Does the disclosure of internal control material deficiency remediation information matter for ESG performance? Evidence from China.

We examine the effects of the disclosure of internal control material deficiency remediation (ICMDR) information on firms' environmental, social and governance (ESG) performance. Using a sample of Chinese listed firms that disclosed ICMD information in the period 2012-2021, we find that firms which disclose their remediation information show better ESG performance and this improvement is achieved by mitigating financial risk. The results hold for various endogeneity concerns. In addition, the signal transmission effects of ICMDR disclosure on ESG performance occur mainly in the social and governance dimensions, whereas the effect on the environmental dimension is insignificant. Further heterogeneity analysis shows that, remediation information disclosure strongly improves ESG performance in firms that actively disclose remediation information, as well as in state-owned and non-heavily polluting enterprises. This study adds to the existing literature by revealing the role of remediation information disclosure in ESG performance, which has been a less explored topic. It also analyses the mediation role of financial risk to inform enterprises to disclose their remediation information as a means of achieving better sustainable development.