THE EFFECT OF ESG DISCLOSURE ON AUDIT FEES, ANALYSTS’ FOLLOWING, AND FORECAST ACCURACY

Abstract

Environmental, social, and governance (ESG) criteria are increasingly used by investors and stakeholders to assess companies' sustainability and ethical impacts. This surge in interest was partly spurred by the U.S. Securities and Exchange Commission's proposal on ESG disclosure. In my three-essay dissertation, I examine how ESG disclosure affects the decisions of auditors and analysts. In the first essay, I hypothesize and find ESG disclosure to be positively associated with audit fees. Two not mutually exclusive hypotheses predict the findings: (1) the confirming hypothesis, which indicates that managers enhance the credibility of their voluntary disclosure by investing in external audit, and (2) auditors increase their risk assessment for firms with more voluntary disclosure. In the second essay, I find ESG disclosure to be positively associated with analyst coverage. The positive relationship is expected due to the following factors: (1) ESG disclosure score is a measure of how much information a firm makes available to the public for its ESG disclosure (2) Analysts' ability to incorporate the credibility of the ESG information into their recommendation creates investors demand for their coverage, and (3) the uncertainty of ESG information creates an incentive for analysts to cover firms with higher ESG disclosure since those firms are more profitable. Finally I find ESG disclosure to be positively associated with forecast accuracy. This is consistent with prior studies that suggest a positive association between the quantity of firms' disclosure and forecast accuracy, and furthermore voluntary nonfinancial disclosure is positively associated with forecast accuracy.