Can nonfinancial disclosure (NFD) benefit companies? - Evidence from the 2016 Hong Kong “Comply or Explain” mandatory environmental, social, and governance (ESG) disclosure policy

Abstract This empirical study investigates whether mandatory nonfinancial disclosure (NFD) impacts financial performance using the Hong Kong 2016 “Comply or Explain” mandatory ESG disclosure policy. We use a total of 4712 observations from balanced panel data obtained from combined sources: Refinitiv and manually collected databases from 2013 to 2020. We employ the difference-in-difference (DID) as an identification strategy to explore the average treatment effect on the treated (ATET) of mandatory ESG disclosure policy. The treatment group is dual-listed companies (A/H shares) from Hong Kong, and the control group is domestic-list-only companies (A shares) from Mainland China. The results suggest that a mandatory ESG disclosure policy positively affects corporate financial performance (Tobin’s Q). From heterogeneity analysis, we also find that mandatory disclosure varies across ownership status, economic development regions and industrial sectors. We find that Hong Kong’s 2016 "Comply or Explain" mandatory ESG disclosure policy positively impacts corporate financial performance. Our findings demonstrate the effectiveness of regulatory-driven nonfinancial information disclosure on corporate financial performance.