The Impact of Environmental, Social, and Governance Disclosures on Information Asymmetry: With Special Reference to Financial Sector Companies Listed in the Colombo Stock Exchange

In an era of increasing global emphasis on responsible corporate behavior, Environmental, Social, and Governance disclosures (ESG) have become a critical mechanism for reducing information asymmetry in financial markets. The Primary objective of this study is to investigate the impact of ESG disclosures on information asymmetry in Sri Lankan listed Financial Sector Companies. The level of ESG disclosures was evaluated based on the Global Reporting Initiative (GRI). To assess information asymmetry, share price volatility, the bid-ask spread as a percentage of the mid-price, and annual trade volume were used as proxies. Growth, size, and profitability were used as control variables. This study collected balanced panel data from 50 financial sector companies listed in the Colombo Stock Exchange (CSE) over nine years from 2015 to 2023. The data were analyzed by using panel regression. Total trade volume and share price volatility are significantly related to ESG disclosures, whereas bid-ask spreads are not. When considering overall ESG disclosures, the banking sector makes a significant contribution over the period, while the diversified financial sector shows volatility in ESG reporting. Further, reporting of governance information has been improved significantly in these sectors. This study provides valuable insights specific to a developing economy, exploring how ESG practices influence transparency and market behavior. By focusing on a unique regional context, this study contributes to the global discourse on sustainable investing, corporate governance, and the reduction of information asymmetry.