Mandatory ESG disclosure and corporate foreign philanthropic giving

Abstract

I examine how mandatory ESG disclosure regulation in a country affects foreign MNEs’ ESG behaviours in that country. I conjecture that ESG disclosure mandate triggers local isomorphic behaviour of foreign MNEs so that they follow local firms’ pro-social behaviour. Employing a staggered difference-in-differences (DiD) design, I find that foreign MNEs increase their ESG activities in a host country, as proxied by donations to that host country, after ESG disclosure mandate is enacted in that country. The treatment effect is robust to a dynamic DiD model for test of parallel trend assumption, to a balanced sample to mitigate differences in mandated versus non-mandated countries, to falsification tests that replace dependent variable with domestic donations and donations to elsewhere in the world, and to a stacked sample to mitigate heterogeneous treatment effect issue in staggered DiD. The increase in donations is more prevalent for countries that are more important to a firm’s portfolio, for firms possessing higher liabilities of foreignness (LOF), with higher media coverage by local media outlets before the mandate, and for firms that rely more on governmental contracts from host country government. Moreover, foreign donations help MNEs maintain governmental contracts and local media sentiment after ESG disclosure mandate. Overall, my findings show that incentives to mitigate the LOF and to maintain relation with local governments and communities lead foreign MNEs to imitate local firms’ pro-social behaviour after mandatory ESG disclosure regulation is enacted. The evidence is consistent with managers making donation decision out of profit-maximization.