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630137 Master.Thesis.Final.Version Mandatory Nonfinancial Disclosure and Risk Management A Study of Mandated Nonfinancial Disclosure in the European Union Copenhagen Business School MSc. Economics and Business Administration Accounting, Strategy and Control Master´s Thesis Date of submission: 15th of May 2019 Pages: 100 Characters: 196,792 Carl Johan Christian Svensson Anton Carl Tomas Wängberg Student number: 115758 Student number: 115757 Supervisor Yanlei Zhang Assistant Professor Department of Accounting Abstract In this study, we examine how mandated nonfinancial disclosure affects risk management in the European Union. Specifically, we examine the implementation of European law 2014/95/EU, mandating companies within the European Union to disclose nonfinancial information related to environmental, social and governance (ESG) matters. By using a difference-in-difference estimation with matched samples, we predict and find (1) that treatment firms subject to the legislation experience a larger increase in risk (measured in Value at Risk and Expected Shortfall) after the implementation of the mandate compared to control firms not affected by the mandate. In a second step, we use a multiple regression model with an interaction term for different treatment groups depending on their pre- regulatory ESG-performance. We predict and find (2) that treatment firms with a relatively high pre- regulatory ESG-performance are less affected in terms of risk by the mandate. These findings suggest that market participants does not perceive that the benefits of the mandated disclosure outweighs the imposed proprietary effects of increased transparency. Additionally, the findings suggest that firms with a strong nonfinancial disclosure performance prior to the legislation are able mitigate the informational shock and imposed proprietary effects subsequent to the mandate. 1 Table of Contents 1.0 Introduction ......................................................................................................................................... 6 2.0 Background ....................................................................................................................................... 10 2.1 Nonfinancial disclosure ................................................................................................................. 10 2.1.1 The development of nonfinancial disclosure .......................................................................... 10 2.1.2 Rationales and trends of nonfinancial disclosure ................................................................... 14 2.2 The European Union ..................................................................................................................... 15 2.2.1 Nonfinancial disclosure within the European Union .............................................................. 15 2.2.2 Mandate 2014/95/EU .............................................................................................................. 16 2.2.3 Law requirements ................................................................................................................... 19 3.0 Literature review ............................................................................................................................... 23 3.1 Voluntary nonfinancial disclosure ................................................................................................. 23 3.1.1 Economic effects of voluntary nonfinancial disclosure .......................................................... 23 3.1.2 Information asymmetry .......................................................................................................... 25 3.1.3 Implications for analysts ......................................................................................................... 25 3.2 Mandatory nonfinancial disclosure ............................................................................................... 26 3.2.1 Economic effects of mandatory nonfinancial disclosure ........................................................ 26 3.2.2 Information asymmetries ........................................................................................................ 27 3.2.3 Reactions to mandatory regulations within the European Union ........................................... 28 3.3 Risk management .......................................................................................................................... 30 3.3.1 The link between nonfinancial disclosure and risk................................................................. 32 3.3.2 Risk measures ......................................................................................................................... 34 3.4. Hypothesis development .............................................................................................................. 35 4.0 Research design................................................................................................................................. 38 2 4.1 Difference-in-difference study ...................................................................................................... 38 4.1.1 Application and timeline of difference-in-difference study ................................................... 39 4.1.2 Event date ............................................................................................................................... 40 4.2 Sample and data selection ............................................................................................................. 41 4.2.1 Sample selection ..................................................................................................................... 42 4.2.2 Sample exclusion .................................................................................................................... 44 4.2.3 Data selection.......................................................................................................................... 45 4.2.4 Matching ................................................................................................................................. 46 4.3 Difference-in-difference model ..................................................................................................... 48 4.3.1 Difference-in-difference approach.......................................................................................... 48 4.3.2 Dependent variables ............................................................................................................... 49 4.3.3 Independent variables ............................................................................................................. 53 4.3.4 Control variables ..................................................................................................................... 55 4.4 ESG multiple regression model ..................................................................................................... 59 4.4.1 Multiple regression with interaction variable ......................................................................... 60 4.4.2 Regulation in effect................................................................................................................. 61 4.4.3 ESG-performance ................................................................................................................... 62 4.4.4 Interaction term ....................................................................................................................... 62 4.5 Hypothesis testing ......................................................................................................................... 63 4.6 Research design considerations ..................................................................................................... 63 5.0 Results and analysis .......................................................................................................................... 65 5.1 Descriptive statistics of data .......................................................................................................... 65 5.2 Difference-in-difference analysis .................................................................................................. 77 5.2.1 Results .................................................................................................................................... 77 3 5.3 ESG multiple regression ................................................................................................................ 87 5.3.1 Results .................................................................................................................................... 87 5.4 Additional analysis – announcement event ................................................................................... 90 5.4.1 Difference-in-difference analysis ........................................................................................... 90 5.4.2 Results .................................................................................................................................... 91 5.4.3 Multiple regression ................................................................................................................. 93 5.5 Summary hypothesis ..................................................................................................................... 95 6.0 Implications for managerial practice and policy ............................................................................... 96 7.0 Conclusion .......................................................................................................................................
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