ABSTRACT This study examines the early effects of the European Union's Corporate Sustainability Reporting Directive (CSRD) on firms' sustainability performance and financial outcomes using panel data for EU‐listed companies from 2017 to 2023. Drawing on Stakeholder Theory and Legitimacy Theory, the analysis assesses whether mandatory Environment, Social and Governance (ESG) disclosure enhances transparency, strengthens organisational legitimacy and improves corporate financial performance. Using a Difference‐in‐Differences framework that compares firms covered by the CSRD with those outside the mandate, the results show that mandatory disclosure is associated with significant improvements in ESG performance and modest gains in profitability and market valuation. However, these benefits are notably weaker for financially constrained firms, suggesting that limited investment capacity reduces their ability to convert regulatory pressure into substantive sustainability improvements. Overall, the findings indicate that while the CSRD reduces information asymmetry and promotes more credible ESG practices, its financial effects are uneven and depend on firms' underlying financial flexibility.
Mohammad Talha (2026) studied this question.