Mandatory sustainability reporting and cost stickiness: empirical evidence from the EU directive

Abstract

Purpose This study aims to examine the influence of mandatory sustainability reporting on the cost stickiness of companies. Design/methodology/approach The study employs Anderson et al.’s (2003) cost stickiness model, using the difference-in-difference method, where the treatment and control groups comprise companies from 17 European Union (EU) countries and 11 non-EU Organisation for Economic Co-operation and Development countries, respectively. The time period spans from 2013 to 2022, with 2017 being the year of the EU Directive’s implementation. The study uses various approaches in addressing endogeneity issues, including propensity-score matching, the multiple specifications method, parallel trend analysis, placebo variable and control variables. Findings The results confirm a statistically significant increase in discretionary costs, i.e. selling general and administrative costs, for EU companies in the post-implementation period. The stickiness is more profound in companies demonstrating an annual improvement in sustainability performance. Stakeholder-oriented civil law countries exhibit an increase, while shareholder-oriented common law countries show a decrease in cost stickiness. Research limitations/implications The study extends the literature on the economic effects of mandatory sustainability reporting by examining the novel aspect of cost behaviour, thereby revealing managerial perceptions about costs arising from compliance. It also highlights the role of company-level and country-level pre-regulation sustainability involvement in moderating the regulatory effect. Practical implications The study provides insights for policymakers in terms of formulating future regulations. Originality/value This study is the first to analyse cost stickiness in relation to mandatory sustainability reporting, adopting a multiple-country setting and covering a significantly long time period.