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 information, such as 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 explanatory power and sustainability information has become value relevant. The analysis focuses on 3,025 nonfinancial companies operating in the eurozone from 2005 to 2020. This study makes several contributions to the extant literature. 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 ESG agendas will be possible only by redirecting corporate investment decision and increasing awareness of sustainability issues. This paper documents that such a shift has not yet been accomplished, despite the increasing commitment of the European Union to the ESG agenda.