The Association between Mandated Environmental Liability Recognition and Voluntary ESG Disclosure Quality

We examine the association between mandated Asset Retirement Obligations (ARO), i.e., environmental clean-up costs of normal operations estimated on the balance sheet, and the quality of voluntary ESG disclosures. We hypothesize that when firms recognize larger AROs with higher accuracy that this effort will spillover into enhanced voluntary disclosure of a broad range of ESG outcomes. Empirical evidence supports this hypothesis. In a sample of environmentally sensitive industries, we find that firms with larger and more accurate AROs exhibit higher ESG disclosure quality. In a changes analysis we find that increases in AROs map into increases in ESG disclosure quality. Further, we document predictable cross-sectional variation in the relation as a function of plausible mechanism variables. We provide DiD evidence as well as an instrumental variable analysis to address endogeneity. Our evidence suggests that accounting resources used to estimate mandatory ARO liabilities induce spillovers into improved voluntary ESG disclosure quality