Do investors value companies' mandatory nonfinancial risk disclosure? An empirical analysis of the Italian context after the EU Directive

Abstract

In October 2014, the European Union adopted Directive 2014/95/EU (hereafter, EU Directive), mandating companies of a certain size to draft and publish corporate nonfinancial information (NFI) regarding society and the environment. In this study, we examine the mandatory disclosure of nonfinancial (NF) risks by listed Italian companies, as required by the EU Directive, focusing on both the state‐of‐the‐art of such disclosure and its usefulness for investors. For this purpose, the study adopts a two‐staged research approach; in the first stage, we employed a manual meaning‐oriented content analysis to investigate the NF declarations (NFDs) of the listed Italian companies that were obliged to disclose NFI, returning a quality NF risks disclosure index. In the second stage, we used the value relevance methodology to investigate whether the disclosed NF risk information affects the levels of equity prices, through a modified Ohlson model. Our research is one of the first to investigate the value relevance of mandatory disclosures of NF risks following the implementation of the EU Directive, in the Italian context. The research was carried out in 2017, the first year of the directive's application for listed Italian companies. The main findings support a positive association between NF risk information disclosure levels and companies' market value. Moreover, they provide evidence of a significant mediating effect of NF risk on the relationship between financial risks and market value.

Assessing the Effects of Directive 2014/95/EU on Nonfinancial Information Reporting: Evidence from Italian and Spanish Listed Companies

“…Other authors, instead, did not find a decisive influence of the Directive on disclosure levels (Carungu et al 2020;Nicolò et al 2020). Postimplementation analyses focused on subtopics of NFI, identifying a positive association between the quality of nonfinancial risk information and market value (Veltri et al 2020), showing that corporate governance and report characteristics affect environmental information (Caputo et al 2021), and revealing high heterogeneity in the quality of SDG reporting (Pizzi et al 2021). Previous studies have analysed the information gap and the consequential adjustment required by the Directive based on the NFI disclosed before its implementation in national law (Venturelli et al 2017;Carini et al 2018;Manes-Rossi et al 2018;Venturelli et al 2019;Doni et al 2019).…”

Does the EU Directive on non‐financial information influence the value relevance of ESG disclosure? Italian evidence

“…Early evidence on the adoption of the Directive shows that it is associated to changes in corporate disclosure that go beyond mere conformity to what laws prescribe (Aureli, Del Baldo, Lombardi, & Nappo, 2020). To our knowledge, the effects of such adoption on the value relevance of non‐financial disclosure have not been investigated yet, with the exception of Veltri, De Luca and Phan (2020) that focuses on the value relevance of risk disclosure in the post‐adoption period. Many recent studies have investigated the value relevance of the mandatory adoption of the Integrated Reporting (IR) framework (IIRC, 2013) in South Africa, showing that the adoption of IR is associated with a reduction of information asymmetries (Cortesi & Vena, 2019) and an increase in the value relevance of earnings (Baboukardos & Rimmel, 2016; Loprevite, Rupo, & Ricca, 2018).…”

Stakeholder engagement is evolving: Do investors play a main role?

“…We understand quality as the substantive approach to sustainability reporting practices (Michelon, Pilonato, & Ricceri, 2015; Romero et al, 2019). We join the conversation about the role played by investors on sustainability reporting (Veltri, De Luca, & Phan, 2020) and the usefulness that reporting quality issues have (Boiral, Talbot, & Brotherton, 2020). By focusing on investors, we are paying attention to one of the less studied groups within the sustainability stakeholders.…”