*2.2. Mandatory Non-Financial Disclosure*

The last strand of literature is related to mandatory non-financial disclosure. Nonfinancial disclosure usually refers to the disclosure of CSR- or ESG-related reports. Research on accounting has demonstrated that voluntary non-financial disclosure reduces firms' cost of equity capital, finance, and information asymmetry [22,39,40]. Although an increasing number of firms are willing to disclose non-financial information, a large proportion of companies are still averse to such disclosures. Therefore, several countries and regions have passed laws to mandate public firms to disclose their non-financial information. Ref. [41] investigated the stock market reaction to the passage of the NFRD in Europe and documented that the market reacts negatively to these types of events on average. Ref. [5] examined the impact of mandatory CSR reporting regulations on firms' disclosure practices and valuations using a sample from Denmark, Malaysia, China, and South Africa. They revealed that the disclosure behavior and Tobin's Q of the affected firms increased following the regulations. Similarly, ref. [3] examined whether mandatory CSR disclosure impacted firms' performance and social externalities and observed that the treatment firms experienced a significant decrease in profitability subsequent to the regulations. However, the extant literature did not document the association between mandatory CSR reporting and corporate innovation, which is important for policymakers and firms' managers considering the role of innovation. Therefore, this study contributes to this literature by examining the impact of MSER on innovation.

#### **3. Data and Methodology**

#### *3.1. Background*

In China, the SSE announced on 30 December 2008 that firms listed in its "Corporate Governance Index" were required to disclose social and environmental governance information in their annual reports beginning in 2008. On 31 December 2008, the SZSE also released a similar announcement that required all firms on its "Shenzhen 100 Index" to disclose social and environmental governance information. Given that the SSE and the SZSE are owned by the Chinese government, the announcements were consistent with the regulations published by the government. Specifically, the SSE Corporate Governance Index consists of 230 listed companies that use best governance practices, which are usually reflected in the total market value, free-float market value, and share turnover. Similarly, the SZSE 100 index is composed of the top 100 listed firms in terms of market value, freefloat market value, and share turnover. Although the regulations only required the affected firms to disclose social and environmental governance information, prior research shows that the regulations have led to substantial changes in firms' activities such as environmental improvements [3] and increases in CSR expenditure [4]. Moreover, this requirement is mandatory for these firms. Accordingly, we leverage this exogenous variation to investigate the impact of mandatory social and environmental regulations on firm innovation. Considering the rules of the SSE Corporate Governance Index and SZSE 100 Index, the treatment firms in our research cannot be randomly assigned. Therefore, to mitigate this concern, we refer to the identification strategy that has been widely used in previous research [3,4,42] and utilize DID-PSM methodology to identify the impact of MSER.

#### *3.2. Data*

The sample consists of all A-share firms listed on the SSE and the SZSE from 2006 to 2011. We first excluded firms pertaining to financial service industries (i.e., banking and insurance industries), given that these firms are subject to different regulations. Next, we excluded firms that had non-positive shareholders' equity in our sample period because these firms do not have a normal operating environment. Moreover, a few firms that voluntarily disclosed social and environmental governance information before the announcement of the regulations were dropped from our sample, as this study mainly focuses on the influence of mandatory regulations on firm innovation. Finally, we removed firms that only appeared in the pre-regulation or post-regulation periods. Table 1 presents the steps for organizing data. The above selection criteria yielded an initial sample of 6670 firm-year observations (1145 unique firms), where the treatment group consisted of 1595 firm-year observations representing 267 treatment firms and the control group consisted of 5075 firm-year observations representing 878 control firms. We obtained the firm-level financial information from the China Securities Markets and Accounting Research (CSMAR) database.

**Table 1.** The Processes of Data Organization.


Note: The observations in the initial sample size were 10,787.
