Capital Markets as Catalysts: Evidence from the Nexus of Financial Development, Rule of Law, and Sustainability Reporting

Purpose: This study investigates the determinants of sustainability reporting adoption across 40 IMF Emerging Market Economies from 2015 to 2024. The aim of the study is to examine how financial market development and institutional quality influence the adoption of corporate sustainability reporting in emerging economies. Design/Methodology/Approach: The study uses a balanced panel dataset of 400 country-year observations. Drawing on institutional theory and financial market development literature, the study examines the effects of domestic credit markets, stock market capitalization and foreign direct investment (FDI) inflows on sustainability reporting. Pooled OLS, Two-Way Fixed Effects and Random Effects models were applied, with robust standard errors clustered at the country level. Moderation analysis was also used to assess the role of institutional quality, particularly the rule of law. Findings: The findings reveal that domestic credit markets, stock market capitalization and FDI inflows have significant positive effects on sustainability reporting adoption. Stock market capitalization emerged as the strongest driver. The results also show that institutional quality strengthens the relationship between financial development and sustainability reporting, especially through domestic credit and equity market channels. Diagnostic tests confirmed cross-sectional dependence, heteroscedasticity and serial correlation, supporting the use of cluster-robust fixed effects. Implications/Originality/Value: The study concludes that financial deepening and institutional reform work together in promoting sustainability reporting. It contributes by showing that emerging economies require both stronger financial markets and better rule-of-law institutions to accelerate corporate sustainability disclosure.