Abnormal Sustainability Reporting Tone and the Value Relevance of Accounting Fundamentals

ABSTRACT

This study investigates whether and how abnormal sustainability reporting tone is associated with the firm's market value and conditions the value relevance of accounting fundamentals. Building on impression‐management theory, the value relevance literature, and recent advances in textual analysis, we focus on the discretionary component of tone embedded in sustainability and integrated reports, namely narrative deviations unexplained by firms' economic fundamentals. Using a sample of 2002 European listed firms from France, Germany, Italy, and Spain over the period 2017–2024 (16,016 firm‐year observations), we extract abnormal tone from ESG‐related disclosures through a two‐step procedure. First, we compute a multidimensional tone index based on positive, negative, uncertainty, litigious, and modal linguistic categories derived from the Loughran and McDonald dictionary. Second, following prior textual‐analysis studies, abnormal tone is measured as the residual component from a tone‐prediction model estimated on firms' economic fundamentals and performance characteristics. We estimate Ohlson‐type valuation models in which the market value of equity is regressed on earnings per share (EPS), book value per share (BVPS), and abnormal tone, while also examining whether abnormal tone moderates the pricing of accounting fundamentals. The results show that abnormal sustainability reporting tone is positively associated with firm market value. More importantly, abnormal tone is associated with greater value relevance of both earnings and book value, indicating that discretionary narrative framing appears to condition how investors interpret and price accounting information. Economic magnitude analyses further reveal that the economic relevance of abnormal tone appears to arise through its moderating role, with the interaction effects exhibiting substantially larger magnitudes than the standalone valuation effect of tone itself. Additional analyses suggest that this conditioning role may have become more pronounced over time. Overall, the findings suggest that sustainability reporting tone matters not because it substitutes for financial information, but because it appears to condition the informational context in which accounting fundamentals are assessed. This study contributes to the value relevance and sustainability reporting literatures by providing novel evidence that abnormal narrative tone in ESG disclosures is associated with differences in the market pricing of earnings and book value, with important implications for regulators, standard setters, and market participants in the evolving European reporting landscape.