The Trade‐Off Between Sustainability Reporting Quality and Corporate Investment Activity: Does Political Stability Matter?

Abstract

ABSTRACT This paper investigates the relationship between sustainability reporting quality (SRQ) and corporate investment activity, focusing on corporate investment intensity and corporate investment inefficiency, and the moderating role of national political stability. Using a multinational sample of 3647 firms from advanced (G7) and emerging (BRICS) economies, we find that higher SRQ restrains the overall level of investment (lower corporate investment intensity). Moreover, we present novel evidence of a dual effect of SRQ on corporate investment inefficiency: Higher SRQ increases inefficiency among firms that overinvest, further aggravating their overinvestment. However, among firms that underinvest, higher SRQ drives investment toward fundamentals‐implied levels, improving efficiency. Importantly, the negative relationship between SRQ and corporate investment intensity is stronger in politically stable countries, where strong institutions enhance disclosure credibility and managerial discipline. Our findings are timely as firms and regulators increasingly rely on sustainability disclosures to guide capital allocation. Our results are robust to alternative variable definitions, sub‐sample analysis and endogeneity corrections implemented using two‐step system GMM, propensity score matching and entropy balancing. We contribute nuanced insights into the context‐dependent impacts of SRQ, informing various stakeholders on aligning sustainability reporting with efficient resource deployment across diverse institutional settings.