The Impact of Corporate Sustainability Performance on Information Asymmetry in European Capital Markets

Abstract

This paper empirically investigates whether corporate sustainability performance (CSP) affects information asymmetry (IA) for European firms listed in the STOXX Europe 600 from 2002 to 2013. We find a significantly negative effect of CSP on IA. By exploiting institutional differences between the European countries, we determine that the negative effect of CSP on IA is more pronounced in liberal market economies compared to coordinated market economies, thus pointing to a substitutive effect of CSP and economic coordination. Further, the impact is greater in countries with stricter disclosure requirements. In such countries, there is generally greater appetite for company-specific information. Disclosure requirements fulfil this need only partially, though, since they concentrate on the corporate governance dimension of corporate sustainability. Hence, especially information on the social pillar matters to investors in a complementary manner and drives the overall effect. Our study contributes to the literature on the positive capital market effects of CSP in showing the proposed effect in European capital markets and the institutional determinants of its strength.