Value Relevance of Accounting Numbers and Sustainability Information in Europe : Empirical Evidence From Nonfinancial Companies

Information is considered value-relevant when used by financial markets in equity valuation and is reflected in market values. The value relevance of different types of information (e.g., accounting numbers) changes according to shifts in investors’ needs. Given the rising importance of environmental and social agendas for policymakers and practitioners, this study examines whether accounting numbers have lost part of their explanatory power and whether sustainability information has become value-relevant. The analysis focuses on 3,025 nonfinancial companies operating in the eurozone from 2005 to 2020. The contributions of this study to the extant literature are as follows. First, analyzing the trend in the value relevance of financial accounting numbers, the results point to an overall decrease in the explanatory power of book values and earnings, particularly for environmental, social, and governance (ESG)-rated companies. However, the results indicate that ESG ratings have not gained value relevance over time. These findings have important implications for policymakers and practitioners. In line with the concept of “double materiality,” implementing environmental and social agendas will be possible only by redirecting investment decision processes and increasing corporate awareness of sustainability issues. This paper documents that such a shift has not yet been accomplished, despite the fact that the European Union was recently dedicated to the ESG agenda