When climate commitment fades: exit from the Paris agreement and financial reporting quality

Purpose This study examines whether and how the quality of financial reporting among US companies changed following the Trump administration’s initial announcement in 2017 to withdraw from the Paris Agreement. Design/methodology/approach Using a quasi-experimental difference-in-differences (DiD) approach on a sample of 6,406 firm-year observations from S&P 1500 firms, covering the 2015–2020 period, we compare financial reporting quality (FRQ) across carbon-intensive and non-carbon-intensive sectors. Findings While we do not find a robustly significant difference in FRQ between the two groups prior to the announcement, carbon-intensive firms exhibit a significant relative improvement in the post-announcement period. This indicates that the US withdrawal helped reduce the financial reporting disparity between firms in high-carbon and low-carbon industries. The finding is robust to falsification and parallel trend tests, alternative variable measurements, model specifications, and controls for potential endogeneity. Research limitations/implications The results suggest that heightened public scrutiny from investors, activists and subnational climate commitments may have outweighed reduced federal regulatory pressure, encouraging carbon-intensive firms to enhance financial reporting transparency. This highlights the role of non-governmental accountability mechanisms in shaping corporate reporting behavior even in deregulatory contexts. Future research should examine real earnings management responses and explore how firm-level governance characteristics mediate these effects. Originality/value Unlike prior research examining market reactions to the US withdrawal, our study is the first to investigate its impact on FRQ, revealing counterintuitive improvements among carbon-intensive firms and demonstrating heterogeneous corporate responses across sectors with varying environmental exposures.