No. 156: Harmonizing the Information Environment: Do Firms Connect Financial and Nonfinancial Reporting?

Around the world, the demand for corporate nonfinancial information is steadily increasing. In addition, corporate stakeholders require consistency of financial and nonfinancial disclosures. Therefore, we ask whether introducing nonfinancial reporting mandates alters firms’ financial information provision. Using 63 country-level nonfinancial reporting mandates in a global sample of firms, we show that, on average, corporate earnings guidance is reduced in response to these mandates. At the same time, firms increase the average amount of non-earnings guidance. The effects vary with firms’ disclosure incentives. First, when stakeholder pressure is high, firms do not reduce earnings guidance levels and increase non-earnings guidance to a larger extent. Second, firms increase non-earnings guidance levels more when proprietary costs are low. Third, firms providing nonfinancial information before the mandate do not alter their financial guidance. In additional tests, we find that the documented effects are largely driven by environmental, rather than social or governance mandates. The results are robust to using the EU’s NFRD as an alternative shock.