Does policy-oriented environmental disclosure increase market uncertainty? Evidence from stock price volatility in China

Abstract

Using textual analysis on Chinese listed firms from 2015 to 2022, this study investigates how policy-oriented environmental disclosures affect stock price volatility. Drawing on institutional and stakeholder theories, we find that such disclosure increases market uncertainty by signaling symbolic regulatory compliance rather than value-relevant performance, thereby weakening investor confidence. This effect is amplified under stronger regulative and normative pressures, while cognitive pressure shows no significant impact. Further analysis indicates that policy-oriented environmental disclosures help companies enhance regulatory legitimacy and obtain environmental subsidies, thereby mitigating and offsetting the negative impact of stock price volatility. Additionally, companies can strategically manage conflicting demands among stakeholders by adjusting the form and content of environmental disclosures. Heterogeneity tests show that policy-oriented environmental disclosures lead to more significant stock price volatility in high-tech companies, non-state-owned enterprises, pollution-intensive industries, and companies with a history of environmental violations. Our findings highlight the complex trade-offs firms navigate in environmental reporting and the dual influence of competing institutional pressures in shaping both the form quality and content quality of firm environmental disclosure.