Sustainability reporting readability, stock liquidity and the role of corporate governance: evidence from an emerging market

Purpose This study investigates whether the readability of sustainability reports affects stock liquidity and how corporate governance mechanisms shape this relationship. Drawing on agency theory, we ask whether investors reward clear non-financial disclosure. By answering this in Iran – a sanctioned emerging market with concentrated ownership – we test the boundaries of Western-developed theories and offer novel evidence from an institutionally distinct context. Design/methodology/approach Our sample comprises 612 firm-year observations from the Tehran Stock Exchange over 2016–2024. We measure sustainability report readability using the Gunning Fog Index and capture stock liquidity using three proxies: the bid-ask spread, Amihud’s illiquidity ratio and the average daily transactions. We examine four governance moderators: blockholder ownership, institutional ownership, board independence and audit firm type. The analysis employs panel data models with fixed effects and Newey–West adjustments. Findings More readable sustainability reports are associated with higher stock liquidity. However, this relationship depends on governance structures. Blockholder ownership and board independence significantly amplify the positive effect of readability on liquidity. Institutional ownership does not emerge as a significant moderator, and audit firm type matters only for specific liquidity measures. These findings suggest that governance mechanisms are not interchangeable; the institutional environment shapes their effectiveness. Originality/value This study offers one of the first empirical examinations of how corporate governance moderates the relationship between sustainability reporting readability and stock liquidity in an emerging market context. By locating the study in Iran – an economy shaped by prolonged sanctions – we provide a robust test of agency theory’s boundaries. The result is a refinement: some expected relationships hold, others do not, revealing how context conditions the financial consequences of disclosure transparency. These findings offer actionable insights for policymakers designing disclosure regulations and for investors and boards seeking to enhance market efficiency in institutionally challenging environments.