DO FIRMS WITH HIGHER AGENCY COSTS USE ESG DISCLOSURES AS A LEGITIMACY TOOL?

Abstract

The purpose of this study is to explore whether firms use environmental, social, and governance disclosures to gain organizational legitimacy when agency costs increase. Agency theory suggests that the disclosure of ESG information reduces information asymmetry, monitoring costs, and conflicts between managers and capital providers. An alternative is legitimacy theory, which posits that managers might make disclosures that are more visible but do not correct governance gaps or bad decisions. The analysis uses descriptive statistics, correlations, multicollinearity diagnostics, pooled least squares, and fixed-effects estimation and is based on 6,190 firm-year observations. The Hausman test provides backing for fixed effects; namely, that unobserved firm characteristics are correlated with the explanatory variables included in the model. In the fixed-effects regression (FE) model, the coefficient on ESG disclosure is positive but significant only at the 10 percent level. This is a weak positive correlation, indicating that unresolved agency costs in firms can co-occur with ESG reporting. Assurance, controversies, disclosure quality, and managerial intent are still unobserved; however, this provides no evidence of legitimacy management. Agency costs appear to have a strong negative relationship with profitability, and neither audit fees nor firm size have a statistically meaningful relationship with profitability. The study combines agency and legitimacy theories, distinguishes between statutory and symbolic disclosure, and offers implications for boards, investors, and regulators. Future studies should work in reverse, testing whether agency costs predict ESG disclosure.