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Companies in the United States are turning to voluntary earnings guidance to prevent confusion resulting from environmental, social and governance (ESG) disclosures, according to a new study from researchers at Florida Atlantic University and the University of Vassa in Finland.

The paper sheds new light on how environmental, social and governance disclosures from companies may increase information asymmetry, challenging previous theories that ESG disclosures enhanced transparency.

Information asymmetry happens when investors have less access to critical information about a firm, often causing confusion and inefficiencies in the market. Reducing this lack of information is crucial for investors to make sound decision-making. To combat this, firms are releasing voluntary earnings guidance, or disclosures on estimates about future financial earnings, to help reduce speculation among investors.

"There is a belief that ESG disclosures would decrease or improve the information asymmetry. However, because of the different ways companies use ESG disclosure, it may create confusion among market participants," said Anna Agapova, Ph.D., associate professor of finance in FAU's College of Business.

"What we find is that companies increase issuing voluntary earnings guidance to mitigate the unexpected effect of ESG disclosure on information asymmetry."

The paper, "," was accepted for publication in the International Review of Financial Analysis in the winter.

Researchers analyzed data from publicly listed U.S. companies from 2002–21, relying on 54,878 firm-quarter observations. Researchers measured information asymmetry with four proxies: bid-ask spread, Amihud illiquidity measure, distribution of analysts' forecasts, and standard deviation of earnings announcements' returns.

Despite the voluntary earnings guidance mitigating possible confusion with ESG disclosures, researchers found that market participants did not have a clear understanding of how to interpret ESG disclosures alongside the earnings guidance.

"The conclusions in this paper add to the debate regarding the need for clear and formalized guidelines for sustainability reporting and disclosure through the establishment of proper standards for sustainability that should help decrease disagreement and improve a common understanding regarding ESG information," the authors noted in the study.