Is more not always better? Untangling the impact of ESG disclosure transparency on idiosyncratic risk.

Abstract

Environmental, social and governance (ESG) increasingly impacts firms' risk management and investment decisions. Based on instrumental stakeholder theory, this study uses data from Chinese-listed manufacturing firms from 2013 to 2021 to examine the relationship between ESG disclosure transparency and idiosyncratic risk (IR). Artificial intelligence (AI) intellectual property protection and institutional investor distraction are incorporated as moderating variables in examining this relationship. Our empirical results indicate that ESG disclosure transparency lowers IR initially. However, once a certain threshold is reached, ESG disclosure transparency commences to increase IR, showing a U-shaped relationship. Furthermore, this study verifies that AI intellectual property protection shifts the turning point of the U-shaped curve to the right and steepens the U-shaped link by strengthening the positive impact of ESG disclosure transparency. AI intellectual property protection thus has a complementary role to ESG disclosure transparency about the effect on IR. In contrast, institutional investor distraction shifts the U-shaped curve to the left. It flattens the U-shaped curve by weakening the positive effect of ESG disclosure transparency, demonstrating that institutional investor distraction takes on a substitution role to ESG disclosure transparency regarding its effect on IR. Managerial implications and future research avenues are also discussed.