Tilburg School of Economics and Management (TiSEM), Tilburg U.
Drawing upon legitimacy and institutional theory we hypothesize that companies engage in environmental, social and governance (ESG) reporting to meet the expectations of institutional investors. While companies are driven to ESG disclosure in seeking legitimacy amongst different constituencies, this effect may be complementary or substitutive to country-level governance. We test our hypotheses using a sample of 4,252 firm-year observations from the United Kingdom and the five largest EU countries. Our results show that while strong national institutions attract investment by institutional investors, ESG disclosure does not have such an effect. We also reveal a positive relationship between ownership by institutional investors and ESG reporting in countries characterized by a weaker institutional environment, indicating the substitutive effect between ESG disclosure and country-level governance.