AAA Spark Meeting of the Regions

The Dual Effect of Transparency on Investment Efficiency: Evidence from Environmental and Social Disclosure

• In Event: Environmental, Social, & Governance

Abstract

While higher transparency can enhance firms’ investment efficiency by reducing information asymmetry, it also incites outside monitoring and limits the discretion of self-interested entrenched agents. In a theoretical model, we show that a higher level of transparency increases capital investment efficiency if the benefits of capital accessibility are sufficiently greater than the costs of outside monitoring so that entrenchment benefits increase proportionally by more than transparency. However, managerial entrenchment attenuates the positive impact of transparency on investment efficiency. We then empirically test the theoretical predictions using a sample of 1,607 unique U.S.-listed firms for the period from 2016 to 2021. Our results provide consistent evidence that a firm’s transparency, specifically firm disclosure related to environmental and social (E&S) performance, is positively associated with investment efficiency. Further, the positive impact of transparency on investment efficiency is greater for firms with lower managerial entrenchment. Finally, we show that the positive association between E&S disclosure and investment efficiency is stronger for firms exposed to E&S externalities that are more likely to affect the firm’s financial performance.

Authors

• Hong Kim Duong, Old Dominion University

• Ying Wu, Salisbury University

• Eduardo Schiehll, HEC Montréal, University of Montréal

• Hong Yao, Salisbury University