Managing Transparency: ESG Disclosure and Firm Performance

Mandatory ESG disclosure regulations vary across countries and regions. Some, such as Singapore, require all listed firms to disclose ESG reports (i.e., full ESG disclosure), while others, including the UK and the EU, mandate disclosure only for large firms and allow small firms to disclose voluntarily (i.e., partial ESG disclosure). To examine the implications of these regulatory designs, we develop a game-theoretic model with one large firm and one small firm in a competitive market, and assess how disclosure regulations affect firms' strategic disclosure choices and performance outcomes. Our results reveal that the small firm voluntarily discloses ESG reports only when the penalty for violations falls below a certain threshold. An all-win outcome for the large firm, the small firm, and consumers arises only under a moderate level of penalty intensity, under which both firms disclose ESG reports. Moreover, while partial disclosure can mitigate the competitive disparity between large and small firms (i.e., the Matthew Effect), this effect is realized only when the penalty is sufficiently high; otherwise, partial disclosure may even exacerbate this disparity. Overall, our analysis underscores that the interaction between the scope of mandatory disclosure and penalty intensity fundamentally shapes disclosure incentives and market fairness. Therefore, well-aligned regulation can improve transparency while preventing excessive market polarization, which provides valuable insights for policymakers seeking to balance regulatory objectives with market equity.