (the KOSPI and the KOSDAQ) because different markets might react differently to disclosures (Grant 1980). The KOSPI market is composed of large-cap stocks that have been listed for a long time. There is much information available for large companies in the market, and there might be less unexpected information at the time when earnings are actually disclosed (Atiase 1985). However, the KOSDAQ market is composed of smalland mid-cap stocks that have been listed for a relatively short period of time. We also examined whether the effect of disclosure information differed between manufacturing and non-manufacturing firms, because existing studies mainly analyzed manufacturing firms. 4. Results 4.1. Descriptive Statistics Prior to empirical analysis, the descriptive statistics of variables used in this study were confirmed. The values of independent and dependent variables are shown in Table 2. Table 2 indicates that the overall accounting profit, trading volume, and stock price increased above the market average because averages of sales, operating profit, net profit, and volume change were all positive on the date of changes in profit and loss disclosure. Table 2. Descriptive statistics. Sales Profit Net Profit Volume AR Count 932 932 932 932 932 Mean 0.21 0.42 0.39 0.22 0.09 Std 1.47 2.69 3.06 0.80 3.05 Min −4.00 −5.00 −5.00 −3.02 −9.84 25% −1.00 −2.00 −2.00 −0.25 −1.59 50% 1.00 1.00 1.00 0.15 −0.06 75% 1.00 2.00 3.00 0.63 1.56 Max 5.00 5.00 5.00 3.52 16.80 4.2. Correlation Analysis Table 3 shows correlation analysis results; there was a significant positive correlation among variables. In particular, trading volume was closely related to returns and stock prices. Among the financial disclosure information, operating profit was the most highly correlated with abnormal returns, followed by net profit and sales. 45 J. Risk Financial Manag. 2023,16, 504 Table 3. Correlation analysis. Sales Profit Net Profit Volume AR Sales 1 0.447 * 0.321 * 0.100 * 0.096 * Profit 0.447 * 1 0.640 * 0.149 * 0.141 * Net Profit 0.321 * 0.640 * 1 0.117 * 0.118 * Volume 0.100 * 0.149 * 0.117 * 1 0.368 * AR 0.096 * 0.141 * 0.118 * 0.368 * 1 * denotes 1% significance with p-value less than 0.01. 4.3. Results of the Market Model A regression analysis for each of the KOSPI and KOSDAQ markets was conducted to investigate the influence of three types of financial disclosure information and trading volume on the stock price. We used the following regression model to investigate how compulsory disclosure information affected stock prices for different market types as follows: ARi=b0+b1SRi+b2OPRi+b3NPRi+b4VRi+e where irepresents KOSPI and KOSDAQ market types. Table 4 shows regression analysis results with four factors as independent variables and the stock price change as the dependent variable. Table 4. Regression analysis results for market models. Variables Market KOSPI KOSDAQ Total Intercept Coefficient −0.232 −0.628 −0.533 t-Value (Sig.) −0.106 (0.916) −0.348 (0.728) −0.380 (0.704) Change rate of sales (SR) Coefficient 0.359 −0.146 0.051 t-Value (Sig.) 3.171 * (0.002) −1.614 (0.107) 0.722 (0.470) Change rate of operating profit (OPR) Coefficient −0.012 0.123 0.065 t-Value (Sig.) −0.161 (0.872) 2.009 ** (0.045) 1.356 (0.175) Change rate of net profit (NPR) Coefficient 0.066 0.008 0.033 t-Value (Sig.) 0.984 (0.326) 0.172 (0.863) 0.823 (0.411) Change rate of volume (VR) Coefficient 1.357 1.285 1.340 t-Value (Sig.) 8.711 * (0.000) 7.227 * (0.000) 11.463 * (0.000) Adj. R20.208 0.096 0.140 Obs. 367 565 932 * and ** denote 1% and 5% significance, respectively. Table 4 shows that there are no significant variables for total sum of KOSDAQ and KOSPI data, except trading volume, which had a 1% significance level. However, sales and trading volume variables were found to have 1% statistical significance for the KOSPI market data, and operating profit variable had 5% significance and trading volume had 1% statistical significance for the KOSDAQ market data. These results are interesting because previous studies considered only net profit as a significant variable. Our results show that sales and operating profit affect stock prices more than net profit does. Kim (2021) showed that changes in the performance of a company’s main operating activities had a more significant impact on stock price fluctuations than non-operating activities did. 46 J. Risk Financial Manag. 2023,16, 504 Furthermore, Kim (2021) said that change rate of operating profit affected stock prices of startup companies which was established 10 years or less ago, whereas change rate of sales affected stock prices of somewhat established companies which are 11 to 30 years old, which supported our results that sales affected KOSPI stock prices and operating profits affected KOSDAQ stock prices. Our results are consistent with those of Grant (1980) and Atiase (1985), who found that stock price reactions to accounting earnings varied across markets. The results also show that trading volume had a significant impact on stock prices regardless of KOSPI or KOSDAQ market type. This implies that market participants consider trading volume as well as sales and operating profit, because stock prices tends to rise when trading volume increased on announcement day compared to the day before the announcement. 4.4. Results of the Sector Model Regression analysis was conducted for the two sectors to investigate the influence of three types of financial information and volume on the stock price. We also used the following regression model for different sectors: ARi=b0+b1SRi+b2OPRi+b3NPRi+b4VRi+e where irepresents manufacturing and non-manufacturing market sectors. Table 5 shows the results of regression analysis for the sector model that operating profit affects manufacturing firms’ stock prices at a 10% significance, whereas no accounting profit affects non-manufacturing firms’ stock prices. Additionally, trading volume affects stock prices of both manufacturing and non-manufacturing industries at 1% significance. Table 5. Regression results for sector models. Variables Sector Manufacturing Non-Manufacturing Intercept Coefficient −0.352 −0.980 t-Value (Sig.) −0.194 (0.846) −0.408 (0.683) Change rate of sales (SR) Coefficient 0.059 0.054 t-Value (Sig.) 0.623 (0.533) 0.468 (0.641) Change rate of operating profit (OPR) Coefficient 0.111 −0.014 t-Value (Sig.) 1.740 *** (0.082) −0.183 (0.855) Change rate of net profit (NPR) Coefficient −0.004 0.093 t-Value (Sig.) −0.072 (0.942) 1.398 (0.163) Change rate of volume (VR) Coefficient 1.372 1.285 t-Value (Sig.) 9.362 * (0.000) 1.319 * (0.000) Adj. R20.153 0.120 Obs. 577 287 * and *** denote 1% and 10% significance, respectively. 5. Conclusions This paper examined the effects of Korea’s compulsory preliminary profit and loss disclosure on stock prices using individual corporate financial profit and loss disclosure data. The effect of corporate financial disclosure might vary by stock market type and 47 J. Risk Financial Manag. 2023,16, 429 Disclosure Score, which provide detailed insights across diverse ESG topics and indicators. The impact of capex on ESG disclosure can vary based on factors such as expenditure magnitude and type. For instance, modest capex levels may have minimal influence, while higher levels could lead to positive or negative outcomes, depending on their impact on opportunities and risks for firms and stakeholders. To address these gaps, this study conducts a comprehensive examination of capex’s impact on ESG disclosure and evaluates the moderating role of governance. The research utilizes a unique dataset comprising non-financial firms included in the FTSE All Share index in the United Kingdom from 2012 to 2021. ESG disclosure is meticulously measured using the Bloomberg ESG Disclosure Score. Methodologically, this study employs instrumental variable techniques to address endogeneity concerns and utilizes spline regression models to explore potential non-linearities and thresholds. In essence, this study contributes valuable insights into the complex interplay among capex, governance, and ESG disclosure, particularly within the context of the United Kingdom. These findings have practical implications for corporations, investors, and regulatory bodies, providing actionable guidance for integrating ESG considerations into capex decision making and effectively communicating ESG performance and its consequences to diverse stakeholders. 2.2. Theoretical Framework and Hypothesis Development We draw on two main theories to explain the link between capital expenditure and ESG disclosure: Stakeholder theory and Resource Dependence theory. Stakeholder theory (Freeman 1984; Donaldson and Preston 1995; Mitchell et al. 1997) posits that firms should consider the interests and expectations of various stakeholders beyond shareholders, such as customers, employees, suppliers, regulators, and society. By investing in capital expenditure, firms can enhance their reputation and legitimacy among their stakeholders, as they demonstrate their commitment to innovation and growth. This may induce firms to provide a greater amount of ESG, as they seek to communicate their social and environmental responsibility and performance to their stakeholders. Based on this theory, we hypothesize that there is a positive association between capital expenditure and ESG disclosure: H1. There is a significant positive connection between capital expenditure and ESG reporting. Resource Dependence theory (Pfeffer and Salancik 1978; Hillman et al. 2009) suggests that firms invest in capital expenditure to acquire and maintain valuable resources that enable them to survive and thrive. By doing so, they can improve their efficiency, quality, and differentiation, which can increase their market share and profitability. However, capital expenditure can also influence the cost of capital of firms, which is the minimum return that they must generate on their investments to satisfy their investors and creditors. The cost of capital comprises the cost of equity and the cost of debt, which reflect the risk and return expectations of equity holders and debtholders, respectively. Capital expenditure (capex) can influence the cost of capital in two main ways: by increasing or decreasing the risk of the company and by affecting the company’s access to capital. For instance, it can boost the growth potential and profitability of a firm, lowering its risk and increasing its value. This can decrease the cost of equity and debt, as investors and creditors require lower returns for investing in a less risky and more valuable firm (Modigliani and Miller 1958; Myers 1977). Alternatively, it can increase the firm’s financial risk, which can lead to higher leverage and bankruptcy costs. This can increase the cost of debt and equity, as creditors charge higher interest rates and credit spreads for lending to a riskier firm and as equity holders demand higher returns for investing in a more volatile firm (Modigliani and Miller 1958). Capex can also affect the cost of capital indirectly through ESG disclosure. ESG disclosure provides information about the social and environmental impacts and risks of a firm’s capex, affecting its reputation, legitimacy, stakeholder relations, and access to capital. ESG disclosure can help investors and creditors to better understand the firm’s ESG risks and performance, which can lead to lower cost of capital. This is because ESG disclosure 54 J. Risk Financial Manag. 2023,16, 429 can reduce information asymmetry and agency costs between a firm and its investors and creditors, as well as signal the firm’s commitment to sustainability and responsibility (Healy and Palepu 2001; El Ghoul et al. 2011). ESG disclosure can also raise the cost of capital by creating expectations and obligations for a firm to maintain or improve its ESG performance or by exposing the firm to potential litigation or regulation related to its ESG impacts or risks (Dhaliwal et al. 2011; Ioannou and Serafeim 2019). The effect of capital expenditure on ESG disclosure may also vary depending on the quality and effectiveness of corporate governance practices. Corporate governance, referring to the system of rules, practices, and processes by which a firm is directed and controlled, plays a vital role in influencing the association between capital expenditure (capex) and Environmental, Social, and Governance (ESG) disclosure. It encompasses the balance of power and accountability among various stakeholders, including shareholders, the board of directors, management, auditors, regulators, and society. Corporate governance’s impact on a firm’s ESG disclosure and performance is significant, as it can shape the quality and quantity of information reported to stakeholders (Ng and Rezaee 2015; Eliwa et al. 2021). The choice of the United Kingdom as the primary focus of our study is strategic and grounded in several compelling factors that establish it as an optimal context for investigating the relationships between ESG reporting and audit fees (Moussa 2023). Firstly, the United Kingdom consistently exhibits a strong commitment to promoting corporate sustainability and ESG reporting through various regulatory initiatives, such as the UK Corporate Governance Code (ICAEW (Institute of Chartered Accountants in England and Wales) 2021), the UK Listing Rules, and the Taskforce on Climate-related Financial Disclosures (TCFD). These initiatives effectively encourage companies to provide more comprehensive ESG-related information, rendering the UK an ideal environment for exploring the potential cost implications of ESG reporting on audit fees. Secondly, the corporate governance landscape in the UK is well established, featuring an array of guidelines and codes that advocate for robust governance practices. Our study delves into how the presence of robust corporate governance mechanisms influences the association between ESG reporting and audit costs, offering valuable insights into governance’s role in mitigating the expenses associated with ESG reporting. Lastly, the availability of extensive financial and ESG disclosure data for UK-listed companies, sourced from annual reports, sustainability reports, and third-party data providers, facilitates rigorous empirical analysis. This data richness ensures a comprehensive exploration of our research questions, strengthening the depth and validity of our study. Based on this theory, we hypothesize that: H2. There is a significant moderating effect of corporate governance practices on the association between capital expenditure and ESG reporting. We expect that corporate governance practices will enhance the positive effect of capex on ESG disclosure by increasing the credibility and reliability of disclosure, as well as the responsiveness and accountability of firms to their stakeholders’ demands and pressures. 3. Research Methodology 3.1. Research Design and Data Collection This study uses a quantitative technique to investigate the association between capital expenditure (capex) and Environmental, Social, and Governance (ESG) reporting level and the moderating role of corporate governance in this association, using a novel dataset of non-financial firms listed in the FTSE All Share index in the UK from 2012 to 2021. To this end, data on capex, ESG disclosure level, and corporate governance variables are collected from the Bloomberg database, while financial data on Firm Size, Profitability, Liquidity, Board Size, and Independent Board and Audit Committee Non-Executives are obtained from the Eikon database. The data collection covers a ten-year period, ensuring a sufficient time span for measuring the effect of capex on ESG disclosure level. 55 J. Risk Financial Manag. 2023,16, 429 3.2. Sample Selection and Data Sources The sample includes non-financial firms that were traded on the UK FTSE All Share index during the research period. The selection of the UK market as the research context was motivated by several reasons. Firstly, the UK market comprises a diverse array of wellestablished companies across different industries, allowing for a thorough examination of various levels of capex, ESG disclosure, and corporate governance practices. Secondly, the UK has a strong framework for ESG reporting, supported by regulatory provisions such as the Code of Corporate Governance in the UK and the Companies Act 2006 (ICAEW (Institute of Chartered Accountants in England and Wales) 2021), thereby creating a conducive regulatory environment for investigating the association between capex and ESG disclosure. Thirdly, there is a growing demand for ESG information in the UK market due to the increasing recognition of sustainable business practices. The findings from this study also possess applicability beyond the UK, offering valuable perspectives for firms in other countries that have similar ESG reporting requirements and governance practices. 3.3. Variables and Measurement This section provides an overview of variables and measurement methods for this study. We will show how we calculate the level of capex, ESG disclosure, corporate governance, and the other factors that may influence their relationship. 3.3.1. Capex We measure Capex by taking the logarithm of the ratio of capital expenditure to total assets (Capex/TA). This ratio shows the proportion of a firm’s total assets that are invested in its long-term assets. Capex indicates the firm’s growth opportunities and strategic choices for its future operations and competitiveness. Capex also affects ESG disclosure, as firms with higher Capex may encounter more stakeholder pressure to disclose the environmental and social impacts and risks of their investments. 3.3.2. ESG Disclosure ESG disclosure level indicates how much a firm reveals about its nonfinancial information concerning environmental, social, and governance issues in its public documents, such as annual reports and sustainability reports (Boffo et al. 2020). Bloomberg provides a score for ESG reporting based on the data available from these sources, as well as from the firm’s website. The score reflects the extent of ESG disclosure by firms, with 0.1 indicating minimal disclosure and 100 indicating maximal disclosure (Moussa 2023). 3.3.3. Corporate Governance Corporate governance is a term that refers to the system of rules, practices and processes by which a company is directed and controlled (Chartered Governance Institute UK & Ireland 2019). Corporate governance can affect both capital expenditure (capex) and Environmental, Social, and Governance (ESG) disclosure decisions, as it influences how managers allocate resources and communicate with stakeholders. Capex refers to the spending on long-term assets that generate future cash flows and growth opportunities for the company. ESG disclosure refers to the communication of a company’s policies and performance on environmental, social, and governance issues to its stakeholders. Both capex and ESG disclosure can affect the company’s risk profile, reputation, and competitiveness in the market. To measure Governance, we use four indicators that reflect the composition and independence of the board of directors and the audit committee of the company. These indicators are Board Size, which reflects the number of directors on the board of the company (Endrikat et al. 2021); Board Diversity, which captures the proportion of female directors to total directors on the board of the company; Independent Board, which gauges the share of board members who are free from the influence of the company’s management or major shareholders (Ghafran and O’Sullivan 2017); and Audit Committee Non-Executives, which 56 J. Risk Financial Manag. 2023,16, 429 indicates the presence of non-executive directors in the audit committee of the company who are independent from the company’s management (Ghafran and O’Sullivan 2017). To capture the combined effect of these Governance mechanisms on capex and ESG disclosure decisions, we use the principal component analysis (PCA) technique (Arena et al. 2015; Mallin et al. 2013; Moussa 2023; Elmarzouky et al. 2021). PCA is a statistical method that simplifies a data set by changing it into a new coordinate system where fewer dimensions than the original data can capture most of the variation in the data. The use of PCA in this study has several advantages, as suggested by Moussa (2023): • It permits us to capture the combined impact of multiple Governance mechanisms on capex and ESG disclosure decisions. • It helps to address issues of multicollinearity and measurement error that may arise from using multiple correlated variables. • It provides a comprehensive and reliable measure of Governance that can be compared across different companies and industries. By utilizing PCA, we can overcome potential challenges associated with analyzing multiple independent variables simultaneously. This analytical technique condenses the information from board size, independent board members, audit committee non-executives, and audit committee independence into a unified measure. It enables us to capture the overall effect of Governance on capex and ESG disclosure decisions, facilitating a more holistic comprehension of the relationships amongst Governance mechanisms and the dependent variables. 3.3.4. Control Variables We use several control variables in our regression models to investigate how capex and ESG disclosure level are related and how corporate governance influences this relationship. These control variables are Firm Size, which is the natural logarithm of total assets (Frank and Shen 2016); Liquidity, which is the current ratio that indicates the company’s ability to pay its short-term liabilities with its current assets (Cho et al. 2021); Profitability, which is the return on assets (ROA) that shows the company’s financial performance (Cho et al. 2021; Hou et al. 2012); Board Size, which is the number of directors on the board (Hou et al. 2012); Board Diversity, which is the percentage of female directors on the board (Hou et al. 2012); Independent Board, which is the percentage of independent directors on the board (Ghafran and O’Sullivan 2017); Audit Committee Non-Executives, which is the percentage of non-executive directors on the audit committee (Ghafran and O’Sullivan 2017); and Constant, which is a fixed value that does not change with the independent variables. These control variables help us control for other factors that may affect the dependent variables and increase the validity of our analysis. 3.4. Empirical Models and Econometric Techniques We will use two regression models to test the effect of capex on ESG disclosure and the moderating role of corporate governance in this effect: a first model that controls for all the other variables and a second model that adds an interaction term to see how corporate governance changes the effect. First model: ESG Disclosure Level = β 0+ β 1 × Capex + β 2 × Firm Size + β 3 × Liquidity + β 4 × Profitability + β 5 × Board Size + β 6 × Board Diversity + β 7 × Independent Board + β8×Audit committee non-executives + β9×Constant. Within this model, ESG Disclosure Level serves as the dependent variable and is measured by a set of independent variables, namely Capex, Firm Size, Liquidity, Profitability, Board Size, Board Diversity, Independent Board, Audit Committee Non-Executives, and Constant. These independent variables have coefficients ( β ) that indicate the effect of a one-unit change in the corresponding explanatory variable on the outcome variable (ESG Disclosure Level). The model does not account for all the variations in the outcome variable, and the error term (ε) captures this. 57 J. Risk Financial Manag. 2023,16, 429 Second model: ESG Disclosure Level = β 0+ β 1 × C.Capex#c.total_governance + β 2 ×Firm Size + β3×Liquidity + β4×Profitability + β6×Constant. Within this model, ESG Disclosure Level is the dependent variable and is measured by a set of independent variables, including Firm Size, Liquidity, Profitability, and Board Size. Moreover, the model includes an interaction term (C.Capex#c.total_governance) to examine how corporate governance moderates the association between capex and ESG disclosure. The explanatory variables have coefficients ( β ) that indicate the effect of a one-unit change in each corresponding predictor variable on the outcome variable (ESG Disclosure Level). The model does not account for all the variations in the outcome variable, and the error term (ε) captures this. 3.5. Addressing Endogeneity Concerns Addressing endogeneity concerns is crucial in regression analysis, particularly when there exists a correlation between the explanatory variables and the error term. This correlation can introduce biases and render the estimates unreliable. In this study, various approaches are adopted to tackle endogeneity concerns, thereby enhancing the robustness of the findings. To address endogeneity, we use lagged variables for capex and ESG disclosure and fixed effects models following a specific approach to control for unobservable heterogeneity. By incorporating these methods, we can account for the temporal association amongst variables, address potential endogeneity issues caused by omitted variable bias, and control for unobservable heterogeneity. Through these approaches, we aim to mitigate the potential biases introduced by endogeneity, ensuring the credibility and dependability of our research findings. 4. Empirical Results 4.1. Descriptive Analysis and Results Table 1 presents the descriptive statistics of the study variables. The sample consists of 3294 observations for ESG disclosure level, which has a mean of 50.473 and varies from 0.99 to 94.35. The capital expenditure (Capex) has 3995 observations, with a mean of 10.084 and a range of 3.689 to 15.932. Among the control variables, Firm Size has the largest number of observations (5829), with a mean of 13.884 and a low standard deviation of 1.918. The Liquidity has 3078 observations, with a mean of 1.672 and a wide variation from 0.053 to 29.27. The Profitability (ROA) has 4307 observations, with a mean of 0.06 and a range of − 0.853 to 0.345. The Board Size has 6421 observations, with a mean of 7.555, a minimum of 3, and a maximum of 12. The Board Diversity has 3287 observations, with a mean of 23.433 and a range of 0 to 66.67. The Independent Board has 3296 observations, with a mean of 63.085 and a variation from 17.65 to 100. The Audit Committee Non-Executives has 3266 observations, with a mean of 98.39 and a range of 20 to 100. Table 1. Descriptive Statistics. Variable Obs Mean Std. Dev. Min Max ESG Score 3294 50.473 19.106 0.99 94.35 ln Capex 3995 10.084 2.377 3.689 15.932 Firm Size 5829 13.884 1.918 3.912 22.032 Liquidity 3078 1.672 1.492 0.053 29.27 ROA 4307 0.06 0.096 −0.853 0.345 Board Size 6421 7.555 2.48 3 12 Board Diversity 3287 23.433 12.57 0 66.67 Independent Board 3296 63.085 17.353 17.65 100 Audit Committee Non-Executives 3266 98.39 5.955 20 100 58 J. Risk Financial Manag. 2023,16, 429 4.2. Pairwise Correlations Table 2 reports the pairwise correlation coefficients amongst the study variables, including the ESG Score, capital expenditure (Capex), and the control variables, such as Firm Size, Liquidity, Profitability (ROA), Board Size, Board Diversity, Independent Board, and Audit Committee Non-Executives. The correlation analysis shows some notable findings between the variables. The ESG Score has a moderate positive correlation (0.514) with Capex, indicating a positive association between higher ESG Score and higher capital expenditure. This suggests that companies with higher capital expenditure tend to disclose more ESG information. Among the control variables, firm size has a strong positive correlation (0.572) with the ESG Score, implying that larger firms have higher ESG disclosure levels, and a strong positive correlation (0.675) with Capex, implying that larger firms have higher capital expenditure. Liquidity has a weak negative correlation ( − 0.108) with the ESG Score, implying that higher liquidity levels are related to lower ESG disclosure levels. Likewise, Profitability (ROA) has a weak negative correlation ( − 0.101) with the ESG Score, implying that more profitable companies tend to disclose less ESG information. Regarding the board-related variables, Board Size has a moderate positive correlation (0.465) with the ESG Score, implying that larger boards are related to higher ESG disclosure levels. However, Independent Board has a very weak positive correlation (0.021) with the ESG Score, implying that there is no significant association between the proportion of independent board members and the ESG disclosure level. The Board Diversity variable has a weak positive correlation (0.277) with the ESG Score, implying that more diverse boards may be related to higher ESG disclosure levels. The Audit Committee Non-Executives variable has a very weak positive correlation (0.089) with the ESG Score, implying that there is no significant association between the proportion of non-executives on the audit committee and the ESG disclosure level. Table 2. Pairwise correlations. Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (1) ESG Score 1.000 (2) Capex 0.514 1.000 (3) Firm Size 0.572 0.675 1.000 (4) Liquidity −0.108 −0.114 −0.068 1.000 (5) Profitability (ROA) −0.101 −0.120 −0.153 0.160 1.000 (6) Board Size 0.465 0.423 0.509 −0.058 −0.070 1.000 (7) Board Diversity 0.277 0.081 0.134 −0.069 0.036 −0.035 1.000 (8) Independent Board 0.021 0.209 0.123 −0.088 0.009 −0.209 0.337 1.000 (9) Audit Committee Non-Executives 0.089 0.063 0.084 0.030 0.021 0.032 0.042 0.085 1.000 Our data analysis results, which aim to test the hypotheses of our study, are presented in this section. The data do not exhibit significant multicollinearity, as indicated by the weak correlation among the independent and control variables. This result is also supported by the variance inflation factors (VIFs), which are within the acceptable threshold. The absence of multicollinearity, as implied by the VIF values, increases the reliability and validity of our findings. 4.3. Regression Analysis, Findings, and Discussion This study employed a multivariate analysis to explore the association among ESG Scores, capital expenditure (Capex), and various other control variables. The study focused on non-financial companies listed in the FTSE All Share index in the UK, spanning from 2012 to 2021. In Table 3, four regression models, namely OLS, random effects, fixed effects, and Tobit, were applied to the data. The OLS model was the baseline for comparison, and the random effects model accounted for potential heterogeneity across different years. The fixed effects model controlled for unobserved time-invariant factors that may affect the ESG 59 J. Risk Financial Manag. 2023,16, 429 Score. The Tobit model accounted for censoring in the ESG Score variable. The analysis results showed that Capex had a positive and significant effect on ESG Score across all four regression models, with a coefficient of 0.425. This indicated that companies with higher capital expenditure disclosed more ESG information, implying higher stakeholder engagement. Table 3. Regressions. Variables OLS Random Fixed Tobit ESG Score ESG Score ESG Score ESG Score Capex 0.722 *** 0.722 *** 0.820 *** 0.722 *** (0.246) (0.246) (0.246) (0.245) Firm Size 4.511 *** 4.511 *** 4.501 *** 4.511 *** (0.341) (0.341) (0.340) (0.340) Liquidity −0.521 ** −0.521 ** −0.584 ** −0.521 ** (0.234) (0.234) (0.233) (0.233) Profitability (ROA) −0.811 −0.811 2.124 −0.811 (3.575) (3.575) (3.645) (3.566) Board Size 0.663 *** 0.663 *** 0.713 *** 0.663 *** (0.164) (0.164) (0.165) (0.164) Board Diversity 0.327 *** 0.327 *** 0.271 *** 0.327 *** (0.0255) (0.0255) (0.0288) (0.0254) Independent Board 0.196 *** 0.196 *** 0.197 *** 0.196 *** (0.0232) (0.0232) (0.0232) (0.0232) Audit Committee Non-Executives 0.237 *** 0.237 *** 0.256 *** 0.237 *** (0.0426) (0.0426) (0.0428) (0.0425) Constant −67.12 *** −67.12 *** −69.14 *** −67.12 *** (4.877) (4.877) (4.884) (4.865) Observations 1858 1858 1858 1858 R-squared 0.510 0.505 Number of Year 10 10 Standard errors in parentheses. *** p< 0.01, ** p< 0.05. Based on stakeholder theory, companies may invest more in capital expenditure to improve their reputation and legitimacy among their stakeholders, such as customers, employees, suppliers, regulators, and society at large. By disclosing more ESG information, companies may signal their commitment to social and environmental responsibility and thus increase their stakeholder trust and satisfaction. The study results also indicated that the effect of Capex on ESG Score was stronger for companies with higher governance quality. This indicated that governance moderated the association between Capex and ESG Score, influencing the degree of ESG disclosure. Companies with higher governance quality may have more effective board oversight and internal controls, which may enable them to monitor and manage their ESG risks and opportunities more efficiently. Moreover, companies with higher governance quality may have more stakeholder pressure and expectations to disclose their ESG information, as they may be subject to higher scrutiny and accountability by their stakeholders. Regarding the control variables, the findings showed that Firm Size, Liquidity, Profitability (ROA), Board Diversity, Independent Board, and Audit Committee Non-Executives had positive and significant effects on ESG Score at 1%, implying that companies with larger size, higher liquidity, higher profitability (ROA), more diverse boards, higher proportion of independent board members, and higher proportion of non-executives on the audit committee disclosed more ESG information. On the other hand, profitability (ROE) had a negative and significant effect on ESG Score at 1%, indicating that more profitable companies disclosed less ESG information. This may be because more profitable companies may have less incentive or need to disclose their ESG information, as they may already enjoy a strong market position and reputation. 60 J. Risk Financial Manag. 2023,16, 429 4.4. Does Governance Matter? Table 4 shows the moderating effect of governance on the association between capex and ESG Score. The interaction term “c.ln_capex#c.total_governance” has a positive and significant coefficient of 0.425 across all four regression models at the 99% confidence level. This shows that governance moderates the association between capex and ESG Score. This finding can be explained by resource dependence theory. This theory suggests that firms invest in capital expenditure to acquire and maintain valuable resources that can improve their competitive advantage and performance (Pfeffer and Salancik 1978). By doing so, they show their commitment to innovation and growth, which may increase their stakeholder engagement and satisfaction. Resource dependence theory is relevant because it highlights the role of capital expenditure in creating value and reducing uncertainty for the firm and its stakeholders, such as investors, customers, suppliers, and regulators (Hillman et al. 2009). For instance, capital expenditure can enhance the firm’s efficiency, quality, and differentiation, which can boost its market share and profitability. The moderating effect of governance in the association between capex and ESG Score underscores the importance of governance practices in influencing ESG disclosure. Companies that invest more in capital expenditure and have higher governance quality are likely to disclose more ESG information, which can positively affect their reputation and legitimacy. Table 4. Moderating effect of governance. Variables OLS Random Fixed Tobit ESG_Score ESG_Score ESG_Score ESG_Score c.ln_capex#c.total_governance 0.425 *** 0.425 *** 0.375 *** 0.425 *** (0.0293) (0.0293) (0.0313) (0.0292) Firm Size 6.665 *** 6.665 *** 6.753 *** 6.665 *** (0.190) (0.190) (0.190) (0.189) Liquidity −0.621 *** −0.621 *** −0.702 *** −0.621 *** (0.241) (0.241) (0.240) (0.240) Profitability (ROA) 4.582 4.582 7.277 * 4.582 (3.668) (3.668) (3.721) (3.663) Constant −41.57 *** −41.57 *** −43.01 *** −41.57 *** (2.854) (2.854) (2.864) (2.850) Observations 1858 1858 1858 1858 R-squared 0.474 0.468 Number of Year 10 10 Standard errors in parentheses. *** p< 0.01. * p< 0.1. 4.5. Robustness Check This study tested the sensitivity of its findings regarding the measurement of profitability. In this analysis, the profitability variable was replaced with ROE (return on equity), which is another common measure of profitability and the multivariate regression models were recalculated accordingly. Table 5 shows the outcomes of this robustness check, which demonstrate a consistent and significant effect of the interaction term “c.ln_capex#c.total_governance” on ESG Score at 1%, with a coefficient of 0.404 across all four regression models (OLS, random effects fixed effects Tobit). This indicates that companies that invest more in capital expenditure and have higher governance quality disclose more ESG information. Importantly, this finding is consistent with the results obtained when using the original profitability variable (ROA), indicating the robustness and reliability of the study’s conclusions in relation to variations in the measurement of the key variable. The analysis also confirms the positive and significant effects of Firm Size, Liquidity, Board Diversity, Independent Board, and Audit Committee Non-Executives on ESG Score at 1%. 61 J. Risk Financial Manag. 2023,16, 429 Table 5. Robustness check. Variables OLS Random Fixed Tobit ESG_Score ESG_Score ESG_Score ESG_Score c.Capex#c.total_governance 0.404 *** 0.404 *** 0.351 *** 0.404 *** (0.0272) (0.0272) (0.0291) (0.0272) Firm Size 6.889 *** 6.889 *** 6.971 *** 6.889 *** (0.178) (0.178) (0.177) (0.177) Liquidity −0.588 *** −0.588 *** −0.629 *** −0.588 *** (0.194) (0.194) (0.193) (0.194) ROE 8.309 *** 8.309 *** 9.979 *** 8.309 *** (2.596) (2.596) (2.603) (2.593) Constant −45.18 *** −45.18 *** −46.49 *** −45.18 *** (2.652) (2.652) (2.650) (2.649) Observations 2066 2066 2066 2066 R-squared 0.480 0.477 Number of Year 10 10 Standard errors in parentheses. *** p< 0.01. 5. Discussion 5.1. Implications of the Study’s Findings for Theory and Practice This research carries various implications for both theory and practice, as it provides new insights into the association between capital expenditure and ESG reporting and the moderating role of governance in this relationship. This study also contributes to the literature on stakeholder theory and resource dependence theory, as it applies these frameworks to explain the link between capex, governance, and ESG disclosure. The study has implications for companies, investors, and regulators, as it offers guidance on how to incorporate ESG considerations into capex decisions and how to communicate ESG performance and impact to stakeholders. Implications for companies : How capital expenditure can influence ESG disclosure strategies and reputation management. This study suggests that companies can use capital expenditure as a strategic tool to enhance their ESG disclosure and reputation management. By investing in capex that shows their commitment to innovation and growth, companies can improve their reputation and legitimacy among their stakeholders, such as customers, employees, suppliers, regulators, and society at large. By disclosing more ESG information, companies can signal their social and environmental responsibility and performance to their stakeholders and thus increase their trust and satisfaction. This study also suggests that companies should align their capex decisions with their governance practices, as governance can moderate the association between capex and ESG disclosure. Companies with higher governance quality can disclose more ESG information after investing in capex compared to companies with lower governance quality. This can enhance the credibility and reliability of their ESG disclosure, as well as the responsiveness and accountability of their management to their stakeholders’ demands and pressures. Implications for investors : How understanding the association between capital expenditure and ESG disclosure can inform investment decisions. This study suggests that investors can use the association between capital expenditure and ESG disclosure as a criterion for evaluating the financial performance and value of companies. By understanding how capex affects ESG disclosure, investors can assess the growth potential and sustainability of companies, as well as their risk exposure and mitigation strategies. This study also suggests that investors should consider the governance quality of companies, as it can influence the degree of ESG disclosure after investing in capex. Investors can prefer companies with higher governance quality, as they disclose more ESG information after investing in capex, compared to companies with lower governance quality. This can provide more transparency and assurance for investors, as well as more opportunities for engagement and influence. 62 J. Risk Financial Manag. 2023,16, 429 This study provides some criteria or indicators for investors to evaluate the financial performance and value of companies based on their capex, governance, and ESG disclosure. These include: I The level of capex relative to sales or assets, which indicates the growth strategy or investment intensity of companies. I The level of ESG disclosure relative to peers or benchmarks, which indicates the social and environmental responsibility or performance of companies. I The quality of governance practices, such as board composition, oversight, independence, diversity, and accountability, which indicates the stakeholder engagement and accountability of companies. I The cost of capital, such as cost of equity or debt, which indicates the risk and return expectations of investors and creditors. Implications for regulators : How the findings can shape future regulatory policies related to ESG disclosure and capital allocation. This study suggests that regulators can use the findings to design and implement effective regulatory policies related to ESG disclosure and capital allocation. By recognizing the positive association between capex and ESG disclosure, regulators can encourage companies to invest more in capex that supports their social and environmental goals and impacts. By acknowledging the moderating role of governance in this relationship, regulators can also promote higher governance standards for companies, such as board composition, oversight, independence, diversity, and accountability. By doing so, regulators can foster a culture of transparency and responsibility among companies and investors, as well as enhance their stakeholder relations and value creation. This study provides some policies or standards for regulators to encourage or enforce higher levels of capex, governance, and ESG disclosure among companies. These include: I Providing incentives or subsidies for companies to invest in capex that supports their social and environmental objectives and impacts, such as tax breaks, grants, or loans. I Setting minimum requirements or guidelines for companies to disclose their ESG information to their stakeholders, such as mandatory reporting, disclosure frameworks, or auditing standards. I Imposing sanctions or penalties for companies that fail to comply with the capex, governance, or ESG disclosure regulations, such as fines, suspensions, or delistings. I Creating platforms or mechanisms for stakeholder dialogue and feedback on capex, governance, and ESG disclosure practices, such as forums, surveys, or ratings. 5.2. Implications for the Future of ESG Disclosure This study also has implications for the future of ESG disclosure, as it indicates potential changes in ESG disclosure practices based on its findings. This research also emphasizes the role of capital expenditure as a tool for promoting sustainability and responsible business practices. This study implies that ESG disclosure practices may change in response to changes in capex decisions and governance practices. As companies invest more in capex that reflects their innovation and growth strategies, they may disclose more ESG information that showcases their social and environmental impacts and performance. As companies adopt higher governance standards that enhance their stakeholder engagement and accountability, they may also disclose more ESG information that demonstrates their commitment to sustainability and responsibility. These changes may lead to more comprehensive, detailed, comparable, and reliable ESG disclosures that meet the expectations and needs of various stakeholders. This study implies that capital expenditure can play a key role in promoting sustainability and responsible business practices among companies. By investing in capex that supports their social and environmental objectives and impacts, companies can create value for themselves and their stakeholders. By disclosing more ESG information that communicates their social and environmental responsibility and performance, companies 63 J. Risk Financial Manag. 2023,16, 374 standards is to improve financial statements’ transparency and reliability worldwide and facilitate cross-border investments. Because of this global dimension, it is more difficult and essential to determine the economic consequences of accounting standards in the context of financial regulatory reforms as an increasing number of countries with different levels of development adopt IFRS (Zeff 2012). Examining these effects has important economic and social implications for European countries, which may impact the domestic and international users of accounting information. Therefore, regulators are interested in knowing whether IFRS adoption may have contributed to reducing the cost of equity capital and, consequently, report an increase in market efficiency and liquidity (Han et al. 2016). Investors are interested in determining whether information asymmetry problems have reduced since IFRS adoption. This indicates decreased information acquisition and verification efforts, allowing for more efficient investment decisions (Diamond and Verrecchia 1991; Ball 2006) and a potential increase in cross-border investment (De Fond et al. 2011). While previous studies have documented the positive effects of IFRS implementation (i.e., reduction in firms’ cost of equity capital), empirical evidence on the role of specific legal disclosure requirements on these financial benefits is lacking. Hellman et al. (2018) argue that non-compliance is significant in both general and specific IFRS disclosures. Therefore, the findings based on IFRS adoption cannot be used to determine the effect of IFRS requirements on the level of disclosure. This creates a gap in the literature that we attempt to fill by explicitly examining the relationship between firm-level IFRS disclosure and its impact on the cost of equity capital. This study sheds light on whether IFRS disclosure requirements benefit users economically and contribute to the disclosure overload debate. The contributions of this study are two-fold. First, studying the impact of IFRS adoption on the cost of equity capital can help inform policy decisions on financial reporting and accounting standards. Second, the cost of equity capital is an important indicator for companies because it reflects the return investors require to compensate for the risk associated with investing in a particular company. Therefore, understanding the relationship between IFRS and the cost of equity capital can have important implications for both companies and policymakers. Hence, this study assesses the effect of IFRS on the cost of equity capital for a sample of 337 European firms listed on STOXX 600 Europe in 17 European countries that implemented these standards between 1994 and 2022. To account for cross-sectional dependence among the firms in our sample, we perform CD tests, as suggested by Pesaran (2021). Furthermore, we use the GMM-system technique to examine the relationship between IFRS adoption and the cost of equity capital. The findings from the analysis suggest that there is an inverse relationship between IFRS disclosure requirements and the cost of equity capital. In simpler terms, companies that adhere to higher levels of IFRS disclosure tend to experience lower costs of equity capital. The remainder of this paper is organized as follows: Section 2 provides an overview of the relevant theoretical and empirical literature and presents the development of our hypotheses. Section 3 details the sample data and methodology used. Section 4 presents the empirical results. Section 5 presents the main conclusions and some policy implications. 2. Literature Review and Hypothesis Development 2.1. Theoretical Framework From a theoretical perspective, separation of ownership gives rise to the need for better governance. Smith (1776) highlighted the agency problem by stating that managers should consider other people’s funds rather than their own. He argued that managers could not look after the funds as partners were in a partnership. According to Berle and Means (1932), small shareholders cannot be a controller in large corporations with dispersed ownership because of high costs and low returns (Ali et al. 2019). 70 J. Risk Financial Manag. 2023,16, 374 In cases where accounting enforcement mechanisms are lacking, a company’s corporate governance system and financial reporting incentives, commonly referred to as “corporate characteristics”, may significantly impact the determination of incentives for disclosures. According to agency theory, there is an agency relationship in which one party (i.e., principal) delegates work to another (i.e., agent) performing that work on behalf of the principal. Thus, there is a separation of ownership and control of the entity, and it may be expensive or difficult for the principal to verify what the agent is doing because of information asymmetry (Eisenhardt 1989; Jensen and Meckling 1976). The application of corporate governance principles is a monitoring cost that can be used to curb the information asymmetry caused by agency relationships. For instance, Fama and Jensen (1983) claimed that the role of the board of directors can be used as an information system to monitor shareholders’ opportunism toward top executives. Further, Eisenhardt (1989) posited that when the board provides quality financial information (through, for instance, compliance with IFRS disclosure requirements), top executives are more likely to behave consistently with shareholders’ interests. According to Damak-Ayadi et al. (2020), the adoption of IFRS for SMEs’ standards in various countries can be attributed to two main theories: the neo-institutional theory, as proposed by DiMaggio and Powell (1997), and the economic theory of networks, as proposed by Katz and Shapiro (1985). According to DiMaggio and Powell (1997), companies that internationalize their operations tend to gain increased legitimacy in the eyes of their stakeholders and the broader business community. Déjean and Saboly (2006) further argued that this quest for organizational legitimacy plays a significant role in influencing firms to adopt specific practices or standards, such as IFRS for SMEs. As a result, firms may embrace these standards not only for their inherent benefits but also to align themselves with prevailing norms and gain acceptance in their international business engagements. As highlighted by Meyer and Rowan (1977), organizations facing environmental constraints should actively employ mechanisms of legitimacy. By doing so, these organizations can establish a favorable image and gain acceptance within their societal and business environments. Adopting mechanisms of legitimacy can involve embracing widely recognized standards, like IFRS, to showcase their commitment to transparency, accountability, and responsible financial reporting. DiMaggio and Powell (1983) argued that legitimacy is achieved through the concept of “institutional isomorphism”. They proposed that a country’s full adoption of IFRS can be explained by three types of isomorphism. The first is coercive isomorphism, which refers to the institutional pressures on economic actors to adopt IFRS. Mantzari et al. (2017) defined coercive pressures as occurring when external powerful parties, such as the state and other constituents upon which an organization is dependent, force the adoption of an organizational practice or element, usually by using sanctions. On the other hand, Reichborn-Kjennerud et al. (2019) defined coercive pressure as the social pressure to follow existing societal norms. They highlighted that norms may be formal or informal. Formal coercive norms are based on laws and regulations, while informal coercive pressure includes media and public expectations. The impetus behind the adoption of IFRS can be attributed to the regulatory system and influential international financing organizations, such as the World Bank and International Monetary Fund (IMF), as pointed out by Judge et al. (2010). Another factor influencing the adoption of IFRS is mimetic isomorphism, where organizations imitate the practices of more efficient counterparts when they face uncertainty in their environment and have ambiguous objectives. Meyer and Rowan (1977) proposed that organizations facing uncertain environments can effectively and economically navigate these challenges by adopting a strategy of imitating the behaviors of successful organizations. In simpler terms, when organizations encounter uncertainties or complexities in their operating environment, they can increase their chances of success by emulating the practices and strategies of established and prosperous companies. By imitating successful 71 J. Risk Financial Manag. 2023,16, 374 organizations, they can draw upon proven methods and approaches, reducing the risks associated with experimentation and trial-and-error. Meyer and Rowan (1977) suggested that this imitative approach allows organizations to benefit from the experiences and lessons learned by others, enabling them to adapt more efficiently to dynamic market conditions and increasing the likelihood of achieving favorable outcomes in their own endeavors. Mantzari et al. (2017) defined mimetic pressures as occurring “when an organization attempts to imitate a more successful referent organization or improve upon the practice of other organizations”. Boolaky et al. (2020) highlighted that “mimetic isomorphism arises from the replication of practices across nations, whereby there is a tendency to emulate what more successful countries have done to secure benefits and social acceptance”. Finally, normative isomorphism signifies the influence of universities and other professional organizations on firms, leading them toward homogeneity (Hassan 2008). DiMaggio and Powell (1997) further stressed that normative isomorphism is closely associated with a country’s level of education. Hassan et al. (2014) emphasized that normative pressure resulting from the norms and values of the profession also influences the degree to which a nation will adopt international best practices. Boolaky et al. (2018) suggested that normative isomorphism occurs when individuals are trained under similar educational systems and tend to engage in similar conventional practices; they concluded that a firm that draws from a standard pool of professional staff would be able to improve its systems and practices because their ability to harmonize and enhance accounting quality may be greater. The economic theory of networks suggests that countries are more inclined to adopt international standards, like IFRS, when they observe their economic partners already using them. According to Ramanna and Sletten (2009), IFRS is perceived as a commodity that countries have the discretion to embrace. The adoption decision is influenced by the network effect, wherein one country’s adoption of IFRS encourages others to follow suit, leading to a network of countries utilizing the same standardized financial reporting framework. The decision to adopt international standards like IFRS is driven by two critical factors: the inherent value of the product and the network effects it creates, as described by Katz and Shapiro (1985). Ramanna and Sletten (2009) put forward the idea that harmonizing accounting practices serves the purpose of globalizing trading networks. They introduced two key concepts: the “autarky value”, which represents the inherent value of the product (accounting standards developed by the IASB), and the “synchronization value”, which reflects the network value of the product arising from harmonization with other countries already using the same standards. According to the authors, a country should opt for international standards only when the combined benefits of both autarky and synchronization outweigh the advantages of sticking to local accounting standards. 2.2. Information Disclosure and Cost of Equity Capital Whether firms benefit from disclosure is one of the most critical issues in current accounting research. In particular, these benefits may arise from the reduced cost of equity capital brought about by companies’ increased disclosure of accounting information. In recent years, several theoretical studies have focused on the relationship between the cost of equity capital and disclosure. From a theoretical point of view, it has been argued that disclosure reduces information asymmetry and, consequently, the cost of equity capital for companies by reducing bid/ask spreads (Amihud and Mendelson 1986) or by increasing demand for a company’s shares (Diamond and Verrecchia 1991). Another advantage of improving the quality of information is that it reduces the estimation risk of potential investors regarding the parameters of a stock’s future performance. Indeed, investors are expected to assign greater systematic risk to poorly informed assets rather than highly informed ones (Clarkson et al. 1996). Although many arguments favor accounting information quality and its positive impact on the cost of equity capital, theoretical discussions remain open. Thus, one of 72 J. Risk Financial Manag. 2023,16, 374 the most controversial central questions in theoretical literature is whether the effects of information are diversified or not. Easley and O’Hara (2004) proposed a model of rational expectations in which information can influence a company’s cost of equity capital, which is compatible with the logic of non-diversification. Indeed, a company can influence its cost of equity capital by acting on the accuracy and quantity of information made available to its investors. Furthermore, the authors believe that this objective can be achieved through a company’s choice of accounting standards and disclosure policies. In their study, Lambert et al. (2007) devised a methodology that establishes a connection between accounting information and the cost of equity capital. Their primary objective was to examine whether the quality of a company’s accounting information is mirrored in the cost of its equity capital. Through this approach, the authors effectively demonstrated that the quality of accounting information has a dual impact on a company’s cost of equity capital. Firstly, the quality of accounting information directly influences a company’s cost of equity capital by shaping market players’ perceptions of the distribution of future cash flows. Secondly, the quality of accounting information also has an indirect impact on a company’s cost of equity capital through actual decisions made based on that information. Decisions taken by the company, which may alter the distribution of future cash flows, can further affect the cost of equity capital. In several empirical studies, the relationship between information disclosure and information asymmetry/sharing costs varies according to the type of firm, type of disclosure, and measure of information asymmetry (Botosan 1997; Leuz and Verrecchia 2000; Botosan and Plumlee 2002; Francis et al. 2008). Furthermore, the effects of mandatory IFRS adoption on equity costs suggest that IFRS adoption can reduce equity costs in countries with strong enforcement and investor protection mechanisms (Daske et al. 2008; Li 2010; Persakis and Iatridis 2017). In their research involving a sample of 307 Spanish-listed companies from 1999 to 2009, Castillo Merino et al. (2014) conducted a focused country-level analysis using OLS regression analysis. The dependent variable, the cost of equity capital, was estimated using the proxy proposed by Easton (2004). The authors discovered that Spanish-listed companies experienced a substantial decrease in their cost of equity capital following the compulsory adoption of IFRS in 2005. This reduction in the cost of equity capital remained significant even after accounting for various firm-specific risk factors and market-related variables that could potentially influence the cost of equity. Thus, increased financial disclosure, improved comparability of information, and changes in legal and institutional enforcement appear to have a joint effect on the cost of equity capital, leading to a sharp decrease in expected returns on equity. Houqe et al. (2016) conducted a study examining the impact of IFRS adoption on the cost of equity capital for listed companies in New Zealand. Their research was based on a sample of 290 firm-year observations spanning two periods: 1998–2002 and 2009–2013. The authors reported a significant negative association between IFRS adoption and the cost of equity capital, suggesting that IFRS is a higher-quality set of accounting standards than previous New Zealand GAAP. Their study provides empirical evidence on the impact of IFRS adoption on the cost of equity capital of New Zealand companies and supports the findings of previous studies on European companies. In the case of Brazilian firms, Gatsios et al. (2016) assessed the impact of IFRS adoption on the cost of equity capital of 1325 Brazilian public companies over the period 2004–2013 using Difference-In-Difference (DID) analysis, which compares the results of firms that voluntarily adopted IFRS with those that adopted IFRS after the mandatory adoption period. Their results indicate that IFRS adoption did not reduce equity costs in Brazil. Similarly, Da Silva and Nardi (2017) studied the impact of IFRS adoption on Brazilian firms’ cost of equity capital using DID and GMM approaches for 2010 and 2011. Their results show that an increase in information contributes to a reduction in asymmetric information and that a more efficient allocation of resources reduces the cost of equity capital. These results support the hypothesis of increased earnings quality after IFRS adoption. 73 J. Risk Financial Manag. 2023,16, 374 Sanjaya et al. (2017) attempted to analyze and compare the cost of equity capital before and after the adoption of IFRS on the financial instrument of financial accounting standards (PSAK) for banking companies listed on the Indonesian stock exchange for the period 2008–2009 before IFRS adoption and 2013–2014 after IFRS adoption. The results of this study prove that the cost of equity capital was lower after IFRS adoption on financial instruments of financial accounting standards for banking companies listed on the Indonesian stock exchange. Thus, IFRS adoption reduces equity costs, impacts the reduction of non-performing loans, increases the loan-to-deposit ratio, and increases the net interest margin. For a sample of 1658 firm-years from companies listed on the KSE and KOSDAQ from 2000 to 2013, Kim and Ryu (2018) studied the effect of mandatory IFRS adoption on the cost of equity capital, starting from its mandatory introduction in 2011 using the average implied cost of equity capital values presented by Claus and Thomas (2001), Gebhardt et al. (2001), Easton (2004), and Ohlson and Juettner-Nauroth (2005). Their results show a significantly negative relationship between mandatory IFRS adoption and the cost of equity capital, thus decreasing the cost of equity capital. Not far away, De Moura et al. (2020) conducted a study to investigate the impact of mandatory IFRS adoption on the cost of equity capital and cost of debt for a group of firms operating in Argentina, Brazil, Chile, Mexico, and Peru. The findings reveal that even after controlling for firm-level reporting incentives, mandatory IFRS adoption reduces equity costs. Additionally, the cost of debt experienced a significant reduction after the IFRS adoption. These results suggest that the enhanced disclosure and comparability facilitated by IFRS standards, compared with previous domestic accounting standards, mitigated the information asymmetry problem and produced positive economic outcomes for firms operating in Latin America. For their part, Saha and Bose (2021) examined the association between IFRS disclosure requirements and the cost of equity capital for a sample of 157 Australian firms. The authors showed that disclosure requirements negatively affect the cost of equity capital; thus, firms with higher IFRS disclosure levels have a lower cost of equity capital. Furthermore, the study revealed a negative relationship between IFRS disclosure requirements and the costs of debt and equity for the companies under investigation. These findings add valuable insights to the ongoing discussion about the comparative advantages and disadvantages of IFRS disclosure requirements. The implications of these results are significant for standard-setting bodies, regulators, and stakeholders who rely on financial statements for decision-making and analysis. In a recent study, using a meta-analysis of 56 empirical studies with 1265 effect sizes, Opare et al. (2021) determined the impact of IFRS adoption on financial reporting comparability, market liquidity, cost of equity capital, and cost of debt. Their results show that IFRS adoption significantly improves comparability, increases market liquidity, and reduces the cost of equity capital but has no significant effect on the cost of debt. The results also show that mandatory IFRS adoption has a greater impact than voluntary adoption. However, for the cost of debt, voluntary adoption results in a reduction in the cost of debt but the impact of mandatory adoption on the cost of debt is not significant. 2.3. Financial Instruments and Cost of Equity Capital The risks associated with financial instruments are considered one of the most important aspects tested from the perspective of economic theory, along with the cost of capital. Despite the complexity of financial instruments, they are applied by all companies, including accounts receivable and payable as financial instruments that must be disclosed in every small or large company (Lim and Foo 2017). In addition, the introduction of financial instruments requires the disclosure of detailed information about the risks arising from the company’s activities, such as liquidity risk, market risk, and credit risk (Jacobs 2009). 74 J. Risk Financial Manag. 2023,16, 374 The importance of financial instruments in the implementation of IFRS and their different effects on the quality of financial reporting, investors, and capital markets have caused conflicts between researchers, accountants, and auditors. In addition, the fair value debate continues to be a controversial topic among academics in terms of its actual impact on the business domain, as fair value is at the core of financial instruments in IFRS implementation; thus, IFRS 7 brings the fair value debate to the forefront of disclosure requirements (Palea 2014; Kasyan et al. 2017). Moreover, IFRS 7 addresses the hedging policies used by companies in terms of cash flows, fair value, and foreign investments, as well as the relevant quantitative or qualitative information that investors and lenders consider important in assessing the situation of these companies (Deloitte 2017; Grosu and Chelba 2019). According to Yamani et al. (2021), IFRS 7 financial instrument disclosures help to reduce information asymmetry. A better disclosure implies that companies adhere to the appropriate application of IFRS standards and meet their requirements. This shows that companies are committed to rules and regulations, thereby improving their level of transparency. Moreover, providing investors with comprehensive financial information on financial instruments enables companies to better understand their terms and conditions. This, in turn, can lead to a reduction in risk estimates and an improvement in capital market liquidity. As a result, investors and shareholders will benefit from greater confidence and closer relationships with companies, potentially leading them to demand a lower cost-of-capital ratio. Financial intermediaries are generally very positive about IFRS standards when assessing potential borrowers. These standards promote transparency, consistency, and comparability, making it easier to make informed lending and risk assessment decisions, thus fostering a healthier financial ecosystem for both borrowers and lenders. Balancing the benefits and costs of better-quality disclosure is crucial for companies. Striking the right balance can help businesses build trust with stakeholders, improve decision-making, and foster long-term sustainable growth while mitigating potential risks and resource burdens. Regulatory frameworks and industry standards play a critical role in guiding companies toward responsible and meaningful disclosure practices. This framework has allowed us to deepen the complexities of disclosure practices and their implications. Taking into account both positive outcomes, such as increased transparency; better risk management and access to capital; and associated costs such as resource allocation, competitive disadvantage, and legal risks, this research can provide a more nuanced analysis of the subject. 2.4. Hypothesis Development The relationship between mandatory IFRS disclosures and the cost of equity capital has been neglected, despite its potential significance in the disclosure overload problem debate. Some studies have examined the impact of IFRS disclosure on firms’ cost of equity capital and are essential for providing additional information and clarifying firms’ accounting policies and calculations. However, there needs to be more research on the association between mandatory IFRS disclosure and the cost of equity capital, particularly in the context of the disclosure overload debate. Disclosure under the various IFRS measurement and recognition requirements should help reduce the cost of equity capital. Thus, based on this reasoning, we propose the following hypothesis: H1. The level of IFRS disclosure reduces companies’ cost of equity capital exposure. In other words, the more a company discloses under IFRS, the lower its cost of equity capital. This hypothesis can be tested by the collection of data on a sample of firms and by analyzing the relationship between the cost of equity capital and the level of IFRS disclosure. It is important to note that proving causality between two variables is only sometimes possible and other factors may influence the results. 75 J. Risk Financial Manag. 2023,16, 374 3. Methodology 3.1. Sample and Data As the mandatory transition to IFRS has concerned listed companies located in the European Union, we followed Ertz et al. (2021) by testing the effect of IFRS on the cost of equity capital by considering 337 firms listed on the STOXX Europe 600 over the period 1994–2022, i.e., a total of 9773 firm-year observations. This stock market index includes the 600 largest market capitalizations in 17 European countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. This choice is motivated by the idea that, although each company has been affected differently by the transition to IFRS, these impacts are homogeneous within a single industry. Therefore, we consider seven industries represented in STOXX Europe 600 with different characteristics. Following Lotfi et al. (2022, 2023), the selected industries were automotive, healthcare, food and beverage, and banking. The companies selected were all listed on STOXX Europe 600 when they published their financial statements under IFRS Standards, mainly in 2004 or 2003. As the impact of IFRS may differ depending on the sector of activity and the environment in which the company operates, it is crucial to consider this in our analysis and diversify the countries where the companies were headquartered at the time of this accounting transition as much as possible. Information on the selected companies by industry sector and head office country is summarized in Table 1. Table 1. Distribution of the final sample by sector of activity. Number of Sectors Sector of Activity Number of Firms Percentage 1 Consumer goods 35 10.39% 2 Technology 27 8.01% 3 Health 49 14.54% 4 Oil and Gas 22 6.53% 5 Industry 154 45.70% 6 Telecommunications 18 5.34% 7 Consumer Services 32 9.50% Total 337 100% 3.2. Cost of Equity Capital Measure The variable chosen for the statistical analysis is the cost of equity capital, defined as the opportunity cost that evaluates investors’ interest in investing their money in a company rather than elsewhere. It represents the minimum rate of return that must be generated by the company’s investments in order for it to meet the profitability requirements of shareholders and creditors. Therefore, to estimate the cost of equity capital, referring to Houqe et al. (2016), we use the modified Price–Earnings–Growth (PEG) ratio model proposed by Easton (2004). Modification of the standard PEG ratio model involves inclusion in the model of a dividend per share forecast one year in advance. Botosan and Plumlee (2005) conclude that estimates of the modified PEG ratio model provide the best measure of the cost of equity capital in a country with strong investor protection because it dominates the other alternatives in that it is consistently and predictably linked to various risk measures such as information risk, leverage risk, residual risk, market risk, and growth. Thus, given strong investor protection, we use the modified PEG ratio model as follows: Ke=epst+2−epst+1+Ke∗Divt+1 Ptor Ke=epst+2−epst+1 Pt−Divt+1 (1) where Ke is the cost of equity capital, epst+1 is the expected earnings per share at the one-year horizon, epst+2 is the expected earnings per share at the two-year horizon, Divt+1 is the one-year-ahead dividend forecast, and Ptis the price per share at year-end. 76 J. Risk Financial Manag. 2023,16, 374 3.3. Estimation Technique To test the effect of IFRS adoption on the cost of equity capital for 337 firms from 17 European countries between 1994 and 2022 chosen from STOXX Europe 600-listed companies, we adopt the following regression equation, which includes a set of companyspecific controls for other factors that may affect a company’s cost of equity capital. We use the IFRS variable, which indicates the change in the accounting framework following the mandatory adoption of IFRS in Europe since 2005; it takes 0 before the mandatory adoption of IFRS in 2005 and 1 after the mandatory adoption of IFRS. Concerning Houqe et al. (2016), and the GMM-system suggested by Arellano and Bover (1995) as well as Blundell and Bond (1998), the model can be written as follows: Keit =β0+β1Keit−1+β2IFRSit +β3Sizeit +β4BMRit +β5Betait +β6FLit +β7ROEit +εit (2) Let Keit represent the cost of equity capital for firm “i” i in year “t”. Additionally, let IFRS be a dichotomous variable that takes the value of 1 when the financial statements of the firm “i” are prepared in accordance with IFRS in a year “t”, and 0 otherwise. Size is measured by the natural logarithm of the current year’s total assets for a firm “i” in a year “t”. BMR is the ratio of the market value of equity to book value of equity for a firm “i” in a year “t”. Beta is the systematic risk of firm i in year t. FL represents the firm’s financial leverage, which is the ratio of total Debt to Shareholders’ Equity of a firm “i” in a year “t”. ROE is the return on equity, which measures financial performance and is calculated by dividing net income by shareholders’ equity of a firm “i” in a year “t”. εit is an error term assumed to verify the statistical properties of white noise regardless of a firm “i” or a period “t”. We summarize all the variables in Table 2. Table 2. Variable description. Variables Definition Ke Cost of Equity Capital IFRS The dichotomous variable that is equal to 1 when the financial statements are prepared in accordance with IFRS and 0 otherwise Size Measured by the natural logarithm of the current year’s total assets for firm i in year t BMR The ratio of the market value of equity to the book value of equity for firm i in year t Beta The systematic risk of firm i in year t FL The ratio of total Debt to Shareholders’ Equity of firm i in year t ROE The return on equity, which measures financial performance and is calculated by dividing net income by the shareholders’ equity of firm i in year t To address potential bias and inaccuracies associated with using difference GMM (Arellano and Bond 1991), Arellano and Bover (1995) as well as Blundell and Bond (1998) propose a system of difference and level regressions. In the difference regression, the instruments are the lagged levels of the explanatory variables, while in the level regression, the instruments are the lagged differences of the explanatory variables. These instruments are considered appropriate under the assumption that while there might be a correlation between the levels of the explanatory variables and the country-specific effect, there is no correlation between these variables in the differences and country-specific effects. The consistency of the GMM-system estimator relies on two key aspects: the validity of the assumption that the error term is serially uncorrelated and the validity of the instruments. The test of the null hypothesis of no first-order serial correlation should be rejected under the identification assumption that the error is serially uncorrelated, whereas the test of the null hypothesis of no second-order serial correlation should not be rejected. Therefore, to evaluate the model’s performance and instrument validity, we employ two diagnostic tests proposed by Arellano and Bover (1995) and by Blundell and Bond (1998). Additionally, we use the Hansen (1982) tests of over-identifying restrictions; if the null 77 J. Risk Financial Manag. 2023,16, 374 hypothesis cannot be rejected, it would indicate that the model is correctly specified and the instruments are valid. 4. Empirical Results 4.1. Descriptive Statistics Before commencing the examination of variables’ stationarity, cointegration relationship, cross-sectional dependence analysis, and model analysis, it is crucial to initiate the process with a descriptive and graphical analysis. This preliminary analysis will serve as the foundation for subsequent estimations and assessments. According to the information presented in Table 3, the variable “Ke” exhibits the following descriptive statistics: The overall mean of the variable is 0.014, with a low median value of 0.005. The standard deviation is 0.719, and the minimum and maximum values are − 37.303 and 37.602, respectively. The distribution of the variable is highly left-skewed, as indicated by the skewness value of − 7.179, which is less than 0. Additionally, the distribution is strongly platykurtic, with a kurtosis value of 2079.617, which exceeds 0, signifying heavy tails and extreme outliers. The dataset comprises a total of 9773 observations. It is important to note that the distribution of the variable “Ke” is non-normal for the entire sample and demonstrates no autocorrelation. In addition, the fact that the median is low (0.5%) proves once again that the distribution is asymmetrical and there is a strong asymmetry of information concerning this variable Ke. Table 3. Descriptive statistics of the variables in the sample. Variables Ke IFRS Size BMR Beta FL ROE Observations 9773 9773 9773 9773 9773 9773 9773 Mean 0.014 0.621 15.598 3.231 0.893 0.583 19.436 Standard deviation 0.719 0.485 1.990 10.008 0.973 0.205 76.295 Minimum −37.303 0 8.301 −548.090 −19.069 0.005 −3043.680 Maximum 37.602 1 21.010 204.570 8.322 2.693 2230.020 Median 0.005 1 15.750 2.380 0.880 0.587 15 Skewness −7.179 −0.497 −0.393 −25.591 −8.855 1.301 2.374 Kurtosis 2079.617 1.247 2.949 1395.255 160.138 13.500 521.683 Jarque–Bera (JB) test 1.8 ×109252.6 7.9 ×1081.0 ×1074.8 ×1041.1 ×108 Probability JB 0.000 - 0.000 0.000 0 0 0 Born–Breitung (BB) test 2.300 - 225.330 0.240 15.890 59.500 4.690 Probability BB 0.317 - 0.000 0.889 0.000 0.000 0.096 Notes: BB refers to Born and Breitung’s (2016) serial correlation test. JB refers to Jarque and Bera’s (1987) normality test. According to the data presented, for the 9773 observations, the variable “IFRS” is described by the following statistics: The overall mean of the variable is 0.621 and the median value is 1. The standard deviation is 0.485, and the minimum and maximum values of the variable are 0 and 1, respectively. The distribution of the variable “IFRS” is highly left-skewed, as evident from the negative skewness value of − 0.497, which is less than 0. Moreover, the distribution is leptokurtic, with a kurtosis value of 1.247, which exceeds 0, indicating heavy tails and more extreme values. After global descriptive statistical interpretation, we first performed a unit root test for the variables of the model. In this step, we first test the null hypothesis of cross-sectional independence between individuals. De Hoyos and Sarafidis (2006) emphasize the need and significance of conducting a cross-sectional dependence test when working with dynamic panel data. In particular, Sarafidis and Robertson (2006) underscore that the presence of cross-sectional dependence in the data is crucial to avoid inconsistencies in all estimation procedures. Hence, in this study, we explore various dependence tests to ensure the reliability of our analysis, as cited in Pesaran (2021). The p-values associated with the different CD tests are below 0.05, suggesting that augmentation with current and lagged cross-sectional averages adequately accounts for cross-sectional dependence (see Table 4). 78 J. Risk Financial Manag. 2023,16, 374 Table 4. Cross-section dependency tests. Tests Value Probability Decision Friedman (1937) 888.479 0.000 Dependence Frees (1995, 2004) 6.033 0.000 Dependence Pesaran (2006) 89.162 0.000 Dependence Pesaran (2015) 103.813 0.000 Dependence Second, after performing the cross-dependence tests cited by Pesaran (2021), we examine the unit root tests for the model variables. In this step, we examine the unit root tests by two generations; the first generation is represented by Levin et al. (2002), Im et al. (2003), as well as Hadri (2000), while the second is represented by Pesaran (2003) and Pesaran (2007) unit root tests. First-generation unit root tests are based on the assumption that the residuals are interindividually independent. This assumption allows for the straightforward establishment of statistical distributions for tests, often resulting in asymptotic or semi-asymptotic normal distributions. In contrast, second-generation unit root tests typically depart from the independence assumption. These tests adopt a completely different perspective in which correlations between individuals are not considered nuisance parameters. Instead, they propose leveraging these co-movements to define new test statistics. According to first-generation unit root tests conducted by Levin et al. (2002), Im et al. (2003), and Hadri (2000) presented in Table 5, the variables in the model are either level stationary or first difference stationary for all variables in the model. However, for the second-generation tests of Pesaran (2003) and Pesaran (2007) presented in Table 6, all variables are stationary in the first difference. Table 5. The first generation of unit root tests. Variables In Level In First Difference LLC IPS Hadri LLC IPS Hadri Ke − 54.564 *** − 58.486 *** 15.152 *** − 88.892 *** − 70.382 *** − 18.036 *** Size − 13.488 *** 6.497 *** 280.411 *** − 36.259 *** − 46.823 *** 9.783 *** BMR −6.273 *** − 13.312 *** 3.787 *** − 47.688 *** − 57.280 *** − 18.237 *** Beta − 12.694 *** −5.013 *** 184.773 *** − 38.816 *** − 46.982 *** 1.178 *** FL − 11.498 *** − 10.209 *** 160.231 *** − 47.375 *** − 53.455 *** −2.446 *** ROE − 12.678 *** − 25.124 *** 92.294 *** − 47.286 *** − 59.689 *** −8.883 *** Note: *** represent significance at 1%. We use the unit root test with breaks suggested by Karavias and Tzavalis (2014) to verify the unit root tests mentioned above. The results in Table 7 show that the series is stationary in level or first difference related to certain breaks in 1995, 1997, 2000, and 2021, related to the European Monetary System crisis (1992–1993), Asian Financial crisis (1997–1998), Internet bubble crisis (2001), and COVID-19 crisis (2019–2020), respectively. Therefore, it is necessary to check for the existence of a cointegrating relationship between the series. Given that the majority of variables exhibit stationarity when analyzed in their first difference, it becomes crucial to investigate whether a cointegrating relationship exists among these variables. Granger (1981) showed that when a series is integrated in order one (they become stationary after the first differencing) but their linear combination is already stationary without differencing, they are said to be cointegrated, which implies the existence of a long-run relationship between the series (Mahmoodi and Mahmoodi 2016). Based on the outcomes presented in Table 8, which include various cointegration tests like those by Kao (1999) and Pedroni (2004), the results indicate that the probability obtained from both tests falls below the 5% significance threshold. As a result, we can infer that there is at least one cointegrating relationship among all the variables included in our model. 79 J. Risk Financial Manag. 2023,16, 374 Lambert, Richar, Christia Leuz, and Rober E. Verrecchia. 2007. Accounting information, disclosure, and the cost of capital. Journal of Accounting Research 45: 385–420. [CrossRef] Leuz, Christian, and Robert E. Verrecchia. 2000. The economic consequences of increased disclosure. Journal of Accounting Research 38: 91–124. [CrossRef] Levin, Andrew, Chien-Fu Lin, and Chia-Shang James Chu. 2002. Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics 108: 1–24. [CrossRef] Li, Siqi. 2010. Does mandatory adoption of International Financial Reporting Standards in the European Union reduce the cost of equity capital? The Accounting Review 85: 607–36. [CrossRef] Lim, Chu Yeong, and See Liang Foo. 2017. Financial reporting risks in relation to financial instruments. In The Routledge Companion to Accounting and Risk, 1st ed. Edited by Margaret Woods and Philip Linsley. London: Routledge. Abingdon: Taylor & Francis. Lotfi, Chaimaa, Swetha Srinivasan, Myriam Ertz, and Imen Latrous. 2022. A tool for study on impact of Big Data technologies on firm performance. In Intelligent Communication Technologies and Virtual Mobile Networks: Proceedings of ICICV 2022. Lecture Notes on Data Engineering and Communications Technologies. Singapore: Springer, vol. 131. Lotfi, Chaimaa, Swetha Srinivasan, Myriam Ertz, and Imen Latrous. 2023. Exploring the Aggregated and Granular Impact of Big Data Analytics on a Firm’s Performance through Web Scraping-Based Methodology. In SAGE Research Methods: Business & Management. Londres: SAGE Publications Ltd. Mager, Ferdinand, and Martin Meyer-Fackler. 2017. Mergers and acquisitions in Germany: 1981–2010. Global Finance Journal 34: 32–42. [CrossRef] Mahmoodi, Majed, and Elahe Mahmoodi. 2016. Foreign direct investment, exports and economic growth: Evidence from two panels of developing countries. Economic Research-Ekonomska Istraživanja 29: 938–49. Mantzari, Elisavet, Christos Sigalas, and Tony Hines. 2017. Adoption of the International Financial Reporting Standards by Greek non-listed companies: The role of coercive and hegemonic pressures. Accounting Forum 41: 185–205. Meyer, John, and Brian Rowan. 1977. Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology 83: 340–63. [CrossRef] Mohsin, Muhammad, Muhammad Nurunnabi, Jijian Zhang, Huaping Sun, Nadeem Iqbal, Robina Iram, and Qaiser Abbas. 2021. The evaluation of efficiency and value addition of IFRS endorsement towards earnings timeliness disclosure. International Journal of Finance & Economics 21: 1793–807. Nguyen, Thi Lam Anh. 2018. Diversification and bank efficiency in six ASEAN countries. Global Finance Journal 37: 57–78. [CrossRef] Ohlson, James A., and Beate E. Juettner-Nauroth. 2005. Expected EPS and EPS growth as determinants of value. Review of Accounting Studies 10: 349–65. [CrossRef] Opare, Solomon, Muhammad Nurul Houqe, and Tony Van Zijl. 2021. Meta-analysis of the Impact of Adoption of IFRS on Financial Reporting Comparability, Market Liquidity, and Cost of Capital. Abacus 57: 502–56. [CrossRef] Palea, Vera. 2013. IAS/IFRS and financial reporting quality: Lessons from the European experience. China Journal of Accounting Research 6: 247–63. [CrossRef] Palea, Vera. 2014. Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market. Journal of International Accounting, Auditing and Taxation 23: 1–17. [CrossRef] Pedroni, Peter. 2004. Panel cointegration: Asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory 20: 597–625. Persakis, Anthony, and George Emmanuel Iatridis. 2017. The joint effect of investor protection, IFRS and earnings quality on cost of capital: An international study. Journal of International Financial Markets, Institutions and Money 46: 1–29. Pesaran, M. Hashem. 2003. Estimation and Inference in Large Heterogenous Panels with Cross Section Dependence, CESifo Working Paper, No. 869. Munich: Center for Economic Studies and ifo Institute (CESifo). Pesaran, M. Hashem. 2006. Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74: 967–1012. [CrossRef] Pesaran, M. Hashem. 2007. A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics 22: 265–312. [CrossRef] Pesaran, M. Hashem. 2015. Testing weak cross-sectional dependence in large panels. Econometric Reviews 34: 1089–117. [CrossRef] Pesaran, M. Hashem. 2021. General diagnostic tests for cross-sectional dependence in panels. Empirical Economics 60: 13–50. [CrossRef] Prather-Kinsey, Jenice, Eva Jermakowicz, and Thierry Vongphanith. 2008. Capital market consequences of European firms’ mandatory adoption of IFRS. Paper presented at the American Accounting Association Annual Meeting, Anaheim, CA, USA, August 3–6; pp. 1–39. Prather-Kinsey, Jenice, Francesco De Luca, and Ho-Tan Phat Phan. 2022. Improving the global comparability of IFRS-based financial reporting through global enforcement: A proposed organizational dynamic. International Journal of Disclosure and Governance 19: 330–51. Ramanna, Karthik, and Ewa Sletten. 2009. Why Do Countries Adopt International Financial Reporting Standards, Working Paper, Harvard Business School, Business Research for Business Leaders. Available online: www.hbs.edu/faculty/Publication%20Files/ 09-102_1bc06d7-7340-4f0a-b638-e23211a40c41.pdf (accessed on 7 August 2023). 86 J. Risk Financial Manag. 2023,16, 374 Reichborn-Kjennerud, Kristin, Belén González-Díaz, Enrico Bracci, Thomas Carrington, James Hathaway, Kim Klarskov Jeppesen, and Ileana Steccolini. 2019. Sais work against corruption in Scandinavian, South-European and African countries: An institutional analysis. The British Accounting Review 51: 100842. Reschiwati, Reschiwati, A. Syahdina, and S. Handayani. 2020. Effect of liquidity, profitability, and size of companies on firm value. Utopia y Praxis Latinoamericana 6: 325–32. Saha, Amitav, and Sudipta Bose. 2021. Do IFRS disclosure requirements reduce the cost of capital? Evidence from Australia. Accounting & Finance 61: 4669–701. Sanjaya, I. Putu Sugiartha, May H. B. Barus, and May Hosiani. 2017. The differences cost of equity capital between before and after adoption of IFRS. Journal Keuangan dan Perbankan 21: 609–20. Sarafidis, Vasilis, and Donald Robertson. 2006. On the Impact of Cross Section Dependence in Short Dynamic Panel Estimation. Cambridge: University of Cambridge. Sharpe, William F. 1964. Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance 19: 425–42. Smith, Adam. 1776. An Inquiry in to the Wealth of Nations. London: Strahan and Cadell, pp. 1–11. Utama, Sidharta, Aria Farahmita Mita, and Viska Anggraita. 2017. Economic consequences of IFRS adoptions around the ASEAN Countries. International Journal of Economics and Management 11: 529–51. Wook-Bin, Leem, and Jee Hoon Yuk. 2018. Effect of the IFRS adoption on the cost of capital: Evidence from Korea. Journal of Applied Business Research (JABR) 34: 209–16. Yamani, Amal, Khaled Hussainey, and Khaldoon Albitar. 2021. The impact of financial instruments disclosures on the cost of equity capital. International Journal of Accounting & Information Management 29: 528–51. Zeff, Stephen A. 2012. The evolution of the IASC into the IASB, and the challenges it faces. The Accounting Review 87: 807–37. [CrossRef] Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content. 87 Citation: Aladwey, Laila Mohamed Alshawadfy, and Raghad Abdulkarim Alsudays. 2023. Does the Cultural Dimension Influence the Relationship between Firm Value and Board Gender Diversity in Saudi Arabia, Mediated by ESG Scoring? Journal of Risk and Financial Management 16: 512. https:// doi.org/10.3390/jrfm16120512 Academic Editor: ¸Stefan Cristian Gherghina Received: 3 November 2023 Revised: 2 December 2023 Accepted: 3 December 2023 Published: 11 December 2023 Copyright: © 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). Journal of Risk and Financial Management Article Does the Cultural Dimension Influence the Relationship between Firm Value and Board Gender Diversity in Saudi Arabia, Mediated by ESG Scoring? Laila Mohamed Alshawadfy Aladwey 1,2,* and Raghad Abdulkarim Alsudays 1 1Department of Accounting, Imam Mohammad Ibn Saud Islamic University (IMSIU), Riyadh 11432, Saudi Arabia; [email protected] 2Department of Accounting, Tanta University, Gharbia 31521, Egypt *Correspondence: [email protected] Abstract: The scarcity of female directors on Saudi boards is linked to cultural and social barriers deeply rooted in traditional masculine norms. Our study investigates the mediating role of ESG scores in the relationship between board gender diversity and firm value within the Saudi context. The Structural Equation Model (SEM) was utilized based on a sample of 54 Saudi-listed financial companies on (Tadawul) during 2021–2022. The study unveiled a negative correlation between female director presence and Saudi firm value. This association is attributed to the prevailing maledominated Saudi societal norms, where boards with more female members may hesitate to prioritize performance-driven actions due to concerns about their perceived legitimacy within traditional gender roles. Conversely, a positive correlation was observed between female director presence and ESG scores, aligning with existing research highlighting the role of board gender diversity in improving sustainability performance. The sustainability framework prevails over the influence of gender diversity, fully integrating it within the broader context of sustainability to enhance the value of Saudi companies. Our results are consistent when considering alternative measures of firm value. Our findings offer valuable insights for investors assessing board gender diversity’s impact on company value and emphasize the role of gender diversity in enhancing sustainability. They suggest that greater female representation on boards is vital for ESG score improvement, promoting sustainable initiatives and overall firm value. This calls for policymakers to promote sustainability disclosures and establish guidelines for increased female board participation, considering the absence of mandatory quotas. Keywords: gender diversity; firm value; ESG disclosure; Saudi Arabia; masculinity—feminist cultural dimension 1. Introduction A broad stream of research has consistently affirmed the positive impact of gender diversity in corporate boards on firm value (e.g., Salem et al. 2019; Issa and Fang 2019; Dwaikat et al. 2021). Similarly, Wahab et al. (2018) suggest that boardroom homogeneity has adverse effects on firms. In addition, the presence of women on boards is widely acknowledged as a pivotal factor contributing to enhanced corporate social performance (Byron and Post 2016; Pucheta-Martínez et al. 2018). This inclusivity also correlates with more substantial corporate social responsibility ratings (Bear et al. 2010) and greater transparency in disclosing social and environmental initiatives (Cabeza-García et al. 2018). Accordingly, increased female representation on corporate boards fosters more democratic, social, and environmentally conscious organizations, resulting in improved environmental, social, and governance (ESG) scoring (del Mar Fuentes-Fuentes et al. 2023) while concurrently enhancing company value and optimizing economic returns (Jiang et al. 2021). J. Risk Financial Manag. 2023,16, 512. https://doi.org/10.3390/jrfm16120512 https://www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2023,16, 512 Gender diversity on corporate boards has garnered growing interest in academic circles due to its significant impact on company performance and value, which holds relevance for a diverse range of stakeholders, including policymakers and practitioners (EmadEldeen et al. 2021; Brahma et al. 2021; Eliwa et al. 2023). This facet of corporate governance is essential because it enhances corporate governance systems and the formulation of strategic decisions in the boardroom (Ullah et al. 2019). Past research draws on diverse psychological, cultural, and social theories to substantiate the implications of gender diversity on firm values (Lu et al. 2022; Eliwa et al. 2023). Within this context, cultural factors and societal pressures prompt companies to prioritize gender diversity within their boards. Simultaneously, the regulatory landscape differs across countries, with some nations mandating the inclusion of at least one woman on corporate boards, while this issue remains relatively unaddressed in others (Karamahmuto˘glu and Kuzey 2016; Issa and Fang 2019). For instance, Aladwey et al. (2022) highlighted that in 2019, the UK Corporate Governance Code recommended that UK companies expand female representation on their corporate boards. Also, Norway has stipulated that a minimum of 40% of directors on corporate boards must be female (Eliwa et al. 2023). Accordingly, due to variations in institutional contexts across countries, influenced by cultural norms and corporate governance regulations, the impact of board gender diversity on firm value and CSR performance is likely to differ (Issa and Fang 2019). The concept of “masculinity” is a socially constructed ideology that societies use to define the behaviors and attributes expected of men. In many cultures, there is a prevailing belief, particularly among women, that men occupy a dominant societal position. Men are discouraged from yielding, compromising, or displaying emotions, often perceived as signs of weakness. In contrast, femininity is often seen as the polar opposite of masculinity, associated with qualities such as compromise, surrender, and emotional expression, which are considered feminine and, therefore, weaker. As a result, masculinity represents the dominant authority of men, giving them more power and agency than women. Some scholars have argued that societies tend to uphold dominant social roles for men, granting them authority over women and other gender identities perceived as feminine (Nahshal 2019). Consequently, masculinity shapes and defines relationships within the framework of dominance, alliances, and subordination. In this way, masculinity becomes a hindrance to the progress of women, as they are often confined to roles defined by masculinity, hindering societal evolution (Dobash and Dobash 2003; Margolis et al. 2009; Flammer 2015). The impact of gender diversity on corporate performance remains an underexplored area in the Middle East and North Africa MENA region countries like Saudi Arabia, where women’s empowerment conditions are in a state of evolution, albeit at varying rates across countries due to the complex socioeconomic dynamics within the region (see, Al Hameli et al. 2023). The low number of female directors represented within the Saudi board (Chebbi and Ammer 2022), driven by cultural and social pressures, may contribute to such an end. Saudi Arabia is widely recognized as a patriarchal and masculine society. Men predominantly hold positions of power and exercise dominance over women, even in domains traditionally considered the domain of women. Men are expected to be the primary breadwinners, while women are traditionally assigned to manage the household, with men typically serving as the heads of their families (Mobaraki and Söderfeldt 2010). However, there are instances where men also take charge of household management. Women often find themselves in situations where they cannot express their opinions, perspectives, or emotions, and they may have limited mobility outside the boundaries of their homes. This dynamic has led to a significant power imbalance between men and women in Saudi society. Consequently, masculinity has a profound impact on the lack of empowerment of women in the Saudi workforce and has played a pivotal role in the virtual absence of women’s roles in the workplace. Saudi Arabia is demonstrating rapid economic growth, positioning itself as a prominent emerging economy regionally in the Middle East and globally. After the new 2030 Vision announcement in April 2016, the Saudi government made substantive changes to 89 J. Risk Financial Manag. 2023,16, 512 increase women’s representation in top managerial positions and certain divisions traditionally restricted to men (Almathami et al. 2020). To enhance female representation in the public domain, women were appointed to governmental positions and granted participation rights in the constrained political processes unfolding within Saudi Arabia (Karolak 2023). The government has also imposed further reforms, such as enforcing Saudi job quotas more rigorously than ever and incorporating positive discrimination in hiring women; otherwise, punishment is implemented (Boshnak et al. 2023). Therefore, it is necessary to investigate traditional notions of masculinity as a substantial role in gender diversity and its relationship with ESC score and firm value. Accordingly, the implications mentioned above of the Saudi 2030 vision, accompanied by the contemporary economic reforms in Saudi Arabia, would enhance female participation and empowerment and would contribute to reshaping the cultural context in Saudi Arabia from masculine-dominated to a notion of board diversity and equality. While this initiative anticipates bolstering Saudi Arabia’s economic well-being through heightened female workforce participation, empirical research to assess the efficacy and achievement of Vision 2030’s objectives in enhancing women’s involvement needs to be improved (Almathami et al. 2020). In addition, Almubarak et al. (2023) issued a call for research papers that explore the interplay between corporate governance variables and the dynamics of ESG in conjunction with various factors, encompassing the benefits of sustainable management and gender diversity considerations. Thus, the study sheds light on an unexplored area within the relevant literature: the examination of board gender diversity in Saudi Arabia and its potential impact on corporate performance. Accordingly, it is interesting to gain deeper insights into gender diversity in the ever-changing cultural and social environment. Thus, our paper aims to study the effect of board gender diversity on firm value in Saudi Arabia and how the ESG scoring would mediate such an effect subject to the reshaped cultural dimension. The aim of our paper is to test the mediating effect of ESG scoring as a proxy for the sustainability performance on the relationship between gender diversity and firm value, taking into account the cultural dimension of Saudi Arabia. Utilizing structural equation modeling (SEM), a well-established inferential framework for mediation analyses, we examine a sample of 54 Saudi financial companies listed on the Saudi Stock Exchange (Tadawul) from 2021 to 2022, resulting in 108 firm-year observations. The findings unveil a negative association between female directors’ presence and Saudi firms’ value. This relationship can be attributed to Saudi Arabia’s predominantly male-dominated society, where a corporate board with a higher proportion of female members may be less willing to adhere to the notion of thinking that prioritizes objective and performance-oriented attitudes and actions that might diminish their perceived legitimacy. Accordingly, the prevalence of traditional masculinity in society may dampen the positive influence of board diversity on a company’s performance. Furthermore, the findings suggest a correlation between the participation of female directors on Saudi corporate boards and enhancements in companies’ ESG scores, serving as a proxy for their sustainable performance and disclosure. This finding is consistent with a substantial body of research that underscores the crucial role of board gender diversity in improving a company’s sustainability performance. Notably, ESG acts as a comprehensive mediator, effectively channeling the intended impact of board gender diversity in promoting the value of Saudi companies. In essence, the sustainability framework takes precedence, outweighing the influence of board gender diversity in enhancing a company’s value, as gender diversity is fully integrated within the sustainability context. Our paper contributes to the pertinent literature in many aspects as follows: First, it sheds light on one of the uncharted areas in the pertinent literature, the board gender diversity in Saudi Arabia and its implications on the value of Saudi firms. Second, although the cultural and social barriers to women’s participation in Saudi boards still matter, our paper provides empirical evidence that the potential of female directors in enhancing Saudi firms’ value is fully mediated within sustainability initiatives. Thus, our study emphasizes that diverse cultural contexts influence the expected positive outcomes of gender diversity 90 J. Risk Financial Manag. 2023,16, 512 within corporate boards, which, in turn, contributes to the realization of firm value. Third, it underscores the notion that the pathways to attaining sustainability goals also facilitate the promotion of gender equality and diversity in a fast-moving Saudi business environment. The remaining sections of the paper proceed as follows. In Section 2, we delve into the institutional context, review the relevant literature, and outline the development of hypotheses. Section 3 provides an overview of the methodology, including details about the sample, data, and models utilized. Proceeding to Section 4, we present descriptive statistics and the primary findings of our study. Section 5 is dedicated to additional tests conducted in our research. Finally, Section 6 offers our conclusions, implications, and recommendations for future research directions. 2. Background, Literature Review, and Hypotheses Development 2.1. Gender Diversity and ESG Score in Saudi Arabia A growing emphasis on gender diversity has also had regulatory implications. Governments and regulators are paying increasing attention to female participation in businesses; depending on where they operate, companies may face even more regulatory pressure to address gender diversity at the board level and beyond (S&P Global 2020). For example, in U.S., California’s law requiring certain publicly traded companies to include women on their boards will more than double the total number of female-held board seats in the state. Other U.S. state governments, including New Jersey, Illinois, and Massachusetts, have taken efforts to introduce similar legislation related to gender diversity on boards of directors (S&P Global 2020). In the Saudi context, amid global requests to enhance environmental, social, and governance investments, the Saudi government in Saudi Arabia wants an improved approach that combines ESG demand with today’s challenging economic reality 1 The GDP in Saudi Arabia has historically been heavily influenced by oil exports. Nevertheless, due to the volatility and instability in oil prices during the past decade, Crown Prince Mohammed bin Salman, acting on behalf of the Saudi government, introduced the Saudi Vision 2030 framework on 25 April 2016 (Boshnak et al. 2023). The Saudi Vision of 2030 2 prioritizes the adoption of essential fiscal amendments that enhance Saudi Arabia’s economic sustainability in the long run. In 2021, the Saudi Stock Exchange 3 announced ESG disclosure standards, which will assist listed businesses and potential corporations intending to go public with their ESG reporting and promote awareness in the local market. According to the ESG Disclosure Guidelines released by the Saudi exchange 4 , the sustainable growth is the pivot of the Vision 2030, and its underlying principles enhance the formulation and execution of Vision 2030 that are in alignment with the chief tenets of ESG practices. This alignment justifies the reason behind the Saudi exchange’s empowerment toward ESC discourse in the capital market. In addition, in 2018 5 , the Saudi Stock Exchange entered a partnership with the UN Sustainable Stock Exchanges Initiative. This collaboration aimed to enhance the ESG awareness initiatives and promote sustainable investment practices. Furthermore, as noted by Nahshal (2019), one of the fundamental goals embedded in Vision 2030 is the enhancement of women’s empowerment in Saudi Arabia. In 2019, Saudi Arabia achieved a remarkable surge in its ranking in the World Bank Group’s Women, Business, and the Law report 6 . This upswing surpassed that of all other countries when compared to its 2018 ranking. Additionally, the International Finance Corporation (IFC) released a report in 2022 on gender equality in corporate leadership among G20 nations 7 , revealing an increase in the percentage of women holding board seats in Saudi Arabia in 2022. This substantial progress can be attributed to Saudi Arabia’s adoption of an extensive range of measures aimed at expanding women’s roles in society and granting them unprecedented economic freedoms (Karolak 2023). Consequently, women’s contributions in Saudi Arabia are now not only expected but also acknowledged. However, a persisting challenge that necessitates cultural adjustments for resolution is the entrenched perceptions of gender roles in a predominantly male-dominated field (Chebbi and Ammer 2022). Despite the persisting issues related to 91 J. Risk Financial Manag. 2023,16, 512 masculinity in the country, Saudi female empowerment is gradually reshaping societal norms and challenging the status quo. This evolving landscape is indicative of a growing movement toward achieving genuine gender equality (Nahshal 2019). 2.2. Hypothesis Development Table 1 summarizes the previous research related to our main variables as follows. Table 1. A summary of the prior research. Research Variables Author Findings Board gender diversity and firm value. Salem et al. (2019); Issa and Fang (2019); Dwaikat et al. (2021) - Demonstrated the capacity of female board directors to elevate a company’s overall value. Agyemang-Mintah and Schadewitz (2019) - Noted that financial institutions benefit from the presence of female directors by witnessing an increase in their value. Noguera (2020) - Emphasized the positive correlation between female directors and the value of real estate investment trusts. Bagh et al. (2023) - Revealed a positive association between board diversity and company value. Alhosani and Nobanee (2023) - Stated that gender diversity in corporate boards has an impact on firm value. Board gender diversity, firm value, and firm performance. Terjesen et al. (2015) - Found women directors elevate board performance through their problem-solving acumen and creativity, ultimately contributing to increased business value. Board gender diversity and ESG performance. Cabeza-García et al. (2018) - Found gender diversity within corporate boards can contribute to the firm’s social and environmental performance. Byron and Post (2016) - The presence of women on corporate boards has been associated with elevated levels of corporate social performance. Bear et al. (2010) - Gender diversity within corporate boards can contribute to stronger corporate social responsibility ratings. Cabeza-García et al. (2018) - The presence of women on corporate boards increased disclosure of social and environmental practices. Aladwey et al. (2022) - Observed that female directors tend to exhibit higher levels of responsibility, which can motivate companies to disclose information related to their social and environmental initiatives. Rao and Tilt (2016); Yasser et al. (2017); Harjoto and Laksmana (2018) - State the influential role of female directors in shaping social and environmental reporting. Pucheta-Martínez et al. (2018) - Discovered a positive correlation between the presence of external women directors (both independent and institutional) and CSR disclosure. Flammer (2015); Margolis et al. (2009); Donaldson and Preston (1995) - Company’s commitment to social and environmental responsibility contribute to its competitive advantage, ultimately enhancing its performance and value. ESG performance and firm value. Alodat et al. (2023) - Found that CSR disclosure have potential to increase firm value and maximize economic return. Board gender diversity, firm value, and ESG performance. Ahern and Dittmar (2012); Matsa and Miller (2013) - Demonstrated that gender diversity has no significant effect on firm-related outcomes, including the ESG score. Escamilla-Solano et al. (2023) - Women directors have multiple positive effects on firm-related outcomes and values, primarily in terms of improving the ESG score and promoting ethical behaviour. Wang et al. (2023) - The mediating role of the ESG score in the relationship between gender diversity and firm value can be expected to differ based on the specific country and its context. 2.2.1. The Relationship between Gender Diversity and Firm Value Board gender diversity has emerged as a pivotal component within corporate governance. Its significance lies in its capacity to enhance the corporate governance system and influence the strategic decisions formulated in the boardroom. Women occupying senior management positions, particularly on boards, contribute a unique set of experiences and 92 J. Risk Financial Manag. 2023,16, 512 perspectives that fortify the governance function of the board. This, in turn, can bolster decision-making processes and yield positive impacts on corporate value. A body of previous research has established a strong relationship between the presence of women on corporate boards and enhanced business value. Notably, studies conducted by Salem et al. (2019), Issa and Fang (2019), and Dwaikat et al. (2021) have all demonstrated the capacity of female board directors to elevate a company’s overall value. Agyemang-Mintah and Schadewitz (2019) further noted that financial institutions benefit from the presence of female directors by witnessing an increase in their value. Additionally, Noguera (2020) emphasized the positive correlation between female directors and the value of real estate investment trusts, highlighting women’s potential to serve as skilled director candidates who enhance market awareness within the industry. Moreover, women directors have been found to elevate board performance through their problem-solving acumen and creativity, ultimately contributing to increased business value (Terjesen et al. 2015). In a similar vein, Bagh et al. (2023) revealed a positive association between board diversity and company value. This connection is attributed to the diverse and distinct characteristics of board members, which facilitate the formulation of high-quality decisions. As mentioned earlier, Saudi’s Vision 2030 opens the door for female participation and empowerment. As argued by Nahshal (2019), this embraced vision has led to what can be described as a “Golden Age” for women in Saudi Arabia, ushering in a significant wave of cultural transformation, especially regarding traditional gender roles. This notion of thinking marks a significant departure from traditional norms where gender segregation hindered women from realizing their full potential, and their empowerment was viewed as unnecessary to achieve economic development (Karolak 2023). Accordingly, based on the context of Saudi Arabia, we hypothesize the following: H1: There is a positive association between board gender diversity and firm values. 2.2.2. The Relationship between Gender Diversity and ESG Score As social and environmental issues become more pressing, ESG and sustainable investment have become important. Furthermore, gender diversity is a social quality that investors value, and it is a metric businesses are eager to promote. Investors are becoming more aware of the need to resolve environmental, social, and governance (ESG) issues, putting pressure on public companies to perform well in all three areas. As a result, investors are urging firms to diversify their boards of directors and to perform gender diversity and equality audits to determine how they will respond to ESG risks and opportunities (S&P Global 2020). As a result, gender diversity has become an essential aspect of the ESG’s identity (Burdon 2023). Gender diversity serves to reinforce and promote ESG investing and companies who make an effort to do so. As expected, companies that have previously adopted gender diversity have experienced numerous advantages. Gender diversity, for example, is a significant feature for integrating enterprises into ESG funds. Aside from that, rating agencies evaluate gender diversity while evaluating their “S” score. When a company performs well in all three categories (environmental, social, and governance), it has a significantly better chance of being included in ESG-focused investing strategies (Burdon 2023). Prior research has increasingly centered on the interconnection between corporate governance and sustainability. In this context, corporate governance and ESG disclosure are inherently intertwined, reflecting a company’s engagement with its internal and external socio-political environment. Notably, gender diversity within corporate boards has emerged as a pivotal aspect of corporate governance, providing valuable resources such as personal networks, knowledge, and ethical principles that can contribute to the firm’s social and environmental performance (Cabeza-García et al. 2018). As a result, the presence of women on corporate boards has been associated with elevated levels of corporate social performance (Byron and Post 2016; Pucheta-Martínez et al. 2018), more substantial corporate social responsibility ratings (Bear et al. 2010), and 93 J. Risk Financial Manag. 2023,16, 512 increased disclosure of social and environmental practices (Cabeza-García et al. 2018). Including more women on corporate boards fosters greater democratic, socially engaged, and ecologically responsible corporate practices, thereby improving social and environmental standards. Moreover, Aladwey et al. (2022) observed that female directors exhibit higher levels of responsibility, which can motivate companies to disclose information related to their social and environmental initiatives. This view is supported by Rao and Tilt (2016), Yasser et al. (2017), and Harjoto and Laksmana (2018), which underscores the influential role of female directors in shaping social and environmental reporting. Furthermore, Pucheta-Martínez et al. (2018) discovered a positive correlation between external women directors (independent and institutional) and CSR disclosure. Subject to the Saudi context, Karolak (2023) argued that to increase women’s participation in the public sphere, women were appointed to governmental positions and granted opportunities to engage in the limited political processes in Saudi Arabia. Accordingly, in light of the evidence indicating that the inclusion of female directors on corporate boards enhances social and environmental disclosure, our research proposes the following hypothesis: H2: There is a positive association between gender diversity and ESG score. 2.2.3. The Relationship between Gender Diversity and Firm Value: The Mediating Effect of ESG Disclosure The benefits of a company’s commitment to social and environmental responsibility contribute to its competitive advantage, ultimately enhancing its performance and value (Donaldson and Preston 1995; Margolis et al. 2009; Flammer 2015). Companies prioritizing sustainability disclosure can increase their value and maximize economic returns (Alodat et al. 2023). Furthermore, firms with greater gender diversity on their boards tend to be more engaged in reporting on social and environmental issues (Aladwey et al. 2022). Altering the composition of corporate boards by increasing female representation can enhance board performance because diverse boards often bring a more comprehensive perspective. However, the impact of gender diversity on corporate boards and its connection to firm value can vary significantly depending on the context and country (Alhosani and Nobanee 2023). In the context of Hofstede’s cultural dimensions, the “masculinity-femininity” dimension can influence board gender diversity, firm performance, and value. This cultural dimension may either support or resist board diversity. For instance, masculinity in organizational culture emphasizes achievement, assertiveness, and material rewards for success. In nations characterized by a pronounced masculinity within their organizational culture, corporate boards often exhibit more significant gender differentiation, with a predominant emphasis on objectives among board members (Kabir et al. 2023). In contrast, a more feminine culture promotes gender equality, and board members tend to be more compromising and collaborative. In such cultures, women on boards often focus on non-monetary contributions and foster cooperative relationships, emphasizing relationships over objectives (Luckerath-Rovers 2013). Due to variations in institutional contexts across countries driven by cultural differences (Post and Byron 2015), the mediating role of the ESG score in the relationship between gender diversity and firm value can be expected to differ based on the specific country and its context. Some scholars argue that appointing women directors to the board has multiple positive effects on firm-related outcomes and values, primarily in terms of improving the ESG score and promoting ethical behavior (Pucheta-Martínez et al. 2018; Escamilla-Solano et al. 2023). However, other authors suggest that gender diversity does not significantly affect firm-related outcomes, including the ESG score (Ahern and Dittmar 2012; Matsa and Miller 2013). Given these inconsistent findings, we hypothesize that the ESG score mediates the relationship between gender diversity and firm value in the context of Saudi Arabia. This hypothesis can be formulated as follows: H3: ESG disclosure mediates the relationship between gender diversity and firm value. 94 J. Risk Financial Manag. 2023,16, 512 Figure 1 depicts the impact of BGD on FV, as indicated by path (c’), mediated through the role of ESG, represented by paths (a) and (b). As illustrated in Panel A, Figure 1, path (c) signifies the direct influence of BGD on FV. The inclusion of mediating variables leads to the breakdown of the total effect (c) of BGD on FV into a direct effect (c’) and an indirect effect (ab), as presented in Panel B, Figure 1. Figure 1. Board gender diversity and firm value: the mediating effect of ESG disclosure. 3. Methodology 3.1. Sample and Data To assess the mediating impact of ESG discourse on the relationship between gender diversity and firm value, we conducted our analysis using a sample comprising financial Saudi companies listed on the Saudi Stock Exchange (Tadawul). Our sample comprises a diverse range of financial Saudi-listed firms across various sectors, including banks, diversified financials, REITs, and insurance. Furthermore, the dataset encompasses data for the years 2021 and 2022, representing the most recent available information. As argued by Shen et al. (2020) and Sultana et al. (2022), the global COVID-19 pandemic substantially dampened economic activities worldwide. Accordingly, we could not extend our analysis to a broader timeframe preceding the mentioned period due to the evident impact of the COVID-19 pandemic on financial data. The sampling process and categorization of firms based on their respective industrial sectors are presented in Table 2. After the exclusion of companies with no or insufficient data about the variables under investigation, our final sample consisted of 54 companies with 108 company-year observations. Data about the variables under investigation were collected from different sources. We manually collected the data regarding the financial variables from the Saudi Stock Exchange’ Tadawul’ website. In addition, the ESG score was obtained from the Refinitiv Thomson Reuters Database. Finally, data for gender diversity were manually collected from companies’ annual reports, governance reports, and official websites. Following Gonçalves et al. (2022), all continuous variables were winsorized at 1% to reduce the influence of outliers. 95 J. Risk Financial Manag. 2023,16, 512 67 Saudi-listed companies for 2014–2019, reveals that the ratio of female directors on the board positively correlates with the extent of CSR disclosure. However, this correlation is statistically nonsignificant. Similarly, Chebbi and Ammer (2022), drawing from a sample of 38 Saudi companies from 2015 to 2021, reported a positive but nonsignificant association between BGD and ESG. Chebbi and Ammer (2022) contend that a plausible explanation for the nonsignificant association is the constrained presence of female directors on the corporate boards within the sample they utilized. Table 8 also provides insights into the relationship between ESG and control variables. Based on a significance threshold of 1%, the results reveal a positive and significant relationship between BS and ESG, as indicated by a p-value of 0.005 and a coefficient ( β3 ) of 0.695. This finding suggests that more directors on Saudi boards are associated with a higher propensity to engage in sustainability activities and initiatives. This is consistent with the perspective presented by Aladwey et al. (2022) from an agency theory standpoint, which suggests that larger corporate boards enhance their capacity to oversee management, improve transparency, and disclose non-financial information while reducing information asymmetry. In addition, Table 8 also reveals a positive effect of AGE on ESG at a significance level of 1%, with a p-value = 0.005 and a coefficient ( β5 ) of 0.968. Hence, it can be observed that older Saudi companies are more receptive to sustainable practices and demonstrate greater willingness to pursue sustainable objectives compared to younger companies. This aligns with a similar observation by Fitranita et al. (2023). 4.3.3. Estimating the Mediating Effect of ESG Disclosure on the Relationship between Board Gender Diversity and Firm Value Steps three and four involved estimating the indirect relationship between board gender diversity (X) and firm value (Y), specifically focusing on the mediating effect of ESG disclosure (M). Upon incorporating ESG into Model 3, the association between BGD and FV becomes non-significant, as reported in Table 8, Model 3, contrasting with the significant relationship presented in Table 8, Model 1. In addition, at a 1% significance level, Table 8, Model 3 highlights a significant and positive association between ESG and FV, supported by a p-value of 0.002 and a β2 ’s coefficient of 0.016. These results all together indicate that ESG fully mediates the relationship between BGD and FV, confirming the fulfillment of H3. Moreover, we illustrate the mediation effect using the Sobel z-test. The outcomes presented in Table 8 indicate that ESG serves as a significant mediator in the relationship between BGD and FV, where the p-values of Sobel of 0.002, Aroian of 0.025, and Goodman of 0.019 are all significant, falling below the 5% significance threshold. Accordingly, ESG functions to offset the effect of BGD on FV. In addition, the entire mediation entails that the collaboration of ESG and BGD contributes to the enhancement of FV. As per the Sustainable Development Report (2023), the Sustainable Development Goals (SDGs) advocate for governments to promote gender equality and establish it as a critical agenda within the framework of sustainable development goals. Accordingly, ESG plays a prominent role in enhancing Saudi companies’ values in the KSA context. Accordingly, this finding aligns with the core principles of Vision 2030. As previously mentioned, Vision 2030 strongly emphasizes sustainable growth, and its guiding principles closely resonate with ESG practices. Moreover, ESG acts as a complete mediator, effectively channeling the intended impact of BGD in enhancing the value of Saudi companies. Simply put, the sustainable concept takes precedence, outweighing the influence of BGD in enhancing a company’s value because gender diversity is fully integrated within the sustainability framework. Similarly, Filho et al. (2022) argue that gender-related matters, particularly gender equality, can be viewed as overarching concerns within the realm of sustainability, contributing to the achievement of sustainable development goals, even though the precise mechanisms for their inclusion may not always be evident. Similarly, Alarcón and Cole (2019) assert that the pathways to achieving sustainability goals also serve as a means to promote gender equality and diversity. It is worth noting that the vice versa would not 102 J. Risk Financial Manag. 2023,16, 512 happen. As evidence, Ahern and Dittmar (2012) and Matsa and Miller (2013) contend that the significant gender imbalance on boards may not necessarily lead to swift changes in organizational ESG activities. 5. Robustness Check Similar to Salhi et al. (2020) and Alodat et al. (2023), in order to assess the robustness of our main findings, we re-conducted the main analysis to determine whether the mediating role of ESG holds if we substitute the measure of our dependent variable: firm value. Accordingly, we re-estimated the main analysis using FV-SP as an indicator of firm value. Following D’Amato and Falivena (2020), FV-SP was measured as the annual growth rate of the stock price for firmiin yeart, and calculated as follows: FV-SPit = [(Pit −Pit−1)/Pit−1]×100 where: Pit represents the stock price of firmiin yeart. Pit−1represents the stock price of firmiin the previous yeart−1. Data for the stock price were manually collected from the Saudi stock exchange (Tadawul). The outcomes displayed in Table 9 show a similarity to the findings reported earlier in Table 8. Table 9. Additional test: the alternate measure of firm value. Model 1 (FV-SP) Model 2 (ESG) Model 3 (FV-SP) Coef. p-Value Coef. p-Value Coef. p-Value Firm value (FV) 6.907 ** 0.037 1.359 *** 0.001 1.802 0.852 ESG 0.449 ** 0.046 Board independence (BI) −2.962 ** 0.043 −7.761 0.469 Board size (BS) 1.602 0.411 1.668 ** 0.005 Firm size (FS) 0.211 0.871 1.083 0.160 Firm age (AGE) 2.061 0.969 1.600 ** 0.005 Leverage (LEV) 0.467 ** 0.036 −0.037 0.701 Constant −1.03 0.499 −6.07 *** 0.003 −3.051 0.970 R-squared 0.126 0.373 0.160 Hausman test 2.24 *** 1.80 * 2.61 *** Firm and year effect Yes Yes Yes N-Obs 108 108 108 Sobel 0.058 Aroian 0.059 Goodman 0.074 *** p< 0.01, ** p< 0.05, * p< 0.1. 6. Conclusions Our paper aims to explore the mediating effect of ESG disclosure on the relationship between gender diversity and firm value, taking into account the cultural context. Based on a sample of Saudi-listed financial companies from 2021 to 2022, the results show a negative and significant association between gender diversity and firm value. Upon introducing 103 J. Risk Financial Manag. 2023,16, 512 the ESG score as a mediator variable, the results indicate that ESG fully mediates the relationship between gender diversity and firm value in Saudi financial companies. Our findings uncover a significant revelation: there exists a negative relationship between corporate gender diversity and firm value, particularly within the context of Saudi Arabia. This observation diverges from the prevailing literature, which predominantly advocates for a positive association. A possible justification is that diverse cultural contexts imply distinct proportions of women required on corporate boards to realize firms’ values. It appears that the results may be aligned with the cultural dynamics of Saudi Arabia, where traditional notions of masculinity play a substantial role. Notably, the low representation of female directors on corporate boards within the Saudi financial sector underscores the intricate interplay between gender diversity and cultural dimensions. When involving the ESG score as a mediating variable, our results indicate that ESG fully mediates the relationship between gender diversity and firm value in Saudi financial companies. The sustainable notion dismisses the effect of BGD on promoting a firm’s value because gender diversity is fully embedded within sustainability’s purview. This suggests that cultural dimensions, such as masculinity, may intersect with ESG considerations to shape the financial landscape in this unique context. Our results are robust for alternate measures of firm value. The findings of our paper have several implications for investors, policymakers, and regulators. First, our findings offer valuable insights for investors seeking to assess the influence of board gender diversity on a company’s overall value. Second, the findings highlight the significance of gender diversity in the realm of sustainability, indicating that enhancing female representation on corporate boards is a crucial strategy for firms aiming to improve their ESG scores. Furthermore, this encouragement motivates firms to actively participate in sustainability initiatives actively, recognizing their positive impact on overall firm value. Consequently, it serves as a compelling prompt for policymakers to recognize the importance of fostering sustainability disclosures among Saudi companies, even though such disclosures remain voluntary. Additionally, these findings advocate for regulators and policymakers to establish rules that facilitate increased female participation on corporate boards, particularly in light of the absence of mandatory minimum requirements for female representation. Gender diversity has become a fundamental component of Saudi Arabia’s Vision 2030, and it is anticipated that fostering gender diversity will play a pivotal role in achieving the objectives of this vision. The persistence of the cultural dimension of a predominantly masculine society in Saudi Arabia may present obstacles to realizing the potential benefits of gender diversity on corporate performance. Within the sustainability framework, there may be a mediating effect of gender diversity on firm value. Specifically, sustainable performance entails the promotion of higher female representation on boards. This notion of sustainability could enhance the value of Saudi firms and contribute to the transformation of the cultural landscape in Saudi Arabia, shifting it from one dominated by traditional masculinity to a more inclusive and diverse notion of corporate governance and equality. Thus, the progression of Saudi companies toward achieving the goals of Vision 2030 encompasses a dedication to sustainable practices, wherein gender diversity on Saudi boards plays a crucial role. This commitment is essential to realizing the positive impacts of gender diversity on the value of Saudi firms. The limitations of our paper could open new avenues for future research. The study explores how a cultural dimension, namely masculinity–femininity, influences the mediating effect of the ESG score on the relationship between gender diversity and firm value. Further research into the intricate dynamics of cultural influences on corporate performance, such as “individualism-collectivism,” “uncertainty avoidance,” and “power distance,” is warranted to gain a deeper understanding of these complex relationships within Saudi Arabia. In addition, our study examines the mediating effect of ESG score over two years, 2021 and 2022. Other researchers could conduct a longitudinal panel study on the effect of gender diversity on the firm value for the period from 2016, the year of the 104 J. Risk Financial Manag. 2023,16, 512 inception of Saudi Vision, to 2030, the year at which the vision is accomplished. In addition, it is anticipated that the participation of female directors on Saudi boards will increase after 2030. Consequently, it would be intriguing for other researchers to explore the impact of achieving a critical mass of female directors on the corporate performance of Saudi companies. Furthermore, subject to data availability, our sample only covers the financial sector in Saudi Arabia. It could be interesting if other researchers expand the sample size to include Saudi-listed non-financial companies to address any difference in findings. Author Contributions: Conceptualization, L.M.A.A. and R.A.A.; Methodology, L.M.A.A.; Formal analysis, L.M.A.A.; Data curation, L.M.A.A.; Writing; Review, L.M.A.A. and R.A.A.; Editing, L.M.A.A. and R.A.A. All authors have read and agreed to the published version of the manuscript. Funding: This research was funded by the Deanship of Scientific Research at Imam Mohammad Ibn Saud Islamic University (IMSIU) (grant number IMSIU-RG23102). Data Availability Statement: Data is unavailable due to privacy or ethical restrictions. Acknowledgments: This work was supported and funded by the Deanship of Scientific Research at Imam Mohammad Ibn Saud Islamic University (IMSIU) (grant number IMSIU-RG23102). Conflicts of Interest: The authors declare no conflict of interest. Notes 1https://www.arabnews.com/node/2267256/business-economy (accessed on 12 March 2023). 2https://www.vision2030.gov.sa/en/vision-2030/vrp/fiscal-sustainability-program/ (accessed on 2 November 2023). 3 Saudi Exchange or Tad ¯ awul is a stock exchange in Saudi Arabia that was formed in 2007 as a joint stock company and the sole entity authorized to act as a securities exchange in Saudi Arabia. 4 https://sseinitiative.org/wp-content/uploads/2021/11/Tadawul-ESG-Disclosure-Guidelines-EN.pdf (accessed on 2 November 2023). 5 https://www.saudiexchange.sa/wps/portal/saudiexchange/listing/issuer-guides/esg-guidelines (accessed on 2 November 2023). 6 https://www.worldbank.org/en/news/opinion/2021/02/24/gender-in-the-gcc-the-reform-agenda-continues (accessed on 24 February 2021). 7 https://sseinitiative.org/wp-content/uploads/2022/12/SSE-IFC-G20-gender-equality-in-corporate-leadership-2022.pdf (accessed on 2 November 2023). 8 Please refer to https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scoresmethodology.pdf (accessed on 2 November 2023). References Abdi, Yaghoub, Xiaoni Li, and Xavier Càmara-Turull. 2022. Exploring the impact of sustainability (ESG) disclosure on firm value and financial performance (FP) in airline industry: The moderating role of size and age. Environment, Development and Sustainability 24: 5052–79. [CrossRef] Abu-Bader, Soleman, and Tiffanie Victoria Jones. 2021. Statistical Mediation Analysis Using the Sobel Test and Hayes SPSS Process Macro. International Journal of Quantitative and Qualitative Research Methods 9: 42–61. Agyemang-Mintah, Peter, and Hannu Schadewitz. 2019. Gender diversity and firm value: Evidence from UK financial institutions. International Journal of Accounting & Information Management, Emerald Group Publishing Limited 27: 2–26. Ahern, Kenneth R., and Amy K. Dittmar. 2012. The changing of the boards: The impact on firm valuation of mandated female board representation. The Quarterly Journal of Economics 127: 137–97. [CrossRef] Aladwey, Laila Mohamed Alshawadfy. 2021. The effect of equity ownership structure on non-conditional conservatism: An empirical study based on listed companies in Egypt. Journal of Financial Reporting and Accounting 19: 742–71. [CrossRef] Aladwey, Laila, Adel Elgharbawy, and Mona Ganna. 2022. Attributes of corporate boards and assurance of corporate social responsibility reporting: Evidence from the UK. Corporate Governance: The International Journal of Business in Society 22: 748–80. [CrossRef] Aladwey, Laila, and Ahmed Diab. 2023. The determinants and effects of the early adoption of IFRS 15: Evidence from a developing country. Cogent Business & Management 10: 2167544. Alarcón, Daniela Moreno, and Stroma Cole. 2019. No sustainability for tourism without gender equality. Journal of Sustainable Tourism 27: 903–19. [CrossRef] Al Hameli, Afra, Charilaos Mertzanis, and Ilias Kampouris. 2023. Women’s empowerment conditions, institutions and firm performance in the MENA region. Accounting Forum 3: 1–30. [CrossRef] 105 J. Risk Financial Manag. 2023,16, 512 Alhosani, Noora Hasan Ismail, and Haitham Nobanee. 2023. Board gender diversity and corporate social responsibility: A bibliometric analysis. Heliyon 9: e12734. [CrossRef] [PubMed] Almathami, Rafiah, Catheryn Khoo-Lattimore, and Elaine Chiao Ling Yang. 2020. Exploring the challenges for women working in the event and festival sector in the Kingdom of Saudi Arabia. Tourism Recreation Research 1: 47–61. [CrossRef] Almubarak, Wadhaah Ibrahim, Kaouther Chebbi, and Mohammed Abdullah Ammer. 2023. Unveiling the Connection among ESG, Earnings Management, and Financial Distress: Insights from an Emerging Market. Sustainability 15: 12348. [CrossRef] Alodat, Ahmad Yuosef, Zalailah Salleh, Haitham Nobanee, and Hafiza Aishah Hashim. 2023. Board gender diversity and firm performance: The mediating role of sustainability disclosure. Corporate Social Responsibility and Environmental Management 30: 2053–65. [CrossRef] Al-Rasheed, Madawi A. 2013. A Most Masculine State: Gender, Politics and Religion in Saudi Arabia. Cambridge: Cambridge University Press. Anh, Vo Thi Thuy, and Nha Khanh. 2017. Impact of Board Gender Diversity on Firm Value: International Evidence. Journal of Economics and Development 19: 65–76. Bagh, Tanveer, Muhammad Asif Khan, Natanya Meyer, and Hammad Riaz. 2023. Impact of boardroom diversity on corporate financial performance. Humanities and Social Sciences Communications 10: 222. [CrossRef] Baron, Reuben M., and David A. Kenny. 1986. The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology 51: 1173–1182. [CrossRef] Bear, Stephen, Noushi Rahman, and Corinne Post. 2010. The Impact of Board Diversity and Gender Composition on Corporate Social Responsibility and Firm Reputation. Journal of Business Ethics 97: 207–21. [CrossRef] Ben Fatma, Hanen, and Jamel Chouaibi. 2021. Corporate governance and firm value: A study on European financial institutions. International Journal of Productivity and Performance Management 72: 1392–418. [CrossRef] Biswas, Pallab Kumar, Larelle Chapple, Helen Roberts, and Kevin Stainback. 2023. Board Gender Diversity and Women in Senior Management. Journal of Business Ethics 182: 177–98. [CrossRef] Boshnak, Helmi A., Mohammad Alsharif, and Majed Alharthi. 2023. Corporate governance mechanisms and firm performance in Saudi Arabia before and during the COVID-19 outbreak. Cogent Business & Management 10: 2195990. Brahma, Sanjukta, Chioma Nwafor, and Agyenim Boateng. 2021. Board gender diversity and firm performance: The UK evidence. International Journal of Finance and Economics 26: 5704–19. [CrossRef] Bravo, Francisco. 2017. Are risk disclosures an effective tool to increase firm value. Managerial and Decision Economics 38: 1116–24. [CrossRef] Brüderl, Josef, and Volker Ludwig. 2015. Fixed-Effects Panel Regression. In The SAGE Handbook of Regression Analysis and Causal Inference. London: SAGE Publications Ltd., pp. 327–58. Burdon, Eric. 2023. How Gender Equality Drives ESG Funds in 2023. Available online: https://www.knowesg.com/featured-article/ how-gender-equality-drives-esg-funds-in-2023 (accessed on 26 July 2023). Byron, Kris, and Corinne Post. 2016. Women on Boards of Directors and Corporate Social Performance: A Meta-Analysis. Corporate Governance: An International Review 24: 428–42. Cabeza-García, Laura, Roberto Fernández-Gago, and Mariano Nieto. 2018. Do board gender diversity and director typology impact CSR reporting? European Management Review 15: 559–75. [CrossRef] Chebbi, Kaouther, and Mohammed Abdullah Ammer. 2022. Board Composition and ESG Disclosure in Saudi Arabia: The Moderating Role of Corporate Governance Reforms. Sustainability 14: 12173. [CrossRef] D’Amato, Antonio, and Camilla Falivena. 2020. Corporate social responsibility and firm value: Do firm size and age matter? Empirical evidence from European listed companies. Corporate Social Responsibility and Environmental Management 27: 909–24. [CrossRef] del Mar Fuentes-Fuentes, M ª , Cristina Quintana-García, Macarena Marchante-Lara, and Carlos G. Benavides-Chicón. 2023. Gender diversity, inclusive innovation and firm performance. Sustainable Development 31: 3622–38. [CrossRef] Dobash, Russel, and Emerson Dobash. 2003. Violence in Intimate Relationships. In International Handbook of Violence Research. Edited by W. Heitmeyer and J. Hagan. Dordrecht: Springer. Donaldson, Thomas, and Lee E. Preston. 1995. The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. The Academy of Management Review 20: 65–91. [CrossRef] Dwaikat, Nizar, Ihab Sameer Qubbaj, and Abdelbaset Queiri. 2021. Gender diversity on the board of directors and its impact on the Palestinian financial performance of the firm. Cogent Economics & Finance 9: 1948659. Ebaid, Ibrahim El-Sayed. 2022. Corporate governance mechanisms and corporate social responsibility disclosure: Evidence from an emerging market. Journal of Global Responsibility 13: 396–420. [CrossRef] Eliwa, Yasser, Ahmed Aboud, and Ahmed Saleh. 2023. Board gender diversity and ESG decoupling: Does religiosity matter? Business Strategy and the Environment 32: 4046–67. [CrossRef] EmadEldeen, Rehab, Ahmed Elbayoumi, Mohamed Basuony, and Ehab Mohamed. 2021. The effect of the board diversity on firm performance: An empirical study on the UK [Special issue]. Corporate Ownership & Control 18: 337–47. Escamilla-Solano, Sandra, Antonio Fernández-Portillo, Mari Cruz Sánchez-Escobedo, and Carmen Orden-Cruz. 2023. Corporate social responsibility disclosure: Mediating effects of the economic dimension on firm performance. Corporate Social Responsibility and Environmental Management, Early View. [CrossRef] 106 J. Risk Financial Manag. 2023,16, 512 Fayyaz, Um-E-Roman, Raja Nabeel-Ud-Din Jalal, Michelina Venditti, and Antonio Minguez-Vera. 2023. Diverse boards and firm performance: The role of environmental, social and governance disclosure. Corporate Social Responsibility and Environmental Management 30: 1457–72. [CrossRef] Fernández-Gago, Roberto, Laura Cabeza-García, and Mariano Nieto. 2018. Independent directors’ background and CSR disclosure. Corporate Social Responsibility and Environmental Management 25: 991–1001. [CrossRef] Filho, Walter Leal, Marina Kovaleva, Stella Tsani, Diana-Mihaela T , îrcă, Chris Shiel, Maria Alzira Pimenta Dinis, Melanie Nicolau, Mihaela Sima, Barbara Fritzen, Amanda Lange Salvia, and et al. 2022. Promoting gender equality across the sustainable development goals. Environment, Development and Sustainability 25: 14177–98. [CrossRef] Fitranita, Vika, Duta Widiyaksa, Baihaq, and Dri Asmawanti. 2023. The influence of company size, company age, profitability, leverage, sales growth, and independent board of commissioners on Islamic social reporting disclosures. Proceeding International Conference on Accounting and Finance 1: 66–75. Flammer, Caroline. 2015. Does corporate social responsibility lead to superior financial performance? A regression discontinuity approach. Management Science 61: 2549–68. [CrossRef] Gonçalves, Tiago Cruz, João Dias, and Victor Barros. 2022. Sustainability Performance and the Cost of Capital. International Journal of Financial Studies 10: 63. [CrossRef] Gunzler, Douglas, Tian Chen, Hui Zhang, and Pan Wu. 2013. Introduction to mediation analysis with structural equation modeling. Shanghai Arch Psychiatry 25: 390–4. Harjoto, Maretno, and Indrarini Laksmana. 2018. The Impact of Corporate Social Responsibility on Risk Taking and Firm Value. Journal of Business Ethics 151: 353–73. [CrossRef] Issa, Ayman, and Hong-Xing Fang. 2019. The impact of board gender diversity on corporate social responsibility in the Arab Gulf states. Gender in Management: An International Journal 34: 577–605. [CrossRef] Jarboui, Anis, Maali Kachouri Ben Saad, and Rakia Riguen. 2020. Tax avoidance: Do board gender diversity and sustainability performance make a difference? Journal of Financial Crime 27: 1389–408. [CrossRef] Jiang, Lisha, Jacob Cherian, Muhammad Safdar Sial, Peng Wan, JoséAntónio Filipe, Mário Nuno Mata, and Xiangyu Chen. 2021. The moderating role of CSR in board gender diversity and firm financial performance: Empirical evidence from an emerging economy. Economic Research-Ekonomska Istraživanja 34: 2354–73. [CrossRef] Kabir, Ashikul, Saiyara Shabbir Ikra, Paolo Saona, and Md. Abul Kalam Azad. 2023. Board gender diversity and firm performance: New evidence from cultural diversity in the boardroom. LBS Journal of Management & Research 21: 1–12. Kapoor, Nimisha, and Sandeep Goel. 2019. Do diligent independent directors restrain earnings management practices? Indian lessons for the global world. Asian Journal of Accounting Research 4: 52–69. [CrossRef] Karamahmuto˘glu, Merve Kılıç, and Cemil Kuzey. 2016. The effect of board gender diversity on firm performance: Evidence from Turkey. Gender in Management: An International Journal 31: 434–55. Karolak, Magdalena. 2023. Saudi Women in the Mohammed bin Salman Era: Examining the Paradigm Shift. In The Palgrave Handbook of Gender, Media and Communication in the Middle East and North Africa. Cham: Springer International Publishing. [CrossRef] Khatri, Ishwar. 2023. Board gender diversity and sustainability performance: Nordic evidence. Corporate Social Responsibility and Environmental Management 30: 1495–507. [CrossRef] Kiharo, MaryAnne Njeri, and Peter Wang’ombe Kariuki. 2018. Corporate governance practices and firm value of listed commercial banks in Kenya. The International Journal of Business and Management 6: 184–92. Kumar, Naveen, and Jasminde Singh. 2013. Effect of board size and promoter ownership on firm value: Some empirical findings from India. Corporate Governance 13: 88–98. [CrossRef] Lu, Yun, Collins G. Ntim, Qingjing Zhang, and Pingli Li. 2022. Board of directors’ attributes and corporate outcomes: A systematic literature review and future research agenda. International Review of Financial Analysis 84: 102424. [CrossRef] Luckerath-Rovers, Mijntje. 2013. Women on boards and firm performance. Journal of Management and Governance 17: 491–509. [CrossRef] Margolis, Joshua D., Hillary Anger Elfenbein, and James P. Walsh. 2009. Does it Pay to Be Good ... and Does It Matter? A Meta-Analysis of the Relationship between Corporate Social and Financial Performance. Available online: https://papers.ssrn.com/sol3/papers. cfm?abstract_id=1866371 (accessed on 1 March 2009). [CrossRef] Martínez-Ferrero, Jennifer, Eryilmaz Mehmet, and Colakoglu Nese. 2020. How Does Board Gender Diversity Influence the Likelihood of Becoming a UN Global Compact Signatory? The Mediating Effect of the CSR Committee. Sustainability 12: 4329. [CrossRef] Matsa, David A., and Amalia R. Miller. 2013. A Female Style in Corporate Leadership? Evidence from Quotas. American Economic Journal: Applied Economics 5: 136–69. [CrossRef] Mobaraki, Hosein, and B. Söderfeldt. 2010. Gender inequity in Saudi Arabia and its role in public health. Eastern Mediterranean Health Journal 16: 113–18. [CrossRef] Moussa, Fatma Ben, Salma Zaiane, and Nihel Ziadi. 2023. The mediating role of CSR on the relationship between gender diversity and risk taking. Journal of Environmental Planning and Management 66: 882–908. [CrossRef] Naghavi, Navaz, Saeed Pahlevan Sharif, and Hafezali Bin Iqbal Hussain. 2021. The role of national culture in the impact of board gender diversity on firm performance: Evidence from a multi-country study. Equality, Diversity and Inclusion 40: 631–50. [CrossRef] Nahshal, Maha Mohammed. 2019. Masculinity in Saudi Arabia Where we are and where we go from here. International Journal of Humanities and Social Science 9: 115–25. 107 J. Risk Financial Manag. 2023,16, 512 Nasr, Mahmoud, and Collin Ntim. 2018. Corporate Governance Mechanisms and Accounting Conservatism: Evidence from Egypt. Corporate Governance 18: 386–407. [CrossRef] Nguyen, Pascal, Nahid Rahman, Alex Tong, and Ruoyun Zhao. 2016. Board size and firm value: Evidence from Australia. Journal of Management & Governance 20: 851–73. Noguera, Magdy. 2020. Women directors’ effect on firm value and performance: The case of REITs. Corporate Governance 20: 1265–79. [CrossRef] Noja, Gratiela Georgiana, Eleftherios Thalassinos, Mirela Cristea, and Irina Maria Grecu. 2021. The interplay between board characteristics, financial performance, and risk management disclosure in the financial services sector: New empirical evidence from Europe. Journal of Risk and Financial Management 14: 79. [CrossRef] Post, Corinne, and Kris Byron. 2015. Women on Boards and Firm Financial Performance: A Meta-Analysis. The Academy of Management Journal 58: 1546–71. [CrossRef] Pucheta-Martínez, María Consuelo, Inmaculada Bel-Oms, and Gustau Olcina-Sempere. 2018. The association between board gender diversity and financial reporting quality, corporate performance and corporate social responsibility disclosure: A literature review. Academia Revista Latinoamericana de Administración31: 177–94. [CrossRef] Rao, Kathyayini, and Carol Tilt. 2016. Board Composition and Corporate Social Responsibility: The Role of Diversity, Gender, Strategy and Decision Making. Journal of Business Ethics 138: 327–47. [CrossRef] S&P Global. 2020. How Gender Fits into ESG? Available online: https://www.spglobal.com/en/research-insights/articles/howgender-fits-into-esg (accessed on 24 February 2020). Salem, Wafaa, Saad Metawe, Amr Youssef, and Mohamed Mohamed. 2019. Boards of Directors’ Characteristics and Firm Value: A Comparative Study between Egypt and USA. Open Access Library Journal 6: 1–33. [CrossRef] Salhi, Bassem, Rakia Riguen, Maali Kachouri, and Anis Jarbou. 2020. The mediating role of corporate social responsibility on the relationship between governance and tax avoidance: UK common law versus French civil law. Social Responsibility Journal 16: 1149–68. [CrossRef] Schober, Patrick, Christa Boer, and Lothar Schwarte. 2018. Correlation coefficients: Appropriate use and interpretation. Anesthesia and Analgesia 126: 1763–68. [CrossRef] Shen, Chenguang, Zhaoqin Wang, Fang Zhao, Yang Yang, Jinxiu Li, Jing Yuan, Fuxiang Wang, Delin Li, Minghui Yang, Li Xing, and et al. 2020. Treatment of 5 critically ill patients with COVID-19 with convalescent plasma. JAMA 323: 1582–89. [CrossRef] Singh, Amit Kumar, Annu Aggarwal, and Ashween Kaur Anand. 2017. Corporate governance mechanisms and earnings management in India: A study of BSE-listed companies. Delhi Business Review 18: 43–54. [CrossRef] Sultana, Reajmin, Ratan Ghosh, and Kanon Kumar Sen. 2022. Impact of COVID-19 pandemic on financial reporting and disclosure practices: Empirical evidence from Bangladesh. Asian Journal of Economics and Banking 6: 122–39. [CrossRef] Sustainable Development Report. 2023. Implementing the SDG Stimulus Includes the SDG Index and Dashboards. Available online: https://s3.amazonaws.com/sustainabledevelopment.report/2023/sustainable-development-report-2023.pdf (accessed on 2 November 2023). Terjesen, Siri, Eduardo Couto, and Paulo Morais Francisco. 2015. Does the presence of independent and female directors impact firm performance? A multi-country study of board diversity. Journal of Management and Governance 20: 447–83. [CrossRef] Thompson, Mark. 2019. Masculinity, Gender Relations and Marriage. In Being Young, Male and Saudi: Identity and Politics in a Globalized Kingdom. Cambridge: Cambridge University Press, pp. 196–235. Ullah, Irfan, Hongxing Fang, and Khalil Jebran. 2019. Do gender diversity and CEO gender enhance firm’s value? Evidence from an emerging economy. Corporate Governance 20: 44–66. [CrossRef] Wahab, Nor Shaipah Abdul, Collins G. Ntim, Mohd Muttaqin Mohd Adnan, and Wei Ling Tye. 2018. Top management team heterogeneity, governance changes and book-tax differences. Journal of International Accounting, Auditing and Taxation 32: 30–46. [CrossRef] Wang, Yilei, Deniz S. Ones, Yagizhan Yazar, and Ipek Mete. 2023. Board gender diversity and organizational environmental performance: An international perspective. Current Research in Ecological and Social Psychology 5: 100164. [CrossRef] Wooldridge, Jeffrey M. 2013. Introductory Econometrics: A Modern Approach, 5th ed. Mason: South-Western Pub. Yasser, Qaiser Rafique, Abdullah Al Mamun, and Irfan Ahmed. 2017. Corporate Social Responsibility and Gender Diversity: Insights from Asia Pacific. Corporate Social Responsibility and Environmental Management 24: 210–21. [CrossRef] Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content. 108 Citation: Chakkravarthy, Balamuralikrishnan, Francis Gnanasekar Irudayasamy, Arul Ramanatha Pillai, Rajesh Elangovan, Natarajan Rengaraju, and Satyanarayana Parayitam. 2023. The Relationship between Promoters’ Holdings, Institutional Holdings, Dividend Payout Ratio and Firm Value: The Firm Age and Size as Moderators. Journal of Risk and Financial Management 16: 489. https://doi.org/10.3390/ jrfm16110489 Academic Editor: ¸Stefan Cristian Gherghina Received: 23 October 2023 Revised: 10 November 2023 Accepted: 12 November 2023 Published: 20 November 2023 Copyright: © 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). Journal of Risk and Financial Management Article The Relationship between Promoters’ Holdings, Institutional Holdings, Dividend Payout Ratio and Firm Value: The Firm Age and Size as Moderators Balamuralikrishnan Chakkravarthy 1, Francis Gnanasekar Irudayasamy 1, Arul Ramanatha Pillai 1, Rajesh Elangovan 2, Natarajan Rengaraju 3and Satyanarayana Parayitam 4,* 1PG and Research Department of Commerce, St. Joseph’s College (Autonomous), Bharathidasan University, Tiruchirappalli 620024, Tamil Nadu, India; [email protected] (B.C.); [email protected] (F.G.I.); [email protected] (A.R.P.) 2 PG and Research Department of Commerce, Bishop Heber College (Autonomous), Bharathidasan University, Tiruchirappalli 620024, Tamil Nadu, India; [email protected] 3PG and Research Department of Commerce, National College (Autonomous), Bharathidasan University, Tiruchirappalli 620024, Tamil Nadu, India; [email protected] 4 Department of Management and Marketing, University of Massachusetts Dartmouth, 285 Old Westport Road, North Dartmouth, Dartmouth, MA 02747, USA *Correspondence: [email protected] Abstract: The present paper aims to empirically examine the effect of promoters’ holdings and institutional holdings on dividend payout ratio and the firm value. Most importantly, this paper explores the age and size of the firm as the moderators in the relationships. Data collected from 23 companies from India and 253 data points were analyzed to test the hypothesized relationships. The results indicate that promoters’ holdings and institutional holdings are positively associated with dividend payout ratio and firm value. Further, moderator hypotheses suggest that (i) firm age moderates the relationship between promoters’ holdings and dividend payout ratio, (ii) firm size moderates the relationship between institutional holdings and dividend payout ratio, (iii) firm age moderates the relationship between promoters’ holdings and firm value, and (iv) firm size moderates the relationship between institutional holdings and firm value. The implications for theory and practice are discussed. The conceptual model developed and tested in this research contributes to both the literature on dividend payout ratio and firm value and to the needs of institutional investors interested in increasing the firm value. Keywords: institutional holdings; promoters’ holdings; firm value; dividend payout ratio; firm size 1. Introduction The institutional and promoters’ holdings, firm value, and dividend payout ratios have been widely researched by scholars in financial management (Grinstein and Michaely 2005; Jory et al. 2017; Rozeff 1982; Strickland 1996;). Extant research reported that mitigating the agency costs helps enhance firm value primarily through governance mechanism (Bathala et al. 1994; Odum et al. 2019; Shleifer and Vishny 1986). The significance of institutional holdings in enhancing the firm value has been highlighted by some researchers in the past (e.g., Chen et al. 2018; Chung et al. 2003; Coffee 1991; Steiner 1996; Tsai and Gu 2007). However, the boundary conditions as to how these holdings affect the firm value have received little attention from the researchers. On the contrary, dividend payout ratio has received increasing attention by researchers, primarily because of its potential effect on the firm value (Budagaga 2017; Damayanti and Palinggi 2023; Nurokhmah et al. 2023; Setiyawati et al. 2017; Tjipta et al. 2022; Yang and Ma 2022). It is well documented that institutional holdings and dividend payout ratio play a significant role in increasing the J. Risk Financial Manag. 2023,16, 489. https://doi.org/10.3390/jrfm16110489 https://www.mdpi.com/journal/jrfm J. Risk Financial Manag. 2023,16, 489 firm value. However, relatively scant research addressed the moderating role of size and age of the firm. From a theoretical standpoint, the large shareholders have the inherent power to influence the governance mechanism by applying pressure on the board to revamp and dance to the tunes of these investors(Shleifer and Vishny 1997). However, the stakes involved are very high for these institutional investors. Hence, they carefully monitor even their drastic moves once they realize that it would decrease the value of the firm. Therefore, institutional and promoters’ holdings act as a double-edged sword, and they determine which side they use to the public, but the consequences can only be known from their actions. It depends on the institutional investors to examine the effect of their actions. Some researchers contend that there is positive association of the institutional holdings to the firm value (Drakos and Bekiris 2010; Hamidullah and Shah 2011; Pant and Pattanayak 2008). The research on the relationship between dividend payout ratio and firm value is exhaustive (Lumapow and Tumiwa 2017; Odum et al. 2019). For example, in a study on chemical companies in India roughly two decades ago from 1996–1997 to 2005–2006, it was found that dividend policy has a significant effect on the shareholder’s wealth (Azhagaiah and Priya 2008). Various other researchers also corroborated the positive impact of dividend policy on the firm value (De Wet and Mpinda 2013). While the direct linear effects of age and size of firm are understandable, it would be interesting to investigate how age and size changes the strength of relationship between institutional and promoters’ holdings on dividend payout ratio and firm value. From a theoretical standpoint, firm size and age will have significant direct influence on firm value and dividend payout ratio. It is logical that as the firm expands in size it is more likely to have higher earnings, and the firms will have a choice to pay higher dividends. At the same time, when a firm is in the industry for a long time (representing the age), it is more likely that it will have a considerable size of the market and have higher rate of returns, a part of which may be distributed as dividends. In this study, our primary interest is to see the moderating effect of age and size on dividend payout ratio and firm value. Since prior researchers have not explored this relationship, this study aims to bridge the gap by answering the following research questions (RQs): RQ1: How do promoters’ holdings effect dividend payout ratio and firm value? RQ2: How do institutional holdings effect dividend payout ratio and firm value? RQ3: How does firm age moderate the relationship between promoters’ holdings and (i) dividend payout ratio and (ii) firm value? RQ4: How does firm size moderate the relationship between institutional holdings and (i) dividend payout ratio and (ii) firm value? This study makes five significant contributions to the literature on dividend payout ratio and firm value. First, the study aligns with the studies in the literature that show that promoters’ holdings are significantly and positively related to dividend payout ratio and firm value. Second, consistent with past studies, this study provides empirical evidence that institutional holdings have a positive and significant effect on dividend payout ratio and firm value. Third, this study found that the relationship between promoters’ holdings and dividend payout ratio is stronger (positive) for older companies in terms of age, whereas the relationship is weaker (negative) for new firms (firms of a lower age). Fourth, the results reveal that promoters’ holdings have higher firm value for new firms when compared to old firms. However, firm value increases exponentially with the increase in age of a firm. Fifth, for big firms, institutional holdings result in a higher dividend payout ratio and higher value of the firm as compared to small firms. To sum up, the oversimplified moderated model developed and tested in this research makes a significant contribution to the literature. 110 J. Risk Financial Manag. 2023,16, 489 2. Hypothesis Development 2.1. Promoters’ Holdings and Dividend Payout Ratio A promoter is a person or a group of persons, who are involved in the incorporation of a corporation. Promoters are the significant part in the organization and management of a business. According to the Securities and Exchange Board of India (SEBI’s) Disclosure and Investor Protection Guidelines, 2000 (DIP Guidelines) and Substantial Acquisition of Shares and Takeover Regulations, the 1997 (Takeover Code) “Promoter or Promoter Group” exercise ample control over the company by virtue of their shareholding and management rights (Kumar and Singh 2013). Promoters’ holdings are the percentage of shares held by the promoters group out of the total outstanding shares. Companies with higher promoters’ holdings pay a high dividend to their shareholders by exercising effective control over the management and reducing the cost of agency (Arora and Srivastava 2021; Jawade 2021). Promoters’ holdings have a positive effect on the dividend payout of BSE 500 listed companies in India (Gupta 2017). On the contrary, companies with more than 65 to 70 per cent promoters’ holdings result in having a 21.3 per cent decrease in the dividend payout ratio, due to higher tax on dividend income (Dhamija and Arora 2019). Earlier scholars reported that larger amounts of promoter holding demotivate the promoters to choose a higher payout ratio (Kumar 2006). From the above discussion we hypothesize the relationship as follows: Hypothesis 1 (H1): Promoters’ holdings are positively associated with dividend payout ratio. 2.2. Promoters’ Holdings and Firm Value The traditional scholars in financial management have empirically advocated that promoters’ holdings result in a decrease in agency cost and increase the firm value because of the vested interests the promoters have in the wealth of the company (Jensen and Meckling 1976), since the personal stakes involved are substantial promoters’ attempt to maximize the firm value (Shleifer and Vishny 1988). Wang (2018) also found a non-linear relationship between promoter’ holdings and firm value where the firm value first declines with an increase in promoter’ holdings and then upsurges as promoters own more shares. On the contrary, an increase in promoters’ holdings has a negative effect on firm value, due to the entrenchment effect (Demsetz 1983). To resolve the contradictory findings, Claessens et al. (2002) suggest that there is a threshold level of stock holdings beyond which the costs of minority shareholders outweigh the benefits, resulting in a decrease in the firm value. Concentrated promoter ownership represents holding at least five per cent of a firm’s shares (Pandey and Sahu 2019; Selarka 2005). Interestingly, Yasser and Mamun (2015) found an insignificant association between the ownership concentration and firm value. Though some studies found a negative association of promoters’ holdings with firm value, extant research skewed towards positive association (Abbasi et al. 2017; AL-Najjar 2016; Denis and McConnell 2003; Gaur et al. 2015; Yasser and Mamun 2017). Based on the above arguments, the following hypothesis is offered: Hypothesis 2 (H2): Promoters’ holdings are positively associated with the firm value. 2.3. Institutional Holdings and Dividend Payout Ratio According to Koh (2003), institutional ownership is defined as the number of shares out of the total shares possessed by institutions at the end of the year. Institutional holdings represent the ownership by institutions such as mutual fund companies, pension fund companies, private foundations, investment companies, and other large agents who manage funds on behalf of others (Ratnawati et al. 2019). Jacob and Jijo Lukose (2018) highlighted the fact that institutional ownership plays a vital role in dividend payout ratio. Since institutional investors periodically monitor the actions of chief executive officers who make policies about the declaration of a dividend, it is more likely that the greater the institutional holdings in the firm, the greater will be the dividend payout ratio (Jensen 111 J. Risk Financial Manag. 2023,16, 489 Figure 4. Firm size as a moderator between institutional holdings and dividend payout ratio. Figure 5. Firm size as a moderator in the relationship between institutional holdings and firm value. 5.5. Direct Effects of Firm Age and Firm Size This study focuses mainly on the moderating effect of firm age and firm size in the relationship between promotors’ holdings and firm value and institutional holdings and dividend payout ratio. Since the moderator variables also have a direct influence (Aiken and West 1991), the direct hypothesis of the effect of moderator variables on the dependent variables is omitted by the researchers. As shown in Table 3, the immediate effects of firm age and size on dividend payout ratio and firm value are positive and significant. Since these direct (linear) effects are understandable, we did not hypothesize these in this research. 6. Discussion This paper attempts to underscore the importance of firm age and size in changing the strength of the relationship between promoters’ holdings, institutional holdings, dividend payout ratio, and firm value. First, it is proposed that promoters’ holdings would positively impact the dividend payout ratio. The underlying logic, supported by the extant research, is that promoters would like to create an impression in the minds of potential investors about the positive intent of the company to take care of the shareholders through good periodical dividend 118 J. Risk Financial Manag. 2023,16, 489 payout. As the investors differ in their requirements, some prefer regular dividends. In contrast, some young investors may care about something other than periodical dividends, and are more interested in the firm’s value. Therefore, the promoters with significant holdings would see regular dividends paid to the stockholders. Moreover, the higher the promoters’ holdings, the more control over the business affairs, whereby the promoters streamline the company’s activities and reduce the agency cost, thus increasing the dividend payout to the shareholders. The promoters can also enjoy this as an incentive for the monitoring role. Thus, the study’s findings corroborated previous findings (Arora and Srivastava 2021; Gupta 2017). Second, the promoter’s holdings also enhance the firm’s value, as their efforts are directed towards its success, measured in terms of firm value. So, it is self-explanatory that the influential monitoring role of promoters’ holdings promotes efficiency in the utilization of resources, thus paving the way to increasing the firm’s value. Thus, the findings support the existing literature (Abbasi et al. 2017; Gaur et al. 2015; AL-Najjar 2016; Yasser and Mamun 2017). Third, the institutional holdings also operate similarly to promoters’ holdings, affecting the positive relationship between dividend payout and firm value. Thus, the study’s findings support the previous literature (Lin and Fu 2017; Muniandy et al. 2016; Thanatawee 2014b). Regarding the moderation hypothesis, firm age moderates the relationship between promoters’ holdings on dividend payout ratio and firm value. Moreover, firm size moderates the relationship between institutional holdings’ dividend payout ratio and firm value. Thus, the findings support the positive moderation hypothesis of previous studies (Chakkravarthy et al. 2023; Suriawinata and Nurmalita 2022). 6.1. Practical Implications The findings from this study have several implications for the companies interested in understanding the antecedents of firm value and dividend payout ratio. As many companies in the pharmaceutical industry have been in the industry for quite a long time, growing competition between the companies prompts the top management team to maintain a sustained competitive advantage by retaining the existing shareholders. One way of doing it is to increase the dividend payout, lest the shareholders move out of the companies and invest in alternative companies that pay higher dividends. The results from this study explain how the firm value is impacted by age and size. When companies shy away from increasing their size, the present study signals that it is a good idea to explore diversification of investments and expand by engaging in either a concentric or conglomerate strategy, depending on the available opportunities. This study also provides valuable insights into companies in general, apart from the pharmaceutical companies, about the boundary conditions for dividend payout ratio and firm value. 6.2. Limitations and Future Research Every research is confined to sample units chosen for the study. In the corporate literature, numerous companies have different accounting disclosure practices, the companies of banking and financial institutions have different disclosure norms, and the practices of dividend study may be different among the industries. This study used 11 years of financial data from 23 BSE S&P Healthcare Index companies. So, the study’s results can be generalized to the particular industry or related industries alone. Moreover, the data depend on the trustworthiness of the prowess database. The study period is from 2016 to 2021; the adverse environmental factors may impact the results which may change when generalizing the results in other periods of the study. Therefore, future researchers can include more years and test the model by extending it to other industries in India and worldwide. Another limitation of this study is the limited sample size. We could focus only on 23 companies (because we focused only on the companies that have been paying dividends continuously). Further, a cross-industry analysis would have been more helpful in enriching the results. It would also be interesting to study the relationships between the variables 119 J. Risk Financial Manag. 2023,16, 489 from industries in different countries, and see if there are any marked differences with the relationships in the hypothesized model. 6.3. Conclusions The present study developed a conceptual model and empirically examined the moderating role of firm age and firm size in the relationship of promoters’ holdings, institutional holdings dividend payout ratio, and firm. The results indicate that firm age and firm size are the prominent moderators. In this research, the hypotheses tested are expected to contribute to the burgeoning theory of financial management. This study provides valuable insights for practicing managers in understanding the antecedents and boundary conditions for enhancing firm value. This study provides avenues for future research. It is suggested that future studies may focus on the role of other variables such as financial leverage and capital structure in influencing the value of the firm and dividend payout ratio, which may significantly contribute to the growing body of knowledge in finance. Author Contributions: Conceptualization, B.C., F.G.I. and A.R.P.; methodology, R.E., N.R. and S.P.; software, B.C., A.R.P. and F.G.I.; formal analysis, B.C., F.G.I. and A.R.P.; investigation, B.C. and A.R.P.; resources, F.G.I., N.R. and R.E.; data curation, B.C., N.R. and R.E.; writing—original draft preparation, B.C., A.R.P. and S.P.; writing—review and editing, A.R.P., N.R. and S.P.; visualization, B.C., F.G.I. and A.R.P.; supervision, F.G.I. and A.R.P.; project administration, F.G.I. and A.R.P.; All authors have read and agreed to the published version of the manuscript. Funding: This research received no external funding. Data Availability Statement: Data will be made available upon request. Conflicts of Interest: The authors declare no conflict of interest. References Abbasi, Farzaneh Beikzadeh, Elahe Asadipour, and Masoud Pourkiyani. 2017. Investigate the effect of ownership structure on the performance of companies listed on the Tehran Stock Exchange. Scinzer Journal of Accounting and Management 3: 26–32. Adjaoud, Fodil, and Walid Ben-Amar. 2010. Corporate governance and dividend policy: Shareholders’ protection or expropriation? Journal of Business Finance and Accounting 37: 648–67. [CrossRef] Affandi, Fakhrun, Bambang Sunarko, and Ary Yunanto. 2019. The impact of cash ratio, debt to equity ratio, receivables turnover, net profit margin, return on equity, and institutional ownership to dividend payout ratio. Journal of Research in Management 1: 1–11. [CrossRef] Ahmad, Ayoib Che, and Mohd Abdullah Jusoh. 2014. Institutional ownership and market-based performance indicators: Utilizing generalized least square estimation technique. Procedia—Social and Behavioral Sciences Journal 164: 477–85. [CrossRef] Aiken, Leona S., and Stephen G. West. 1991. Multiple Regression: Testing and Interpreting Interactions. New York: Sage Publications, Inc. AL-Najjar, Dana M. 2016. Do ownership concentration and leverage influence firms’ value? Evidence from panel data in Jordan. International Journal of Business and Management 11: 262–70. [CrossRef] Annisa, Intan Noor, and Mohamed Rafki Nazar. 2015. Influences of ownership structure with control variable profitability, firm’s age, and firm’s size to corporate social responsibility disclosure (Study on Manufacturing Companies in Indonesia Stock Exchange during the years 2011–2013). e-Proceedings of Management 2: 313–23. Arora, Ravinder Kumar, and Aman Srivastava. 2021. Ownership concentration and dividend payout in emerging markets: Evidence from India. Global Business Review 22: 1276–88. [CrossRef] Ayunitha, Annisa, Hesti Wuri Sulastri, Muhammad Iqbal Fauzi, Muhamad Azis Prabowo Sakti, and Nugi Mohammad Nugraha. 2020. Does the Good Corporate Governance Approach Affect Agency Cost? Solid State Technology 63: 3760–70. Azhagaiah, R., and N. Sabari Priya. 2008. The impact of dividend policy on shareholders’ wealth. International Research Journal of Finance and Economics 20: 180–87. Bakke, Tor-Erik, and Toni M. Whited. 2010. Which firms follow the market? An analysis of corporate investment decisions. Review of Financial Studies 23: 1941–80. [CrossRef] Basri, Hasan. 2019. Assessing determinants of dividend policy of the government-owned companies in Indonesia. International Journal of Law and Management 61: 530–41. [CrossRef] Bathala, Chenchuramaiah T., Kenneth P. Moon, and Ramesh P. Rao. 1994. Managerial Ownership, Debt Policy, and the Impact of Institutional Holdings: An Agency Perspective. Financial Management 23: 38–50. [CrossRef] Bebchuk, Lucian A., Alma Cohen, and Scott Hirst. 2017. The agency problems of institutional investors. Journal of Economic Perspectives 31: 89–102. [CrossRef] 120 J. Risk Financial Manag. 2023,16, 489 Bhattacharya, Prasad S., and Michael A. Graham. 2009. On institutional ownership and firm performance: A disaggregated view. Journal of Multinational Financial Management 19: 370–94. [CrossRef] Bhushan, Ravi. 1989. Firm characteristics and analyst following. Journal of Accounting and Eco-nomics 11: 255–74. [CrossRef] Budagaga, Akram. 2017. Dividend payment and its impact on the value of firms listed on Istanbul stock exchange: A residual income approach. International Journal of Economics and Financial Issues 7: 370–76. Chakkravarthy, Balamuralikrishnan, Francis Gnanasekar Irudayasamy, Rajesh Elangovan, Natarajan Rengaraju, and Satyanarayana Parayitam. 2023. Relationship between return on assets and firm value: Institutional holdings and firm size as moderators. Quality & Quantity, 1–17. [CrossRef] Chang, Kiyoung, Eun Kang, and Ying Li. 2016. Effect of institutional ownership on dividends: An agency-theory-based analysis. Journal of Business Research 69: 2551–59. [CrossRef] Chen, Jianguo, Lloyd Blenman, and Dar-Hsin Chen. 2008. Does institutional ownership create values? The New Zealand case. Quarterly Journal of Finance and Accounting 47: 109–24. Chen, Ming-Hsiang, Henry Tsai, and Wan Quing Lv. 2018. The effects of institutional holdings and state ownership on hotel firm performance in China. Journal of China Tourism Research 14: 20–41. [CrossRef] Chung, Kee H., Peter Wright, and Ben Kedia. 2003. Corporate governance and market valuation of capital and R&D investments. Review of Financial Economics 12: 161–72. Claessens, Stijn, Simeon Djankov, Joseph P. H. Fan, and Larry H. P. Lang. 2002. Disentangling the incentive and entrenchment effects of large shareholdings. Journal of Finance 57: 2741–71. [CrossRef] Coffee, John C., Jr. 1991. Liquidity versus Control: The Institutional Investor as Corporate Monitor. Columbia Law Review 91: 1277–368. [CrossRef] Damayanti, Cacik Rut, and Yalissa Adella Palinggi. 2023. Factors Affecting Dividend Policy: An Evidence from Indonesian Financial Companies. Management Analysis Journal 12: 1–16. Dang, Chongyu, Zhichuan Frank Li, and Chen Yang. 2018. Measuring firm size in empirical corporate finance. Journal of Banking and Finance 86: 159–76. [CrossRef] De Wet, Johannes, and Mvita Mpinda. 2013. The impact of dividend payments on shareholders’ wealth: Evidence from the Vector error correction model. International Business & Economics Research Journal 12: 1451–65. [CrossRef] Demsetz, Harold. 1983. The structure of ownership and the theory of the firm. Journal of Law and Economics 26: 375–90. [CrossRef] Denis, Diane K., and John J. McConnell. 2003. International corporate governance. Journal of Financial and Quantitative Analysis 38: 1–36. [CrossRef] Dhamija, Sanjay, and Ravinder Kumar Arora. 2019. Impact of Dividend Tax Change on the Payout Policy of Indian Companies. Global Business Review 20: 1282–91. [CrossRef] Drakos, Ananstassios A., and Fivos V. Bekiris. 2010. Corporate performance, managerial ownership and endogeneity: A simultaneous equations analysis for the Athens stock exchange. Research in International Business and Finance 24: 24–38. [CrossRef] Ferreira, Miguel A., and Pedro Matos. 2008. The colours of investors’ money: The role of institutional investors around the world. Journal of Financial Economics 88: 499–533. [CrossRef] Firth, Michael, Jin Gao, Jianghua Shen, and Yuanyuan Zhang. 2016. Institutional stock ownership and firms’ cash dividend policies: Evidence from China. Journal of Banking & Finance 65: 91–107. Gaur, Sanjay S., Hanoku Bathula, and Deeksha Singh. 2015. Ownership concentration, board characteristics and firm performance: A contingency framework. Management Decision 53: 911–31. [CrossRef] George, Rejie, Rezaul Kabir, and Jing Qian. 2011. Investment-cash flow sensitivity and financing constraints: New evidence from Indian business group firms. Journal of Multinational Financial Management 21: 69–88. [CrossRef] Gonzalez, Victor M., and Francisco Gonzalez. 2012. Firm size and capital structure: Evidence using dynamic panel data. Applied Economics 44: 4745–54. [CrossRef] Grinstein, Yaniv, and Roni Michaely. 2005. Institutional holdings and payout policy. The Journal of Finance 60: 1389–426. [CrossRef] Gupta, Vandana. 2017. Factors determining the dividend policy of a company. Abhigyan 35: 21–30. Gusni, Gusni. 2017. The determinants of dividend policy: A study of financial industry in Indonesia. Journal Keuangan dan Perbankan 21: 562–74. [CrossRef] Hair, Joseph F., Rolph E. Anderson, R. L. Tatham, and William C. Black. 1998. Multivariate Data Analysis, 5th ed. New Jersey: Prentice-Hall. Hamidullah, Shah, and A. Shah. 2011. The Impact of Ownership Structure on Capital Structure and Firm Value: Evidence from the KSE-100 Index Firms. Paper presented at International Conference on Management, Economics and Social Sciences, Athen, Greece, 17–19 March 2011; pp. 450–54. Hashmi, Syed Danial, Saquib Gulzar, Zeshan Ghafoor, and Iram Naz. 2020. Sensitivity of firm size measures to practices of corporate finance: Evidence from BRICS. Future Business Journal 6: 1–19. [CrossRef] Hasibuan, David H.M., and Khomsiyah. 2019. Does corporate governance affect tax aggressiveness? Evidence from Indonesia. Journal of Accounting, Business and Financial Research 7: 8–16. [CrossRef] He, Wei, Tarun K. Mukherjee, and H. Kent Baker. 2017. The effect of the split share structure reform on working capital management of Chinese companies. Global Finance Journal 33: 27–37. [CrossRef] 121 J. Risk Financial Manag. 2023,16, 489 Jacob, Chacko, and P. J. Jijo Lukose. 2018. Institutional ownership and dividend payout in emerging markets: Evidence from India. Journal of Emerging Market Finance 17: 545–825. [CrossRef] Jalal, Abu, and Shahriar Khaksari. 2020. Cash cycle: A cross-country analysis. Financial Management 49: 635–71. [CrossRef] Jawade, Avinash A. 2021. Does promoter holding affect financed payout of dividends? Borsa Istanbul Review 21: 332–39. [CrossRef] Jennings, William W. 2005. Further evidence on institutional ownership and corporate value. Corporate Governance (Advances in Financial Economics) 11: 167–207. [CrossRef] Jensen, M. 1986. Agency costs of free cash flow, corporate finance and takeovers. American Economic Review 76: 323–29. Jensen, Michael C., and William H. Meckling. 1976. Theory of the firm: Managerial behaviour, agency cost and ownership structure. Journal of Financial Economics 3: 305–60. [CrossRef] Jory, Surendranath R., Thanh Ngo, and Hamid Sakaki. 2017. Institutional ownership stability and dividend payout policy. Managerial Finance 43: 1170–88. [CrossRef] Kania, Sharon L., and Frank W. Bacon. 2005. What Factors Motivate the Corporate Dividend Decision? American Society of Business and Behavioral Sciences 1: 97–107. Karpavicius, Sigitas, and Fan Yu. 2017. How institutional monitoring creates value: Evidence for the free cash flow hypothesis. International Review of Economics and Finance 52: 127–46. [CrossRef] Khan, Tehmina. 2006. Company dividends and ownership structure: Evidence from UK panel data. The Economic Journal 116: C172–C189. [CrossRef] Koh, Ping-Sheng. 2003. On the association between institutional ownership and aggressive corporate earnings management in Australia. The British Accounting Review 35: 105–28. [CrossRef] Kumar, Jayesh. 2006. Ownership structure and dividend payout policy in India. Corporate Governance and Dividend Payout in India. Journal of Emerging Market Finance 5: 15–58. [CrossRef] Kumar, Naveen, and Jatinder Pal Singh. 2013. Effect of board size and promoter ownership on firm value: Some empirical findings from India. Corporate Governance 13: 88–98. [CrossRef] Kurshev, Alexander, and Ilya A. Strebulaev. 2015. Firm size and capital structure. Quarterly Journal of Finance 5: 1–46. [CrossRef] Lahiri, Poulomi. 2013. The Relationship between Dividend Payout Policy and Foreign Institutional Investment in India. Foreign Trade Review 48: 437–459. [CrossRef] Lin, Yongjia Rebecca, and Xiaoquing Maggie Fu. 2017. Does institutional ownership influence firm performance? Evidence from China. International Review of Economics and Finance 49: 17–57. [CrossRef] Lumapow, Lihard Stevanus, and Ramon Arthur Ferry Tumiwa. 2017. The effect of dividend policy, firm size, and productivity to the firm value. Research Journal of Finance and Accounting 8: 20–24. McConnell, John J., and Henri Servaes. 1990. Additional evidence on equity ownership and corporate value. Journal of Financial Economics 27: 595–612. [CrossRef] Mirza, Hammad Hassan. 2014. Determinants of Corporate Dividend Payout Policy: Evidence from Emerging Economies of South Asia. Ph.D., dissertation, COMSATS Institute of Information Technology, Islamabad, Pakistan. Mollah, Sabur, Omar Al Farooque, and Wares Karim. 2012. Ownership structure, corporate governance and firm performance: Evidence from an African emerging market. Studies in Economics and Finance 29: 301–19. [CrossRef] Moortgat, Leentje, Jan Annaert, and Marc Deloof. 2017. Investor protection, taxation and dividend policy: Long-run evidence, 1838–2012. Journal of Banking and Finance 85: 113–31. [CrossRef] Muniandy, Puspa, George Tanewski, and Shireenjit K. Johl. 2016. Institutional investors in Australia: Do they play a homogenous monitoring role? Pacific Basin Finance Journal 40: 266–88. [CrossRef] Navissi, Farshid, and Vic Naiker. 2006. Institutional owner-ship and corporate value. Managerial Finance 32: 247–56. [CrossRef] Nurainy, Renny, Bagus Nurcahyo, A. Sri Kurniasih, and B. Sugiharti. 2013. Implementation of good corporate governance and its impact on corporate performance: The mediation role of firm size (empirical study from Indonesia). Global Business and Management Research: An International Journal 5: 1–13. Nurokhmah, Ulfah, Sudarto Sudarto, and Rio Dhani Laksana. 2023. The effect of dividend payouts on firm value: The moderating role of institutional investors. Sustainable Competitive Advantage (SCA) 12: 1–9. Nwaobia, Appolos N., D. Kwarbai Jerry, and Grace O. Ogundajo. 2016. Tax planning and firm value: Empirical evidence from Nigerian consumer goods industrial sector. Research Journal of Finance and Accounting 7: 172–83. Odum, Augustine Nwekemezie, Chinwe Gloria Odum, Raymond Ifeanyi Omeziri, and Chinedu Francis Egbunike. 2019. Impact of Dividend Payout Ratio on the Value of Firm: A Study of Companies Listed on the Nigerian Stock Exchange. Indonesian Journal of Contemporary Management Research 1: 26–34. Ongore, Vincent Okoth. 2011. The relationship between ownership structure and firm performance: An empirical analysis of listed companies in Kenya. African Journal of Business Management 5: 2120–28. Pandey, Krishna Dayal, and Tarak Nath Sahu. 2019. Concentrated promoters’ ownership and firm value: Re-examining the monitoring and expropriation hypothesis. Paradigm 23: 70–82. [CrossRef] Pant, Manoj, and Manoranjan Pattanayak. 2008. Insider ownership and firm value: Evidence from Indian corporate sector. Economic and Political Weekly 42: 1459–67. [CrossRef] Putri, I. Gusti Agung Pramesti Dwi, Ni Ketut Rasmini, and Ni Putu Sri Harta Mimba. 2017. Pengaruh struktur corporate governance pada yield to maturity obligasi melalui peringkat obligasi. EJurnal Ekonomi Dan Bisnis Universitas Udayana 6: 2287–318. 122 J. Risk Financial Manag. 2023,16, 489 Putri, Vidiyanna Rizal, and Arinie Rachmawati. 2017. The effect of profitability, dividend policy, debt policy, and firm age on firm value in the non-bank financial industry. Jurnal Ilmu Manajemen Ekonomika 10: 14–21. [CrossRef] Ratnawati, Vince, Nita Wahyunir, and Arridho Abduh. 2019. The effect of institutional ownership, board of commissioners, audit committee on tax Aggressiveness; firm size as a moderating variable. International Journal of Business and Economy 1: 103–14. Richardson, David B., Ghassan B. Hamra, Richard F. MacLehose, Stephen R. Cole, and Haitao Chu. 2015. Hierarchical regression for analyses of multiple outcomes. American Journal of Epidemiology 182: 459–67. [CrossRef] [PubMed] Rozeff, Michael S. 1982. Growth, beta and agency costs as determinants of dividend payout ratios. Journal of Financial Research 5: 249–59. [CrossRef] Saxena, Vedika, and Seshadev Sahoo. 2020. Determinants of inter-corporate investments: An empirical investigation of Indian firms. International Journal of Financial Studies 9: 1–15. [CrossRef] Selarka, Ekta. 2005. Ownership concentration and firm value: A study from the Indian corporate sector. Emerging Markets Finance and Trade 41: 83–108. [CrossRef] Setiyawati, Lia, Sugeng Wahyudi, and Wisnu Mawardi. 2017. The Influence of Dividend Policy, Debt Policy, Independent Commissioner, and Institutional Ownership on The Firm Value with Growth Opportunities as Moderator Variables (Study on Non-Financial Companies Listed On IDX in The Period of Years of 2012–15). Journal Business Strategies 26: 146–62. Shleifer, Andrei, and Robert W. Vishny. 1986. Large Shareholders and Corporate Control. Journal of Political Economy 3: 461–48. [CrossRef] Shleifer, Andrei, and Robert W. Vishny. 1988. Value maximization and the acquisition process. Journal of Economic Perspectives 2: 7–20. [CrossRef] Shleifer, Andrei, and Robert W. Vishny. 1997. A survey of corporate governance. Journal of Finance 52: 737–83. Steiner, Thomas Lorenz. 1996. A reexamination of the relationships between ownership structure, firm diversification, and Tobin’s. Q. Journal of Business and Economics 35: 39–48. Strickland, Deon. 1996. Determinants of Institutional Ownership: Implications for Dividend Clienteles. Working Papers Series No. 96-20. Available online: http://ssrn.com/abstract=8204 (accessed on 8 April 2023). Suriawinata, Iman Sofian, and Denty Melatijati Nurmalita. 2022. Ownership Structure, Firm Value and the Moderating Effects of Firm Size: Empirical Evidence from Indonesian Consumer Goods Industry. Journal of Management and Entrepreneurship 24: 91–104. [CrossRef] Taufan, Frendy Akhmad, and Sugeng Wahyudi. 2013. Analisis Pengaruh Kepemilikan Institusional, Profitabilitas dan Likuiditas terhadap Kebijakan Dividend dengan Struktur Modal Sebagai Variabel Intervening serta Pengaruh Pajak terhadap Kebijakan Dividend. Diponegoro Journal of Management 2: 1–15. Thanatawee, Yordying. 2013. Ownership structure and dividend policy: Evidence from Thailand. International Journal of Economics and Finance 5: 121–32. [CrossRef] Thanatawee, Yordying. 2014a. Institutional ownership and firm value in Thailand. Asian Journal of Business and Accounting 7: 1–22. Thanatawee, Yordying. 2014b. Ownership structure and dividend policy: Evidence from China. International Journal of Economics and Finance 6: 197–204. [CrossRef] Tjipta, Regina Vanessa, Werner Ria Murhadi, and Endang Ernawati. 2022. The Effect of Corporate Governance toward Dividend Payout Ratio. Journal of Entrepreneurship & Business 3: 94–103. [CrossRef] Tsai, Henry, and Zheng Gu. 2007. The relationship between institutional ownership and casino firm performance. International Journal of Hospitality Management 26: 517–30. [CrossRef] Tsui, Anne S., Jone L. Pearce, Lyman W. Porter, and Angela M. Tripoli. 1997. Alternative approaches to the employee–organization relationship: Does investment in employees pay off? Academy of Management Journal 40: 1089–121. [CrossRef] Wang, Boya. 2018. Ownership, institutions and firm value: Cross-provincial evidence from China. Research in International Business and Finance 44: 547–65. [CrossRef] Yang, Xia, and Zhong Ma. 2022. Institutional investors’ corporate site visits and dividend payouts. International Review of Economics & Finance 80: 697–716. [CrossRef] Yasser, Qaiser Rafique, and Abdullah Al Mamun. 2015. Effects of ownership concentration on firm performance: Pakistani evidence. Journal of Asia Business Studies 9: 162–76. [CrossRef] Yasser, Qaiser Rafique, and Abdullah Al Mamun. 2017. The impact of ownership concentration on firm performance: Evidence from an emerging market. Emerging Economy Studies 3: 34–53. [CrossRef] Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content. 123 [Document text truncated for crawler view.]