Tax avoidance by multinational enterprises has attracted a lot of public attention recently and elicited calls for regulatory changes to increase tax transparency, for example, by sustainability reporting. Kronenberger and Simons theoretically investigate how the changing information environment for nonfinancial disclosures impact firms’ activities, such as production choices or ESG investments. In this setting, real effects can result because mandatory disclosure eliminates nondisclosures of bad firms but also reduces the possibility of signaling good news by disclosing voluntarily (unraveling from the top). As such, B06 also provides theoretical input to the empirical projects studying the real effects of corporate transparency.
How does the changing information environment for nonfinancial disclosures impact firms' activities, such as production or location choices or ESG-investments?
Stakeholders increasingly voice their desire for transparency about corporate activities. This observation has manifested itself in the current push for sustainability reporting worldwide. Similarly, fiscal authorities aim to expand disclosure requirements. Private Country-by-Country-Reporting (CbCR) improves the tax authorities’ own information endowment by increasing the information transmission to the tax authority. Public CbCR takes this concept a step further by requiring public disclosures to all interested stakeholders; however, trying to serve multiple receivers can harm the clarity in the sense of comprehensibility of the information provided to the receivers. In a similar fashion, the global reporting initiative (GRI) includes a tax-related section in the guidelines on environmental, social or governmental (ESG) reporting as of 2019. Thus tax and sustainability disclosures are undeniably intertwined. For this reason, we pose the question how the changing information environment for nonfinancial disclosures impacts firms’ activities, such as production, location choices, or ESG investments.
Specifically, we analyze optimal choices in settings characterized by multiple receivers and potential goal conflicts, trading off legality and legitimacy involving various reporting formats as well as uncertainty about receivers’ responses to information.
Our results should inform firms about the optimal tax and sustainability disclosure strategies.