The Dynamics of Performance Feedback and ESG Disclosure: A Behavioral Theory of the Firm Perspective

ABSTRACT While companies face increasing pressure from stakeholders to enhance their environmental, social, and governance (ESG) transparency, they are continually weighing the benefits and costs of ESG engagements. This study provides a novel exploration of how performance feedback impacts ESG disclosure among Malaysian public‐listed firms, utilizing the behavioral theory of the firm and performance feedback theory. Analyzing data from 72 companies over the period of 2018 to 2022, and employing a fixed effects model with cluster robust errors, the study reveals that firms underperforming relative to their financial aspirations tend to reduce ESG transparency. In contrast, firms that exceed their performance benchmarks show no significant increase in ESG disclosure. These findings underscore the nuanced relationship between financial performance and ESG reporting, offering valuable insights for corporate leaders and policymakers seeking to strengthen ESG frameworks and promote more consistent reporting practices.