How Has the COVID-19 Crisis Affected the Link Between ESG Disclosure and Firm Value? A Two-Level Analysis of European Listed Companies

This paper examines the impact of environmental, social and governance (ESG) disclosure scores on the firm value of European listed companies before, during and after the COVID-19 pandemic. Using a two-level model and a unique dataset of 264 multinational firms covering the period 2019–2022, we find a negative relationship between ESG disclosure scores and firm value. Nevertheless, the effect of the social and environmental disclosure scores disappears during the crisis, and returns negative during the recovery period. Almost all empirical studies to date have found the inverse effect, suggesting that even though ESG transparency can improve firm reputation, it can also damage it and reduce firm value. We also show that firm-specific factors remain the biggest source of variability in firm value, even during the crisis. Thus, this paper contributes to the existing literature by suggesting that the impact of ESG disclosure on firm value may vary depending on the economic and financial context in which firms operate. More specifically, it shows that the benefits of ESG disclosure, namely the reduction of agency costs, stakeholder trust, and firm legitimacy, which are expected to increase firm value, may not have the predicted effect in a crisis context. Consequently, these findings provide both an empirical and a theoretical contribution to the existing literature on agency theory, signal theory, and legitimacy theory.