The Temporal Paradox of Mandatory Sustainability Disclosure: Evidence from Saudi Arabia’s 2021 Tadawul ESG Guidelines on Reporting Quality

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🔬研究者:Empirical evidence on the adjustment costs of mandatory sustainability disclosure, contributing to the literature on disclosure regulation and earnings management.

🏢実務担当者:Corporate finance teams should anticipate a temporary dip in reporting quality during the first few years of a new ESG disclosure mandate, as resources shift to compliance.

🏛政策担当者:Regulators should phase in mandatory ESG disclosure requirements with adequate transition support, as early compliance burdens may temporarily impair financial reporting quality.

Does mandatory sustainability disclosure improve the quality of corporate financial reporting immediately, gradually, or with delay? We address this question using Saudi Arabia’s January 2021 Tadawul ESG Disclosure Guidelines—the first comprehensive sustainability disclosure framework in the Gulf Cooperation Council and a uniform, accurately dated regulatory shock affecting all listed firms. Using a balanced panel of 135 non-financial firms over 2017–2024 (1080 firm-year observations), we estimate absolute discretionary accruals from the Modified Jones Model and employ event-time fixed-effects regressions with Driscoll–Kraay standard errors robust to heteroskedasticity, autocorrelation, and cross-sectional dependence. We document a temporal paradox: reporting quality did not change in the announcement year (2021), deteriorated significantly in 2022 (+28%) and 2023 (+38%) relative to the pre-reform baseline, and then improved significantly in 2024 (−17%). The pattern survives performance-matched discretionary accruals, exclusion of the 2020 COVID-19 year, a placebo test, sectoral disaggregation across nine Tadawul-aligned industry groups, and a battery of pre-reform firm characteristics. Heterogeneity analysis identifies the underlying mechanism: voluntary pre-2021 ESG disclosers and firms with stronger pre-reform governance exhibit amplified short-run deterioration, while larger firms with pre-existing reporting infrastructure show a substantially attenuated paradox. These patterns are jointly consistent with the adjustment-cost mechanism we develop: the reform redirected scarce reporting governance toward the new disclosure margin during a three-year compliance buildout, after which the constraining effect on accrual-based earnings management emerged. The findings carry direct implications for the design and evaluation of mandatory sustainability disclosure reforms currently advancing across emerging and developed markets.

• openalex https://doi.org/10.3390/su18136582first seen 2026-07-01 04:59:07 · last seen 2026-07-01 05:03:11