ESG DISCLOSURE UNDER REGULATORY TRANSITION: REGULATORY DESIGN AND FIRM BEHAVIOR IN PAKISTAN

Abstract

This study examines the important role of regulatory design in shaping corporate sustainability disclosure within the institutional complexities of an emerging market. Focusing on Pakistan's deliberate, decade-long transition from voluntary guidance to stricter ESG reporting requirements, we see this regulatory transition phase as a powerful signaling mechanism that reduces uncertainty and guides firm behavior even in the absence of mandatory enforcement. By analyzing a unique longitudinal dataset of KSE-30 non-financial firms (2015–2024) through fixed effects and moderated regression models, we establish that the transition period is a significant positive predictor of ESG disclosure quality. We reveal significant heterogeneity in firm response: this effect is substantially enhanced for firms with strong existing internal governance structures, highlighting the important role of absorptive capacity. Importantly, while ESG disclosure is positively associated with accounting (ROA) and market performance (Tobin's Q), these relationships are significantly stronger during active regulatory transition periods. This "value catalyst" effect shows that the institutional context fundamentally improves the financial relevance and credibility of sustainability disclosures. Our findings contribute to institutional and signaling theories by framing regulatory change as a constitutive stage of norm formation. For policymakers in emerging economies, the study provides an evidence-based blueprint for leveraging credible, incremental regulatory strategies to encourage robust corporate transparency and unlock the associated economic benefits without immediate enforcement.