Investment efficiency in the GCC: examining the role of ESG, financial reporting quality and illicit financial flows

Purpose This study aims to investigate the impact of environmental, social and governance (ESG) disclosures, financial reporting quality (FRQ) and illicit financial flows (IFFs) on investment efficiency (INVEFF) in the Gulf Cooperation Council (GCC) region and examine the moderating role of financial constraints in these relationships, focusing on non-financial firms. Design/methodology/approach Fixed-effect panel regression models are applied to examine the impact of ESG disclosures, FRQ and IFF along with the moderating role of financial constraints using data from 62 non-financial firms for the period 2015 to 2022, encompassing both pre- and post-COVID-19 periods to examine the pandemic effects. Findings The empirical results reveal a consistently positive relationship between FRQ and INVEFF, whereas IFFs exhibit a significant negative impact. ESG disclosures show a mixed effect, with potential inefficiencies arising when financial constraints limit firms' strategic flexibility. Furthermore, financial constraints appear to aggravate the negative consequences of IFFs and weak financial reporting. Limited regulatory enforcement around ESG disclosures also diminishes their signaling strength, particularly in capital-constrained environments. Practical implications The findings propose that INVEFF can be enhanced by improving financial reporting transparency and curbing IFFs. Simultaneously, policymakers are encouraged not only to standardize ESG frameworks but also to support financially constrained firms in aligning with sustainability goals. Originality/value This study offers empirical evidence from an underexplored emerging market, GCC, while filling a research gap by examining how financial constraints moderate the impact of ESG, FRQ and IFFs on INVEFF. It further highlights how ESG disclosures in a voluntary environment may serve as a governance tool, especially during periods of economic disruption.