Mandatory Sustainability Reporting in Unlisted Firms: A Study of its Adoption and Effect on the Cost of Debt in a Swedish Setting

Abstract: Drawing on the EU Directive 2014/95 which imposes mandatory sustainability reporting for firms over a certain size since 2017 and the far-reaching Swedish application of this directive, this study explores (1) the existence and (2) the informational contents of the sustainability reports of 153 unlisted Swedish firms in the initial adoption year 2017, and (3) the impact of the regulation on the cost of debt of unlisted firms. We find firm size and state ownership to relate to both the existence and the content of these reports, which we interpret as legitimacy concerns influencing the sustainability reporting behavior of firms also in the mandatory setting. We also find a relationship between GRI adoption and the contents of the reports, as well as a relationship between the contents and the choice of auditor. On the other hand, we find no relationships to employed accounting quality or corporate governance variables. Finally, we find no effect on the cost of debt of firms using a regression discontinuity design. Applying signaling theory, we suggest that mandatory sustainability reporting in its current form performs poorly with regards to resolving information asymmetries for unlisted firms.