Environmental, Social, and Governance Reporting, Innovation Intensity, and Investment Efficiency

This study examines the links between Environmental, Social, and Governance (ESG) reporting, innovation intensity, and investment efficiency. The analysis uses 21,068 firm‐year observations from 48 countries from 2011 to 2020. Corporate ESG reporting is the ESG score from Refinitiv, innovation intensity is based on corporate intangible intensity, and investment efficiency is based on the McNichols and Stubben (2008) model. In line with the views of the agency theory, the findings indicate that firms with greater ESG reporting have higher investment efficiency and the positive impact of ESG reporting on investment efficiency becomes stronger for firms with higher innovation intensity. The findings identify mechanisms to improve investment efficiency in the form of two corporate strategies: engaging in ESG reporting and innovation. Support should be given, in terms of incentives and policy improvements, to enable firms to strategize for ESG reporting and innovation for better resource allocation in the capital market.