Mandated <scp>ESG</scp> Disclosure and Its Effects on Earnings Quality and Cost of Capital: Evidence From European Stock Markets

ABSTRACT This study investigates the causal effects of mandated ESG disclosure on two key corporate financial outcomes: earnings quality and cost of capital. Using a panel dataset of 210 publicly listed firms from eight European Union countries between 2015 and 2024, the study exploits cross‐country variation in the timing and intensity of ESG disclosure mandates under the EU Directive 2014/95/EU. A difference‐in‐differences research design is employed, supported by dynamic models and placebo tests to strengthen causal inference. The findings reveal that firms subject to mandatory ESG disclosure exhibit a statistically significant improvement in earnings quality and a reduction in the cost of capital following the implementation of the regulation. These effects are more pronounced among larger firms, suggesting that firm size moderates the ability to translate ESG transparency into financial benefits. The study recommends that regulators continue enforcing ESG mandates and that firms integrate ESG disclosure as a core element of their financial strategy. By providing rigorous evidence of financial benefits associated with mandated ESG practices, this study contributes to the literature on sustainable finance, corporate transparency, and capital market regulation.