Assessment of the Impact of the Effectiveness of ESG Practices on the Quality of Financial Statements of European Companies

Current research investigates the influence of ESG index of the company on the quality of financial reporting (including the influence of three components separately). For the purpose of the study the sample of 903 European companies were chosen, the sample consists of the yearly data from 2016 to 2023. The sample has been retrieved from the REFINITIV database; some observations were excluded from the sample to ensure the robustness of the results. To analyze the quality of reporting the work compares 6 different models as proxies for reporting quality. As a result, the Performance Matched Modified Jones model is implemented and the empirical results reveal the presence of positive influence of different ESG components on the quality of reporting. As soon as there are plenty of works dedicated to the assessment of influence of Corporate Governance factor on the reporting quality, there are barely few articles that traces the influence of the components of the Social score. To describe this dependence, we use various proxies for Social indexes such as Corporate Social Responsibility index, Human Rights score, Employee Satisfaction rate, and Workforce score and prove that they have statistically significant and positive dependance on the quality of financial reporting.