We predict that the observed market reaction is a function of firms’ pre-existing nonfinancial performance and nonfinancial disclosure. Anticipating increased use of ESG information by market and non-market participants following mandated disclosure, we predict investors will update their beliefs regarding the importance of ESG issues for firm value during the regulation’s passage, and will anticipate higher expected costs for weak firms to maintain poor ESG performance or to shift to improved performance. These revised expectations will cause investors to further price ESG differences across firms with strong versus poor ratings of ESG performance. Similarly, anticipating increased ESG disclosure, investors will price expected proprietary and/or political costs of disclosure, beyond expected informational and monitoring benefits of disclosure...