ESG Disclosure and Firm Performance: Institutional Differences Between Western European and Central and Eastern European Firms

1. Introduction

Environmental, social, and governance (ESG) disclosure has become highly relevant not only for corporations and regulators but also for investors. It is now considered an important element of investment analysis and decision-making. ESG disclosure not only reduces information asymmetry between companies and their investors (Christensen, Hail and Leuz, 2021; Chen and Xie, 2022; and others) but also plays an important role in firms’ market performance. However, the theoretical relationship between ESG disclosure and corporate financial performance (CFP) is not unambiguous; empirical evidence is mixed. While Friede et al. (2015), Busch and Friede (2018), Bai and Kim (2024), and others report positive relationships between ESG disclosure and CFP, Khan (2022), Atz et al. (2023), and Bai and Kim (2024) report neutral or statistically insignificant relationships between. Moreover, Rahi et al. (2021), Giannopoulos et al. (2022), and Dossa (2025) indicate a negative relationship, at least in the short run.

Empirical evidence also suggests that the economic relevance of ESG disclosure depends on the institutional environment in which firms operate; i.e., it may differ across institutional and regional contexts. For example, Rostamicheri et al. (2026) suggest that ESG performance tends to be more financially relevant in emerging or less mature ESG markets.

Finally, it can be stated, that despite the rapidly growing amount of research on ESG topic, a certain gap remains in the academic literature: (i) first of all, in some of the studies there are no clear distinction between ESG disclosure and ESG performance; (ii) secondly, majority of the studies focus on single corporate performance measure instead of taking into account a wider set of indicators; (iii) and finally, regional comparisons between WE and CEE countries remain quite limited.

Therefore, this study aims to examine the association between ESG disclosure and CFP in selected Western European countries (Austria, Belgium, France, Germany, Ireland, Luxembourg, and the Netherlands) and Central and Eastern European countries (the Czech Republic, Hungary, Poland, and Slovakia) and to determine whether this association differs between WE and CEE regions. The research is based on Bloomberg database data for 4553 firms from selected WE and CEE countries over 2013-2024. Based on this data, the bivariate and multivariate panel regression models (constant, fixed, and random effects) are constructed and interpreted. The following variables are selected for this research: (i) The Bloomberg ESG disclosure score is selected as independent variable; (ii) return on assets (ROA), return on equity (ROE), EBITDA margin, net profit margin, the price-to-book ratio and shareholder yield are selected as dependent variables; and (iii) current ratio, debt-to-assets ratio and total assets (log) are selected as control variables. Firstly, pooled data models are estimated to test the existence of the association between ESG disclosure and CFP; secondly, models for WE and CEE subsamples are assessed to conduct a regional comparison, and finally, the interaction term (between ESG disclosure and a CEE indicator) is included in the models to test the regional heterogeneity.

The results of this research reveal that ESG disclosure appeared to be negatively associated with ROA and ROE, positively associated with shareholder yield, and not significantly associated with the remaining performance measures; moreover, regional differences are observed but only for selected accounting-based measures, with a stronger negative association in CEE countries.

This study contributes to the literature in several main ways. First, it focuses specifically on ESG disclosure rather than ESG performance. Second, it involves several accounting-based and market-related corporate performance indicators as dependent variables, allowing the analysis to identify whether ESG disclosure is associated with profitability (return on assets (ROA), return on equity (ROE), EBITDA margin, net profit margin variables), valuation (price-to-book ratio variable), and shareholder return (shareholder yield variable) in the same way. Finally, it provides comparative evidence from selected WE and CEE countries and assesses whether regional differences can modify the association between ESG disclosure and CFP.

Therefore, the results of this research might be practically useful for corporate managers, investors, and regulators. The results suggest that ESG disclosure might be negatively associated with some of CFP indicators (i.e., profitability) in the short run, thus it does not instantly and automatically improve CFP. The strength and nature of this association might vary across time horizons, firm-specific characteristics, and the institutional environment (i.e., capital-market maturity, ESG development stage, and regulation).

The rest of the paper is organized as following: in the second section, the theoretical framework is discussed and hypotheses are developed; in the third section, the data and research design are described; in the fourth section, the empirical results are presented; in the fifth section, the findings are discussed in relation to prior research; and in the sixth section, the conclusions, limitations, and directions for future research are discussed.

2. Literature Review and Hypothesis Development

In the scientific literature, ESG disclosure is analyzed as a form of non-financial information that complements traditional financial reporting and provides a broader understanding of corporate performance (Christensen, Hail and Leuz, 2021; Rahi, Akter and Johansson, 2022; Kim and Kim, 2024; Ali et al., 2025; da Cunha et al., 2025; Rostamicheri et al., 2026). Moreover, ESG is recognized as "a modern standard of corporate performance" (Ali et al. (2025), based on Alshiban 2022) and "an essential indicator for measuring corporate sustainability on the international stage" (Bai and Kim (2024), based on Burke 2021). In this context, ESG disclosure has evolved into a key mechanism through which companies share relevant non-financial information with investors, regulators (Ali et al. (2025), based on Saini 2022), and other stakeholders. On the one hand, such disclosure enhances transparency and supports stakeholder evaluation of firms' sustainability practices. On the other hand, ESG may generate "benefits for corporations' economic–financial performance" (da Cunha et al., 2025) by demonstrating sustainability commitment, risk management practices, and the ability to create long-term value (Vijaya et al., 2026).

More specifically, ESG disclosures are highly relevant for investors. On the one hand, ESG disclosure reduces information asymmetry between companies and their investors (Christensen, Hail and Leuz, 2021; Chen and Xie, 2022; Saini et al., 2023; Malik and Kashiramka, 2024, based on Carnini Pulino et al., 2022; Ali et al., 2025). In other words, ESG reporting improves financial transparency and helps investors better estimate future performance, thereby reducing uncertainty. As a result, companies with higher levels of ESG disclosure tend to face lower risk expectations and a lower cost of capital (Christensen, Hail and Leuz, 2021; Saini et al., 2023; Malik and Kashiramka, 2024; Ali et al., 2025; Wang et al., 2025; Rostamicheri et al., 2026). On the other hand, ESG disclosure plays an important role in firms’ market performance. Institutional investors increasingly demand higher ESG transparency, as sustainability-related risks directly affect both company performance and investment returns (Ali et al., 2025). In this context, ESG disclosure signals better risk management, higher transparency, and stronger long-term sustainability, which may enhance firm valuation (Khan, 2022; Velte, 2022; da Cunha et al., 2025).

To justify the relationship between ESG disclosure and CFP (CFP), it is necessary to discuss the main theoretical perspectives that underpin it. However, it should be noted that prior studies do not always apply a consistent theoretical framework. As highlighted by Acheampong et al. (2025) a meta-analysis of 154 studies, 38.96% of studies apply a single theory, 36.36% apply multiple theories, and 24.68% do not explicitly rely on any theoretical framework. This suggests that, although ESG–CFP relationships are widely analyzed empirically, their theoretical grounding remains heterogeneous. In this context, the results of the meta-analysis indicate that the most frequently applied theories are stakeholder theory, legitimacy theory, signaling theory, agency theory, and resource dependence theory. This is consistent with the findings of other systematic reviews (Acheampong et al., 2025; Khan, 2022; Saini et al., 2023; Bosi et al., 2022; López et al., 2024; Wang et al., 2025), suggesting that ESG–CFP relationships are inherently multi-theoretical and cannot be fully explained by a single framework. Therefore, a structured discussion of the dominant theories is necessary to explain better the mechanisms through which ESG disclosure may affect firm performance. In this context, the relationship between ESG and CFP is analyzed using the main theoretical frameworks identified in the literature. The ESG literature is primarily grounded in three key theoretical perspectives: stakeholder theory, legitimacy theory, and signaling theory (Saini et al., 2023; Santamaria et al., 2021).

From the perspective of stakeholder theory, for a business to develop sustainably, firms should build and maintain relationships with multiple stakeholder groups, which are defined as “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (Freeman, 1984, p. 46, cited in Elms and Phillips, 2018), rather than focusing solely on shareholders. Since companies must meet the expectations of various stakeholders, these expectations influence their performance. In this context, ESG disclosure serves as a key communication and transparency tool, disseminating relevant non-financial information, reducing uncertainty, and supporting stakeholder decision-making (Malik and Kashiramka, 2024; Ali et al., 2025; Saha and Gopal, 2025; Khan, 2022). Second, by addressing stakeholder expectations, firms can develop intangible resources such as reputation, trust, and stakeholder loyalty (Parashar, Jaiswal and Sharma, 2025; Malik and Kashiramka, 2024; da Cunha et al., 2025; Dossa, 2025). Third, long-term firm success depends on aligning the interests of different stakeholder groups, rather than focusing solely on short-term shareholder value (Ali et al., 2025; Canli and Sercemeli, 2026; Rahi, Akter and Johansson, 2022). Overall, these mechanisms suggest that ESG disclosure can improve firm financial and market performance (Parashar, Jaiswal and Sharma, 2025; Malik and Kashiramka, 2024; da Cunha et al., 2025).

According to Lindblom (1994, cited in Deegan, 2002), legitimacy is „a condition or a status which exists when an entity’s value system is congruent with the value system of the larger social system of which the entity is a part.“ In this sense, legitimacy theory assumes that firms operate within a society’s values and norms (Khan, 2022). To survive and be recognized, firms must align their activities with prevailing social norms and values (Velte, 2022; Ali et al., 2025; Canli and Sercemeli, 2026). In the context of ESG, this theory is grounded in the concept of a “ social contract” (Khan, 2022; Parashar and Jaiswal, 2024), whereby disclosure serves as a strategic tool to secure legitimacy. Through ESG disclosure, firms demonstrate their compliance with environmental, social, and governance expectations and justify their activities to external stakeholders (Khan, 2022; Saini et al., 2023; Parashar, Jaiswal and Sharma, 2025). Moreover, companies disclose non-financial information in response to social and political pressure (Li et al., 2024; Cardillo and Basso, 2025). Overall, these mechanisms suggest that ESG disclosure can contribute to improved CFP by reducing risk (Li et al., 2024), strengthening stakeholder support (Kim and Kim, 2024; Ali et al., 2025; Cardillo and Basso, 2025), and enhancing financial outcomes and firm value (Li et al., 2024; Parashar, Jaiswal and Sharma, 2025).

Signaling theory, originally proposed by Spence (1973), explains how firms use disclosure signals to reduce information asymmetry and communicate otherwise unobservable characteristics to external stakeholders. In the ESG context, disclosed ESG information performs a similar role (Li et al., 2024; Cardillo and Basso, 2025), i.e., „as a signal of environmental commitment“ (Saha and Gopal, 2025). By disclosing ESG information, companies signal (1) strong management quality (Kim and Kim, 2024; Rostamicheri et al., 2026), (2) effective risk management practices (Dossa, 2025), and (3) sufficient resources to invest in sustainability initiatives (Kim and Kim, 2024). In this way, ESG disclosure signals a long-term commitment to sustainable and responsible business activities (Rostamicheri et al., 2026).

Moreover, voluntary sustainability reporting serves as a credible signal that enhances reputation and investor confidence (Rostamicheri et al., 2026) and strengthens a competitive advantage (Kim and Kim, 2024). Ultimately, it contributes to improved financial performance and firm value (Dossa, 2025; Rostamicheri et al., 2026; Kim and Kim, 2024; Dossa, 2025).

Another important theoretical perspective explaining ESG–CFP relationships is the Resource-Based View theory, which suggests that firms achieve competitive advantage through “unique resources and capabilities” (Wernerfelt (1984), cited in Parashar and Jaiswal (2024)). According to Barney, Wright and Ketchen (2001), resources may generate sustained competitive advantage when they „are valuable, rare, imperfectly imitable, and non-substitutable“. In the ESG context, sustainability-related practices may become strategic organizational resources. Such resources can include „green technologies, innovation orientation, human resources, green market orientation, and sustainable supply chains“ (Widyantoro et al., 2025). Because these resources are difficult for competitors to replicate, they may create sustained competitive advantage, (Bhandari, Ranta and Salo, 2022). Consequently, RBV theory suggests that ESG practices can strengthen firms’ competitive position, positively contribute to profitability (Burinskienė, Grybaitė and Lapinskienė, 2025), and support long-term value creation (da Cunha et al., 2025).

Empirical evidence also provides substantial support for a positive relationship between ESG disclosure and CFP. Several meta-analyses suggest that, while the strength of this relationship can vary across contexts, its overall effect is generally positive.

For example, Friede et al. (2015), based on a meta-analysis of more than 2,000 empirical studies, report that the majority of studies identify a positive relationship between ESG and CFP. Similarly, Busch and Friede (2018) find a highly significant, positive, and robust relationship between corporate social and environmental performance and financial performance. More recently, Bai and Kim (2024) report a low but positive overall correlation between ESG and financial performance. Meanwhile, Wang et al. (2025), in a comprehensive review of the literature, conclude that ESG disclosure significantly influences CFP, risk, sustainability, innovation, investment efficiency, and costs. A substantial body of empirical research also reports a positive association between ESG disclosure and financial performance. For example, Chen and Xie (2022), Chung et al. (2024), and Parashar et al. (2024) report that ESG disclosure positively affects firm financial performance. Furthermore, Veeravel et al. (2023) find that ESG disclosure tends to increase firm value in the long term. Overall, these findings provide empirical support for a positive association between ESG disclosure and CFP. Based on these arguments, Hypothesis 1 is formulated:

Hypothesis 1 (H1). 

Higher levels of ESG disclosure are associated with better corporate financial performance.

It should be noted, however, that empirical evidence on the relationship between ESG disclosure and CFP is mixed.

While many studies document positive effects, others report negative relationships between ESG and CFP. Rahi et al. (2021) identify a negative relationship between ESG practices and several financial performance indicators. In contrast, Giannopoulos et al. (2022) and Dossa (2025) find that certain ESG dimensions, particularly environmental activities and disclosures, may reduce profitability. Similarly, Veeravel et al. (2023) conclude that although ESG disclosures may enhance firm value and performance in the long run, they can negatively affect short-term financial performance. In addition, Rostamicheri et al. (2026) report a negative effect of ESG scores on ROA and ROE in non-Nordic countries, while Cardillo and Basso (2025) argue that selective ESG disclosure may reduce shareholder returns and profitability. Furthermore, a meta-analysis by Atz et al. (2023) indicates that approximately 13% of ESG disclosure studies report negative financial effects. At the same time, some studies report neutral or statistically insignificant relationships between ESG disclosure and CFP (Khan, 2022; Atz et al., 2023; Bai and Kim, 2024)

Overall, the mixed empirical evidence suggests that the relationship between ESG disclosure and CFP may vary across countries and regions. These differences may be explained by variations in institutional environments, which influence both ESG disclosure practices and their economic consequences.

Institutional theory suggests that firms adapt their ESG disclosure practices in response to external institutional pressures, including regulations, market expectations, and societal norms (Dimaggio and Powell, 1983; Li et al., 2024; Cardillo and Basso, 2025). Therefore, the economic relevance of ESG disclosure may differ across institutional and regional contexts. Firms operating in different institutional environments may face varying levels of regulatory, normative, and market pressures related to ESG disclosure. As noted Rostamicheri et al. (2026), such pressures may affect not only organizational legitimacy but also information asymmetry and financing conditions.

Despite a common regulatory framework, ESG disclosure practices remain uneven across WE and CEE countries due to differences in economic development, legal systems, cultural traditions, ethical standards, and historical backgrounds.

The gap between WE and CEE countries is associated with factors related to the socialist legacy, relatively higher corruption levels, and unresolved environmental and social challenges. Moreover, these regional groups differ in their strategic priorities. As noted by Belyaeva, Rudawska and Lopatkova (2020), firms in Western Europe increasingly pursue social and environmental goals alongside financial performance, whereas firms in CEE countries remain more focused on market growth and financial objectives. Based on these arguments, the following hypothesis is formulated:

Hypothesis 2 (H2). 

The relationship between ESG disclosure and corporate financial performance differs between Western European and CEE countries.

Following the general assumption that ESG–CFP relationships may vary across institutional environments, signaling theory provides an additional explanation for these regional differences.

According to Rostamicheri et al. (2026), ESG performance tends to be more financially relevant in emerging or less mature ESG markets. In contrast, in regions where sustainability standards are already deeply embedded, ESG performance serves primarily a reputational function rather than generating additional financing benefits. Similarly, Cardillo and Basso (2025) argue that ESG performance, combined with high-quality disclosure, may yield stronger financial benefits in institutional environments characterized by regulatory asymmetries and information gaps. Krasodomska (2025) further notes that CEE countries have historically been characterized by lower transparency and greater secrecy than WE countries. Therefore, high-quality ESG disclosure in this region may reduce information asymmetry, strengthen corporate credibility, and increase firms’ attractiveness to investors. In addition, Lohia et al. (2025) found that in countries without mandatory ESG regulations, voluntary ESG disclosure „enables firms to differentiate themselves by demonstrating ESG leadership“, whereas mandatory disclosure requirements may reduce competitive differentiation and weaken the financial impact of ESG reporting. Existing meta-analyses also support these arguments. Friede et al. (2015), in a meta-analysis covering more than 2,000 studies, found that positive ESG effects are more common in emerging markets than in developed markets, noting that „the Emerging Markets sample shows, with 65.4%, a considerably higher share of positive outcomes over developed markets“.

Based on these arguments, the following directional hypothesis related to H2 is formulated, reflecting the stronger signaling effect of ESG disclosure in CEE countries:

Hypothesis 2a (H2a). 

The positive association between ESG disclosure and corporate financial performance is stronger in CEE countries because ESG disclosure signals more strongly in less developed institutional environments.

Given that the ESG–CFP relationship varies across institutional environments, some literature suggests that ESG disclosure has a stronger positive effect in WE countries due to their more developed regulatory systems, stronger legal enforcement, and more mature capital markets.

According to Burinskienė, Grybaitė and Lapinskienė (2025), in Europe, where sustainability regulations are stricter, and stakeholder expectations are higher, ESG engagement is more strongly associated with „long-term value creation and improved financial outcomes“. The authors also observe that „stricter regulatory frameworks, increased investor confidence, and broader public acceptance of ESG practices“ generate a more favorable environment for businesses. Similarly, Wang et al. (2025) found that ESG disclosure has a statistically significant positive effect on the financial performance of firms in developed countries, whereas this relationship is not statistically significant in developing countries. They argue that stronger regulatory systems and stricter legal requirements in developed countries lead to more standardized, comprehensive, and credible ESG disclosures. Li et al. (2024) Support this argument by emphasizing that developed countries generally have more advanced, standardized ESG disclosure systems. In turn, higher-quality ESG reporting enables managers to meet stakeholders’ information needs better (Velte, 2022), thereby improving risk management and reducing uncertainty. Institutional and signaling theories also support these arguments. Li, Liu and Lin (2025) state that „the institutional environment is more beneficial to ESG signaling in developed markets than in emerging markets“ because firms with better ESG performance gain greater trust and goodwill from investors. As a result, firms have lower signaled costs, investors can assess ESG-related information more effectively, and this contributes to higher firm value.

The importance of developed capital markets is further emphasized in studies focusing on investor behavior and financing conditions. Lohia and Maji (2025) suggest that a developed market-based financial system encourages greater ESG transparency among market participants. They also argue that „the institutional investors' emphasis on sustainability helps corporates use ESGD to draw in investment and deploy capital more effectively, improving financial results“. Similarly, Khan, Serafeim and Yoon (2016) observe that a growing number of investors are committed to integrating ESG information and sustainability issues into their capital allocation and investment decisions. Eliwa, Aboud and Saleh (2021) also find that lending institutions integrate ESG information into their lending decisions, thereby benefiting firms with stronger ESG performance and disclosure by lowering borrowing costs. Empirical evidence from Nordic countries further supports this argument.

Rostamicheri et al. (2026) found that firms with strong ESG performance in Nordic markets are associated with lower financing costs and higher investor confidence. Furthermore, „a 10-point increase in ESG score corresponds to an estimated 4.2-basis-point reduction in WACC“, which reflects the benefits of a more mature ESG environment. Finally, Cardillo and Basso (2025) argue that developed markets are more likely to translate sustainability performance into lower capital costs, stronger valuation effects, and improved risk-adjusted returns, since they face fewer institutional voids and lower political risk.

Based on these arguments, the following directional hypothesis related to H2 is formulated, reflecting the stronger effect of ESG disclosure in more developed institutional environments:

Hypothesis 2b (H2b). 

The positive association between ESG disclosure and corporate financial performance is stronger in Western European countries, where regulatory systems and capital markets are more developed.

3. Model Specification

To reach the main goal of this research, i.e. examine the association between ESG disclosure and CFP and determine whether this association differs between mature WE and CEE countries, firm-level data from seven WE countries (Austria, Belgium, Ireland, Luxembourg, Netherlands, France and Germany) and four CEE countries (Poland, Czech Republic, Hungary and Slovakia) are further analyzed. Despite all selected countries being EU members and therefore subject to comparable sustainability reporting requirements, WE and CEE countries still differ in terms of capital-market development, institutional maturity, and the evolution of ESG practices. While selected WE countries can be characterized as relatively mature market economies with more established sustainability reporting infrastructures, selected CEE countries can be described as post-transition economies in which ESG disclosure practices and institutional enforcement have developed more recently. Thus, the final sample consists of 4,553 companies from the selected WE and CEE countries.

To achieve the main goal of this research, panel data models that allow analysis of both cross-sectional and temporal variation are employed. Due to the availability of ESG disclosure and financial information, annual data are used. The data are collected from the Bloomberg terminal. The data are analyzed using EViews. This research covers the period from 2013 to 2024. The period analyzed is determined by data availability and by the continuity of the Bloomberg database.

After an extensive analysis of the scientific literature, the dependent variables reflecting CFP were selected for further research, which were (i) return on assets (ROA); (ii) return on equity (ROE); (iii) EBITDA margin; (iv) net profit margin; (v) price-to-book ratio, and (vi) shareholder yield. As an independent variable, the ESG disclosure score, calculated and provided by the Bloomberg terminal, is selected. To check if the relationship between ESG disclosure and CFP exists under the control of firm-level control variables, the following control variables were selected: (i) current ratio; (ii) debt-to-assets ratio; and (iii) total assets (log). Moreover, to assess whether the association between ESG disclosure and CFP differs between the WE and CEE groups, a CEE dummy variable is introduced (which is equal to 1 if the country belongs to the CEE region and 0 otherwise), based on which the interaction term (CEE dummy * ESG disclosure score) is calculated and included in the models.

To achieve the main goal of this paper, the research is conducted in several steps. Following the approach used by Rostamicheri, P. et al. (2026), Li, Q., Liu, C., and Lin, Y.E. (2025), and others, panel data models are chosen.

At first, to test Hypothesis 1, the association between ESG disclosure and CFP is assessed in a pooled sample of 11 selected WE and CEE countries (Sample 1). At first, the bivariate panel regression models (for each dependent variable) are constructed. The models with an invariant constant (Equation (1)), as well as with fixed (Equation (2)) and random cross-sectional effects (Equation (3)), are formed and evaluated. The most appropriate model (constant, fixed, or random effect) is chosen based on the results of statistical tests (F test and Hausman test)

$$Y_{it}=\alpha +\beta X_{it}+u_{it}$$

(1)

where: i = 1, 2, …, N and t = 1, 2, …, T; N—number of cross-sections; T—number of periods; $Y_{it}$—dependent variable; $\alpha$—intercept; $\beta$—coefficient; $X_{it}$—independent variable; $u_{it}$—error.

$$Y_{it}={\alpha }_i+\beta X_{it}+u_{it}$$

(2)

where: ${\alpha }_i$—intercept;

$$\left.Y_{it}={\alpha }_i+\beta X_{it}+{\left(ui\right.}_i+v_i\right)$$

(3)

where: ${ui}_i+v_i$—error.

After that, to examine whether the association between ESG disclosure and CFP holds while controlling for firm-level variables, multivariate panel regression models are estimated (Equations (4), (5), and (6)).

$$Y_{it}=\alpha +\beta X_{it}+\beta C_{it}+u_{it}$$

(4)

$$Y_{it}={\alpha }_i+\beta X_{it}+\beta C_{it}+u_{it}$$

(5)

$$\left.Y_{it}={\alpha }_i+\beta X_{it}+\beta C_{it}+{\left(ui\right.}_i+v_i\right)$$

(6)

The most appropriate models (constant, fixed, or random effect) are chosen for each pair of dependent and independent variables. This choice is based on the results of statistical tests (the F test and the Hausman test).

Secondly, to test Hypothesis 2, the previously described panel regression models are constructed separately for WE countries (Sample 2) and CEE countries (Sample 3). At first, the bivariate panel regression models are created and analyzed. After that, the control variables are introduced in multivariate panel regression models. The results of those models are then compared for Sample 2 and Sample 3.

Also, in order test Hypotheses 2a and Hypothesis 2b, following the approach of Cardillo, M.A. dos R. and Basso, L.F.C. (2025), Rahi, A.F., Akter, R. and Johansson, J. (2022), Li, Q., Liu, C. and Lin, Y.E. (2025) and others, the relationship between ESG disclosure and CFP in eleven selected WE and CEE countries (Sample 1) is assessed using multiple panel regression models, where a dummy variable CEE dummy and interaction term, i.e. variable (CEE dummy * ESG disclosure score) are added to the set of independent and control variables (Equations (7), (8) and (9)).

$$Y_{it}=\alpha +\beta X_{it}+\beta C_{it}+\beta {\left(CE{E}_{dummy}*X\right)}_{it}+u_{it}$$

(7)

$$Y_{it}={\alpha }_i+\beta X_{it}+\beta C_{it}+\beta {\left(CE{E}_{dummy}*X\right)}_{it}+u_{it}$$

(8)

$$\left.Y_{it}={\alpha }_i+\beta X_{it}+\beta C_{it}+\beta {\left(CE{E}_{dummy}*X\right)}_{it}+{\left(ui\right.}_i+v_i\right)$$

(9)

A positive β of the interaction term would indicate that the association between ESG disclosure and CFP is stronger, or less negative, in CEE countries than in WE countries. In contrast, a negative β for the interaction term would indicate that the association is less positive or more negative in CEE countries.

Firstly, variables were checked for stationarity. For that purpose, the Levin, Lin, and Chu t* unit- root test is used. The results of the unit root test for the variables of Samples 1, 2, and 3 are provided in Table 1. All variables appeared to be stationary at the level.

In the next section, the research results are discussed.

4. Results

4.1. Testing Hypothesis 1

Before analyzing the panel regression results, the correlations among the research variables and their statistical significance are evaluated. The results indicate a very strong positive correlation between Firm Size (Log of Total Assets) and ESG Disclosure Score (r = 0.891, p < 0.001), suggesting that larger firms disclose substantially more ESG-related information. Overall, the correlation analysis provides preliminary evidence regarding the direction and strength of the relationships among the study variables. These findings provide a useful basis for the subsequent regression analysis, which aims to examine these associations in greater detail.

The results of the bivariate panel regression analysis assessing the association between ESG disclosure and corporate performance variables for Sample 1 (WE and CEE countries) are presented in Table 2. The subsequent analysis further explores these relationships within a multivariate framework.

The results in Table 2 allow to state the following: (i) ESG disclosure score variable appeared to be statistically significantly negatively associated with accounting-based performance measures – return on assets (ROA) and return on equity (ROE); (ii) no statistically significant association with EBITDA margin and net profit margin was found; (iii) the association between ESG disclosure score variable on price-to-book ratio appeared to be statistically significant and negative; while (iv) the association with shareholder yield has proved to be statistically significant and positive.

The results of the assessment of the association between ESG disclosure and corporate performance variables, based on a multivariate panel regression analysis for Sample 1 (WE and CEE countries), are provided in Table 3.

The results in Table 3 allow to state the following: (i) the negative association between ESG disclosure and the return on assets (ROA) as well as return on equity (ROE) appeared to be statistically significant and stronger after the inclusion of control variables: from −0.042 (p = 0.044) to −0.082 (p = 0.000) and from −0.172 (p < 0.001) to −0.235 (p = 0.000) respectively; (ii) the association between ESG disclosure and EBITDA margin as well as net profit margin remained statistically insignificant; (iii) the association with price-to-book ration has lost statistical significance after inclusion of control variables; and (iv) the association with shareholder yield remained statistically significant and positive, although the coefficient decreased (from 0.944 (p = 0.001) to 0.704 (p = 0.002)).

Overall, the results indicate that ESG Disclosure is consistently associated with lower accounting-based profitability (ROA and ROE) and higher shareholder yield. In contrast, its effects on operating profitability and market valuation are either insignificant or lose significance after controlling for firm-specific characteristics. Thus, Hypothesis 1, which states that higher levels of ESG disclosure are associated with better CFP, cannot be supported.

4.2. Testing Hypotheses 2, 2a, and 2b

Before analyzing the panel regression results, the correlations among the research variables and their statistical significance are evaluated. The results for WE countries allow us to state that a strong positive correlation was identified between Firm Size (Log of Total Assets) and ESG Disclosure Score (r = 0.650, p = 0.000); however, this correlation appeared to be weaker in comparison to the result for Sample 1 (r = 0.891, p = 0.000). The results for CEE countries indicate a strong positive correlation between Firm Size (Log of Total Assets) and ESG Disclosure Score (r = 0.682, p = 0.000). It is slightly stronger than Sample 2 but weaker than Sample 1. The results of the bivariate panel regression analysis assessing the association between ESG disclosure and corporate performance variables for Samples 2 (WE and CEE) and 3 (CEE) are presented in Table 4 and Table 5, respectively.

The results in Table 4 allow to state that for the WE: (i) no statistically significant association with return on assets (ROA) can be observed; (ii) association with return on equity (ROE) is statistically significant and negative, but it appeared to be weaker in comparison to Sample 1 (β = −0.172, p = 0.000 and β = −0.119, p = 0.016 respectively); (iii) no statistically significant association between ESG disclosure and EBITDA margin as well as net profit margin can be observed; (iv) association between ESG disclosure score variable and price-to-book ratio appeared to be statistically significant and negative, and substantially stronger in comparison to Sample 1 (β = −0.063, p =0.000 and β = −0.008, p = 0.019 respectively); and (v) association with shareholder yield has proved to be statistically significant and positive but weaker in comparison to Sample 1 (β = 0.594, p = 0.005 and β = 0.944, p = 0.001 respectively). The results in Table 5 allow to state that for the CEE: (i) no statistically significant association with return on assets (ROA) can be observed; (ii) association with return on equity (ROE) is statistically significant and negative, and appeared to be substantially stronger in comparison to Sample 1 and Sample 2 (β = −0.491, p = 0.000, β = −0.172, p = 0.000, and β = −0.119, p = 0.016, respectively); (iii) no statistically significant association between ESG disclosure and EBITDA margin as well as net profit margin can be observed; (iv) association between ESG disclosure score variable and price-to-book ratio appeared to be statistically insignificant, in contrast to Sample 1 and Sample 2, where a statistically significant negative association was identified; and (v) association with shareholder yield has proved to be statistically significant and positive but weaker in comparison to Sample 1 and Sample 2 (β = 0.321, p = 0.023, β = 0.944, p = 0.001, and β = 0.594, p = 0.005, respectively). The results of the multivariate panel regression analysis assessing the association between ESG disclosure and corporate performance variables for Samples 2 (WE) and 3 (CEE) are presented in Table 6 and Table 7, respectively.

The results in Table 6 allow to state that for WE countries after the inclusion of control variables: (i) association between ESG disclosure and ROA became statistically significant and negative (from −0.020 (p = 0.326) to −0.064 (p = 0.002)); (ii) the negative association between ESG disclosure and return on equity (ROE) remained statistically significant and became stronger (from −0.119 (p = 0.016) to −0.173 (p = 0.002)); (iii) association between ESG disclosure and EBITDA margin as well as net profit margin remained statistically insignificant; (iv) the negative association with price-to-book ratio remained statistically significant although weakened (from −0.063 (p = 0.000) to −0.043 (p = 0.008)); and (v) association with shareholder yield remained statistically significant and positive and became stronger (from 0.594 (p = 0.005) to 0.867 (p = 0.001)).

The results in Table 7 allow to state that for CEE countries after the inclusion of control variables: (i) association between ESG disclosure and ROA became statistically significant and negative (from −0.108 (p = 0.127) to −0.213 (p = 0.014)); (ii) the negative association between ESG disclosure and return on equity (ROE) remained statistically significant and became stronger (from −0.491 (p = 0.000) to −0.584 (p = 0.000)); (iii) association between ESG disclosure and EBITDA margin as well as net profit margin remained statistically insignificant; (iv) association with price-to-book ratio remained statistically insignificant; and (v) the positive association with shareholder yield lost its statistical significance after the inclusion of control variables (from 0.321 (p = 0.023) to 0.172 (p = 0.147)). Comparing the results for WE countries, it can be observed: (i) the negative association between ESG disclosure and ROA as well as ROE appeared to be stronger in Sample 3 (β = −0.213 and β = −0.064; β = −0.584 and β = −0.173 respectively); (iii) the negative association between ESG disclosure and price-to-book ratio remained statistically significant only in Sample 2; and (v) the positive association with shareholder yield appeared to be statistically significant in Sample 2, but insignificant in Sample 3. The negative association between ESG disclosure and accounting-based profitability is considerably stronger in CEE countries. In contrast, the positive association between ESG disclosure and shareholder returns is stronger in WE countries. Thus, Hypothesis 2, stating that the relationship between ESG disclosure and CFP differs between WE and CEE countries, can be partially supported. Finally, the results of the assessment of the association between ESG disclosure and CFP in eleven selected WE and CEE countries (Sample 1), including the interaction term (CEE dummy * ESG disclosure score), are provided in Table 8.

The results in Table 8 allow us to assess whether the association between ESG disclosure and CFP differs between WE and CEE countries. These results allow to state the following: (i) in case of ROA, the interaction term is negative and statistically significant (β = −0.137, p = 0.017), indicating that the negative association between ESG disclosure and ROA is significantly stronger in CEE countries (Sample 3) than in WE countries (Sample 2); (ii) in case of ROE, the interaction term is also negative (β = −0.232), but statistically significant only at 90% confidence level, thus stronger negative association in CEE countries can be confirmed only with lower confidence level; (iii) for the rest of dependent variables, no statistically significant differences between the two regional groups can be identified. These results do not allow us to support Hypothesis 2a, stating that the positive association between ESG disclosure and CFP is stronger in CEE countries due to the stronger signaling effect of ESG disclosure in less developed institutional environments, as well as Hypothesis 2b, stating that the positive association between ESG disclosure and CFP is stronger in WE countries due to more developed regulatory systems and capital markets.

5. Discussion of Results

The results of the research suggest that the association between ESG disclosure and CFP depends on the performance measure considered. The results revealing a negative association with ROA and ROE are consistent with results obtained by Rahi et al. (2021), who claim a negative relationship between ESG practices and financial performance indicators, as well as with the findings of Giannopoulos et al. (2022), Dossa (2025), and Rostamicheri et al., Veeravel et al. (2023), stating that ESG activities might reduce firms’ profitability. In the short run, better ESG disclosure might entail costs for collecting ESG information, implementing sustainability measures, etc. At the same time, the positive association might emerge in the longer term, as noted by Veeravel et al. (2023). On the other hand, these results contrast with Friede et al. (2015), Busch and Friede (2018), Chen and Xie (2022), Chung et al. (2024), and Parashar et al. (2024), who identify an overall positive association between ESG disclosure and CFP. Based on this, it can be stated that ESG disclosure should be viewed primarily as a strategic, potentially long-term investment in transparency and investor relations rather than as a mechanism that immediately and automatically improves short-term profitability.

The statistically insignificant associations with EBITDA margin and net profit margin are similar to those reported by Khan (2022), Atz et al. (2023), and Bai and Kim (2024), who demonstrate that the association between ESG disclosure and financial performance might be neutral or context-dependent.

Based on the results of this research, it can also be observed that the price-to-book variable loses significance after the inclusion of control variables, suggesting that firm-specific characteristics, such as size, liquidity, and leverage, largely influence the association between ESG disclosure and market valuation.

The research also revealed a positive association with shareholder yield. This result is consistent with stakeholder and signaling theories, as greater transparency may strengthen investor confidence and support shareholder-oriented financial policies.

Overall, the results indicate that ESG disclosure does not produce a uniform improvement in CFP, and therefore, H1 is not supported.

The results for the WE and CEE subsamples indicated regional differences and at least partially supported H2, which posits that the relationship between ESG disclosure and CFP differs between WE and CEE countries. This is consistent with institutional theory and is consistent with results obtained by Dimaggio and Powell (1983), Li et al. (2024), Cardillo and Basso (2025), and Krasodomska (2025), who argue that the financial relevance of ESG disclosure depends on the institutional environment.

Interestingly, ESG disclosure was negatively associated with ROE in both regions. Still, the association was substantially stronger in CEE countries, while a positive association with shareholders’ yield was stronger in WE countries. The results do not support H2a and H2b, which both posit a positive association between ESG disclosure and CFP. These results might suggest that firms in CEE countries incur higher short-term costs from ESG disclosure, while firms in WE countries can turn greater ESG transparency into shareholder benefits.

7. Concluding Remarks

Analysis of prior research suggests that ESG disclosure can create financial value for both firms and investors by reducing information asymmetry and strengthening stakeholder trust; however, its effects may vary depending on firm-specific characteristics, the institutional environment, and the time horizon considered.

In the pooled sample (companies from WE and CEE), the ESG disclosure score was negatively associated with accounting-based profitability (ROA and ROE) and positively associated with shareholder yields. This suggests that higher ESG disclosure is not immediately and automatically reflected in firms’ profitability in the short run, possibly because higher profitability reduces short-run costs; nevertheless, better ESG disclosure may still contribute to shareholders’ yield.

The results for the WE and CEE subsamples indicate some regional differences: ESG disclosure is negatively associated with ROE in both regions, with a substantially stronger negative association in CEE countries. In comparison, a positive association with shareholders' yield is stronger in WE countries. This might suggest that firms in CEE countries incur higher short-term costs from ESG disclosure, while firms in WE countries can turn greater ESG transparency into shareholder benefits.

This research is based on the aggregate ESG disclosure score but does not distinguish among the environmental, social, and governance dimensions. As these dimensions may have different financial implications, assessing these components separately might be one direction for future research.

The analyzed period (2013-2024) was characterized by significant economic and regulatory changes in the European Union, and future studies could focus on comparing separate sub-periods or on examining associations under different market regimes (i.e., before and after the introduction of certain regulations).

The comparison between WE and CEE reveals some institutional differences between the two regions. Still, it is worth noting that at least some of the differences may be attributable to country- and industry-specific factors. As this research covers a relatively limited number of countries, future research could extend the geographical scope and examine the relationship separately across countries, industries, and firm types.