The Interplay Between ESG Disclosures and Individual Investors’ Behaviors: Do Affective and Cognitive Reputation Matter?

Abstract

Sustainable Responsible Investment (SRI) emphasizes the integration of Environmental, Social, and Governance (ESG) factors into investment decisions. This study examines the relationship between ESG disclosures and individual investors’ trading behaviors, with corporate reputation as a mediating construct within the framework of signaling theory. Extending signaling theory, the study incorporates both cognitive and affective dimensions of corporate reputation to explain how ESG signals are interpreted by investors in emerging markets. Primary data were collected in 2025 from 390 individual investors in the Pakistan Stock Exchange (PSX), and Structural Equation Modeling (SEM) was used for analysis. The findings reveal that environmental and governance disclosures have a significant positive impact on investors’ behaviors, while social disclosures show a limited direct effect on both cognitive and affective corporate reputation dimensions. The results further indicate that corporate reputation significantly mediates the relationship between environmental and governance disclosures and investors’ behaviors. However, no mediation effect is observed for social disclosures. The study demonstrates that both cognitive (rational evaluation) and affective (emotional trust) dimensions of corporate reputation enhance the credibility of ESG signals and strengthen their influence on investment decisions. Overall, the study contributes to the ESG and signaling theory literature by highlighting how dual-dimensional corporate reputation shapes investors’ responses to ESG disclosures in emerging markets such as Pakistan.

1. Introduction

Recently, Environmental, Social, and Governance (ESG) or Sustainability has become one of the hot topics among academicians and practitioners [1,2]. The United Nations Global Compact in June 2004 introduced, for the first time, the concept of ESG and urged organizations to consider ESG performance with business objectives [3]. Many organizations, such as the United Nations, the International Reporting Standards Foundation, and concerned investment institutions, jointly promoted the ESG phenomenon to the public and extended new research areas in ESG and its applications [4]. ESG investments are considered a significant element for attaining Sustainable Development Goals (SDGs) along with nations’ climate protection goals. The increasing relevance of ESG disclosures in shaping corporate transparency and accountability, it becomes essential to understand how these disclosures translate into investors’ perceptions and actions. As ESG reporting becomes more prevalent, its role in influencing investment choices demands closer examination, particularly because asymmetric information or information failure exists in every economic system [5,6,7].

Financial markets are mainly classified based on the traded financial assets and include both institutional and individual investors. Most shares are owned by institutional investors, including pension funds, mutual funds, endowments, and foundations. Generally, institutional investors trade high volumes of transactions [8,9]. Conversely, individual investors trade in small volumes and are termed noise traders, as they tend to be impulsive and irrational in their trading [10,11]. Their irrational and suboptimal investment decisions and choices create an avenue for institutional investors to reap profits and gains by exhibiting professionalism in trading [12]. An institutional investor, compared to an individual investor, has more access to information, market intelligence, and resources to make sound investment decisions, while individual investors remain divergent in making investment decisions [13]. Researchers and policymakers are rapidly focusing on the costs and benefits of ESG investing [14,15,16], but the relative significance of financial and non-financial considerations among retail investors and their motives for ESG investment are not well understood [17,18]. Consequently, retail investors’ investment decisions not only depend on the valuation of risk and return but are also subject to psychological and personal traits [19]. The psychological biases of investors, including overconfidence, risk aversion, loss aversion, and regret, determine investment behavior; if not thoroughly considered, they can cause suboptimal decisions. The investment rationality assumption has been challenged on multiple grounds, such as individual bounded rationality, perfect market efficiency, asymmetric information, and psychological biases [20].

The extensive literature is well documented on institutional investors’ decisions [21,22,23,24]. On the other hand, limited empirical evidence exists to investigate the determinants of the trading behavior of individual investors [25,26]. Individual investors lack resources and asset allocations, have less diversified portfolios, and, most of the time, their trading behaviors are based on unrealistic expectations. There is a scarcity of evidence on individual investors’ trading behaviors, and most existing studies are in the context of developed economies [13,27]. Consequently, this requires investigating individual investors’ trading behaviors in the context of a developing country to validate existing theories and extend the body of knowledge through new avenues [28,29,30]. Furthermore, existing studies have largely focused on the direct relationship between ESG disclosures and investors’ behaviors, overlooking the psychological mechanisms through which ESG information shapes investors’ perceptions [31].

Traditional finance theories have often failed to fully explain real market behavior, as market anomalies and financial bubbles persist. Therefore, the signaling theory is adopted in this study as the underlying mechanism. The signaling theory considers informational disclosures as signals sent by firms to create future prospects [32,33,34,35]. The signaling theory holds great importance for understanding the behavioral mechanism where two parties—corporations and their stakeholders—have different needs for information. Therefore, the signaling theory can provide exceptional insight into determinants of individual investors’ behaviors. Previous studies lack empirical evidence regarding the validity of the signaling theory and its roles to understand investment behavior [36,37].

Therefore, in the realm of the signaling theory, a significant theoretical contribution emerges in the context of ESG disclosure and how it shapes retail investors’ behaviors. Generally, stakeholders build perceptions of a corporate’s present behavior based on prior perceived reputation or perception. The contribution specifically revolves around ESG signals provided by companies, how investors respond to these disclosures, and how ESG signals are decoded by recipients to make informed decisions. Furthermore, how the corporate reputation of the signal provider (i.e., the company) is perceived by the receiver (i.e., the investor) impacts those decisions. Notably, the disclosed information’s quality is often difficult to assess; so, the reputation of reporting entities plays a significant role in evaluating the information being disclosed [38,39]. Corporate reputation is a source of competitive advantage that cannot be easily imitated and primarily contributes to a firm’s value [40,41,42]. However, despite the extensive literature on reputation, it is still difficult to draw conclusions about reputation and to generalize empirical findings [43]. According to Bigus et al. [43], the idea of corporate reputation is a Gordian concept, which is characterized by definitional ambiguity and inadequate construct assessment. Extending the notion, most studies revealed deficiencies in the common understanding of corporate reputation and mismatches in its measurement. Common understanding is required so stakeholders can assess the integrity and quality of the company. Similarly, the positive reputation of the company’s products and its social and environmental features will induce responsible perspectives among employees, consumers, and other stakeholders. Moreover, firms with favorable reputations related to non-financial information have more reliable ESG or sustainability disclosures, thereby lowering the chances of greenwashing. Corporate reputation is even more significant in non-financial than financial reporting, as it is still uncertain how ESG reporting quality can be determined [44,45,46].

This research significantly advances the conceptualization of corporate reputation by examining it through affective corporate reputation, encompassing likeability and integrity, and, secondly, cognitive corporate reputation, which includes competence and performance. It provides a more sophisticated comprehension of corporate reputation by incorporating these dual dimensions, underscoring the impact of investors’ emotional connections and perceptions of a company’s competence on its overall reputation. This dual approach enhances the current literature by offering a comprehensive perspective on corporate reputation that integrates cognitive and affective perspectives. Considering the identified gap, this research aims to investigate the intersection between Environmental, Social, and Governance disclosures and individual investors’ behavior, as well as how corporate reputation influences ESG signals that affect investment behavior. This study examines how perceived corporate reputation shapes investors’ interpretation of ESG signals in an emerging market context, such as Pakistan, where the number of individual investors is steadily increasing, while information asymmetry remains a significant challenge. By focusing on this setting, the study provides insights into the role of corporate reputation in influencing investment decisions under conditions of limited information transparency.

2. Theoretical Background and Hypothesis Development

2.1. Signaling Theory

Information influences individual investment decisions, enterprises, and governments. Public information (publicly accessible) and private information (limited public access) are the two primary sources of information upon which individuals base their decisions. Stiglitz [47] elucidated that information asymmetries arise when different individuals possess varying degrees of knowledge. Information asymmetries exist between individuals or institutional investors whoever can access private information, potentially can make more informed decisions. Stiglitz [47] stated that over a century, formal investment decision-making models based on assumptions of perfect information have ignored information asymmetries. The signaling theory postulates that corporate managers have more accurate information about the value of the firm that might remain unknown to investors. This assumption is derived from asymmetric information, in which one party has information, and the other lacks it. Asymmetric information remains if concern manager does not convey relevant information to investors so it can be used in investment decisions. Conversely, standard finance theories support the narrative that information is equally accessible and distributed to all economic agents. However, in practice, management holds more information than shareholders regarding detail operations. The signaling theory reduces information asymmetry [48]. Information asymmetry causes uncertainty, which ultimately adversely affects economic decisions.

Therefore, signaling remains effective in dealing with information disparities and remains significant to investigate corporate information disclosures (signals) to relevant stakeholders. The relevant information disclosures for stakeholders are vital to make sound and well-informed financial choices, and signals’ quality remains robust to shape behavioral intentions. The quality or reputation of signals and the signal provider potentially covers the gap in information between management and stakeholders. The signaling theory revolves around four key elements: the signaler, signals, the receiver, and the feedback. Corporate managers act as signalers, whereas signals are disclosures that provide information. Receivers are different stakeholders who utilize information in their decision-making, such as customers, employees, investors, etc. The company’s long-term prospects and value are communicated through signals that are significant in building corporate reputation and stakeholder engagement. The signaling theory perspective in the stock exchange plays a significant role in shaping investors’ behavior and, in turn, their asset allocation or investment decisions [49,50]. Moreover, positive signals build corporate image, which positively influences investors. The theoretical underpinnings of the signaling theory have been used by various management scholars in different contextual studies, predominantly regarding consumers, competitors, and stakeholders. However, limited evidence exists on its applicability in the context of the stock market—specifically, retail investors’ decision-making and the signaling theory. So, the signaling theory can offer an effective framework and lens for a deep understanding of how corporate disclosures affect investment judgement and behavior. Secondly, signals’ reliability and credibility are also key factors because not all positive signals from companies are certainly honest and indicate good qualities of the signaler. Despite the significance of signal reliability, the applicability of the signaling theory in environmental disclosures assumes positivity of signals, which suggest positive relation between environmental performance and voluntary disclosures by companies [51]. Peng et al. [52] found in their analysis of sustainability reports that almost ninety percent of companies in the mining and energy sectors significantly conceal negative events. The aforementioned studies suggest that research incorporating the signaling theory to investigate environmental disclosures must not assume that firm positive signals will ultimately be perceived favorably by investors. Conversely, a sophisticated application of the theory assumes that the relationship between positive signals and desired outcomes is primarily dependent on the reliability of the signals. So, based on the studies reviewed, there is still a significant gap in understanding signal reliability in the context of ESG disclosures.

This study uses a signaling theory framework to suggest that ESG disclosures help resolve information asymmetries and enhance the decision-making process by encouraging investors to believe in the reputation of the firm. In particular, this study defines corporate reputation along a two-dimensional construct: cognitive reputation—investors’ rational evaluations of the firm's competence and reliability—and affective reputation—the emotional responses of investors, based on trust and admiration. The novelty of this research is the addition of two types of reputation, namely, cognitive and affective, to the signaling theory, acting as two separate mechanisms that impact investment decisions. This dimensional approach goes beyond the traditional view of the influence of ESG information on investors and enhances the ESG and corporate reputation field and literature.

2.2. Hypothesis Development

2.2.1. Corporate Environmental, Social, and Governance Disclosures (ESG) and Investors’ Behaviors

Information asymmetry can be reduced by environmental disclosures conveying relevant and complementary information to investors [53,54,55,56,57]. Therefore, environmental disclosures are primarily significant to investors, analysts, and portfolio managers for the assessment of risk [58].

Environmental issues consider functioning, preservation, and quality of the natural system and environment. These issues include waste management, greenhouse gas (GHG) emissions, climate change, ozone depletion, renewable energy sources, air pollution, water pollution, biodiversity loss, ocean acidification, energy efficiency, and land use. Environmental concerns have been considered a key aspect in investors’ decision-making, and this is evident in the literature in countries such as Japan, India, France, and Australia. For instance, investors prioritize environmental issues as one of the most influential non-financial objectives in their investment decisions [59,60,61,62]. Furthermore, in Bangladesh, irresponsible industries cause environmental pollution [63].

Therefore, with investors’ intensified awareness regarding environmental issues around the world, it has become necessary to investigate the relation between environmental issues and individual investors’ behavior.

Investment returns without societal welfare cause hidden costs that are ultimately borne by investors, consumers, and society [64]. Besides financial gains, investors show concern for sustainability over the long term within their investment decisions. Corporations, as part of society, remain responsible for sustainable development and contributing to society. Social issues related to well-being include workplace health and safety, labor standards, human rights, child slavery, freedom of expression, employee diversity, community development, human resource management, consumer rights and protection, and the protection of community interests. Henke [65] revealed a positive relation between employee satisfaction and future stock return. Investors’ suboptimal investment decisions are a result of non-integration of social information, which affects stock returns over the long run [66]. Crifo et al. [67] revealed that along with environmental issues, social issues also significantly influence investment decisions.

Zwaan et al. [61] stated that investors in the Australian superannuation fund consider social issues a dominant component of ESG. Another study by Sultana et al. [68] mentioned social issues as the dominant one among ESG factors. Kothari [69] emphasized that investors, specifically individual investors, should include social issues when making investment decisions. Globally, investors are considering corporate social disclosures in their investment decisions, specifically in the context of developing countries. So, there is a need to explore, in the context of the developing country Pakistan, whether investors’ behaviors are influenced by corporate social disclosures or social issues. On this notion, the study proposed a second hypothesis based on the discussion.

Corporate governance (CG) includes executive remuneration, structure, size, diversity, skill, and independence of the board of directors, shareholder rights, business ethics, whistleblowing mechanism, internal control system and risk management, bribery and corruption, and general issues relating to management of the company. Crifo et al. [67] stated that corporate governance is an important factor to make investment decisions rationally. Similarly, Giannetti and Simonov [70] revealed that decision-making investors negatively screen companies that lack corporate governance. Zwaan et al. [61] found that 64% of respondents consider governance issues in their investment decisions. Corporate governance is the mechanism through which companies are directed and controlled [71]. Accordingly, CG comprises rules, regulations, policies, and procedures that govern an organization’s operations [72]. Effective corporate governance ensures that companies are operating with transparency and integrity [73]. Companies with good governance aid in mitigating risk, protecting stakeholder interests, and building confidence of the public and financial markets. Corporate governance stimulates accountability, fairness, and rational decision-making, which result in building positive corporate reputation and attracting investors. Based on the arguments presented, the study proposes the following hypotheses.

H1a. 

Corporate environmental disclosures influence investment behaviors of individual investors.

H1b. 

Corporate social disclosures influence investment behaviors of individual investors.

H1c. 

Corporate governance disclosures influence investment behaviors of individual investors.

2.2.2. Environmental, Social, and Governance Disclosure and Affective and Cognitive Corporate Reputation

Corporate reputation is an intangible and highly valuable resource of firms that provides a competitive edge [74]. Some studies have found a positive impact of corporate social responsibility (CSR) on firm reputation [75]. Moreover, Bear et al. [76] have also argued that CSR, irrespective of business operations, boosts corporate reputation. Effective CSR practices shape firm reputation, which ultimately leads to customer loyalty and stakeholders’ engagement [74,77,78]. The internal and external stakeholders’ positive perception about a firm’s social responsibility results in a positive reputation and further facilitates easy funding from investors and financial institutions [79]. DasGupta [80], from a signaling theory perspective, stated that corporate ESG performance positively signals to the public and enhances their perceptions of the organization. Environmentally and socially responsible practices create an opportunistic strategy through which organizations build a positive image. Pham and Tran [81] stated that organizations with ESG behavior positively influence public perceptions. Furthermore, corporations with good ESG performance are likely to make more disclosures about their practices as a strong signal to stakeholders [82]. So, ESG disclosure is used by companies as an impression management strategy.

Furthermore, Reber et al. [82] examined IPOs across multiple stock exchanges and confirmed that good ESG practices enhance corporate reputation. Similarly, ESG performance reflects corporate ethical behavior, which is consistent with the values of stakeholders and ultimately enhances corporate reputation [53,83,84,85]. Based on the supporting literature and theory, the study proposes its hypotheses.

Stakeholder demands are met through these disclosures, which strengthen corporate reputation by improving organizational stewardship. ESG reporting is a responsible approach in managing a firm’s sustainability impacts; making such information public builds emotion appeal and goodwill. Implementation research indicates that assurance of stakeholders, investors, employees, and consumers due to obligations for ethical and environment issues improves the company’s reputational capital [86,87]. Also, it helps safeguard against reputational risks because it decreases the opportunities for others to perceive or think that these companies are engaging in greenwashing or other unethical conduct. ESG proactively managed and reported by the firm engenders trust and responsibility, thus avoiding corporate image degradation [88]. Research also indicates that ESG performance is associated with economic, social, and environmental responsibility, with benefits of competitive advantage, apart from the creation of a satisfying corporate image. The integration of stakeholder and shared value theories reveals the win–win situation enshrined in ESG principles through exemplary demonstrations of how clear disclosers that support ESG strategies improve corporate image and operating performance [86].

Affective corporate reputation, on the other hand, pertains to the emotional connections and feelings stakeholders associate with an organization. This type of reputation is influenced by perceptions of the company’s behavior, values, and relational approach. Trust represents the belief that the organization acts in good faith, behaves ethically, and is reliable. It arises when stakeholders perceive the company as transparent, honest, and consistent in its actions. Trust enhances stakeholders’ emotional attachment and loyalty, making it a cornerstone of affective reputation. Likeability is the extent to which stakeholders have a positive emotional reaction to the organization. This dimension includes the perception of the company as approachable, caring, and aligned with stakeholders’ values. A likable organization fosters goodwill and strengthens emotional bonds with its stakeholders.

Schwaiger [89] stated that the cognitive component of corporate reputation refers to the rational and knowledge-based evaluation of an organization’s capabilities and outputs. It is shaped by stakeholders’ perceptions of a company’s performance and competence, which are grounded in factual, measurable elements. Zhang and Schwaiger [90] stated that the cognitive dimension reflects stakeholders’ assessment of the organization’s expertise, skills, and ability to deliver on its commitments. Companies are often evaluated based on their industry knowledge, innovation, leadership, and operational efficiency. A high level of competency establishes confidence among stakeholders regarding the organization’s ability to achieve strategic objectives. Performance is a crucial aspect of cognitive reputation, emphasizing the company’s outcomes and achievements. It includes financial performance (e.g., profitability, growth, and market share), as well as non-financial performance metrics, such as sustainability initiatives, quality of products/services, and customer satisfaction. Consistent positive performance reinforces stakeholders’ rational trust in the company.

H2a. 

Environmental disclosure positively influences cognitive corporate reputation.

H2b. 

Social disclosure positively influences cognitive corporate reputation.

H2c. 

Governance disclosure positively influences cognitive corporate reputation.

H3a. 

Environmental disclosure positively influences affective corporate reputation.

H3b. 

Social disclosure positively influences affective corporate reputation.

H3c. 

Governance disclosure positively influences affective corporate reputation.

2.2.3. Corporate Reputation Mediational Role

The research on corporate reputation has been growing over the last decade from multiple perspectives, such as economics, finance, accounting, marketing, human resources, organizational behavior, and strategic management [91,92,93,94]. Freeman [95] defined corporate reputation as the company’s comparative success in fulfilling various stakeholders’ expectations. Similarly, Weigelt and Camerer [96] defined corporate reputation as attributes attached to a firm derived from its past actions. Kim et al. [97] defined it as the aggregate public recognition of credibility and quality of a firm or its products.

Across various fields of research, one consistent finding is that reputation, whether of a company, an individual, or any organization, serves as a powerful signal of qualities that may not be directly observable [98]. It helps people form impressions and expectations, ultimately influencing how they think about future investment decisions. Park and Rogan [99] stated that reputation allows managers to manage cognitive dissonance of evaluators, e.g., when contradictory news is revealed about the quality of a product. Therefore, a good reputation is one of the significantly valuable intangible resources that enables stakeholders to act favorably towards the company. In this context, the signaling theory explains how company’ strategical choices and actions emit signals, which are utilized by stakeholders to develop a firm impression [100].

A company’s reputation plays a significant role in determining its value and may provide a distinct, almost unmatched, competitive advantage [101,102,103]. Therefore, when legal requirements surrounding financial presentation are presumed to be broken, publicly traded corporations suffer significant losses in market value, and their audit firms lose a great deal of business [104,105,106,107]. Since reputation is crucial to any business, accounting scholars and practitioners have given corporate reputation, also referred to as reputation, a great deal of attention since the 1980s. Since 2000, this interest has increased significantly [108,109,110,111].

Peloza et al. [112] stated that perception of a company being environmentally responsible also helps to attract environmentally conscious customers, as well as investors, business partners, and regulators. This increased trust allows for better access to resources, financial support, and collaborative opportunities, all of which play a part in the formation of a positive corporate reputation [113]. Furthermore, mediation explains the mechanism through which an intervening variable influences the relationship between an independent and a dependent variable. In the present study, corporate reputation serves as the mediating variable that explains how ESG disclosures influence investors’ behavior. Based on the foregoing arguments and the supporting literature, the following hypotheses are proposed regarding the relationships among ESG disclosure components, corporate reputation, and investors’ behavior:

H4a. 

Affective corporate reputation impacts investors’ behaviors.

H4b: 

Cognitive corporate reputation impacts investors’ behaviors.

H5a. 

The relationship between environmental disclosures and investors’ behaviors is mediated by cognitive corporate reputation.

H5b. 

The relationship between social disclosures and investors’ behaviors is mediated by cognitive corporate reputation.

H5c. 

The relationship between governance disclosures and investors’ behaviors is mediated by cognitive corporate reputation.

H6a. 

The relationship between environmental disclosures and investors’ behaviors is mediated by affective corporate reputation.

H6b. 

The relationship between social disclosures and investors’ behaviors is mediated by affective corporate reputation.

H6c. 

The relationship between governance disclosures and investors’ behaviors is mediated by affective corporate reputation.

The conceptual framework of the study, illustrating the relationships among the study variables and the proposed hypotheses, is presented in Figure 1.

3. Research Methods

This study adopted a positivist approach among the philosophies because the research problem under investigation relates to cause and effect, which can be objectively examined. Furthermore, the study is based on a deductive approach; hypotheses are postulated on signaling. Data are then collected from a structured questionnaire from the stock market. These steps are in concordance with a deductive research approach that involves testing theories with data. The study conducts the analysis of the proposed model by employing different statistical tools, illustrating that the deductive approach is appropriate for quantitative research.

For primary data collection, purposive sampling was used from the target population based on the following reasons: firstly, it was time- and cost-effective; secondly, it accounted for individual investors’ willingness to participate in the survey based on their availability. Purposively, investors who were actively engaged in stock exchange trading, i.e., buying and selling shares, were identified.

3.1. Data Collection and Sample

To examine the influence of ESG disclosures on individual investors’ decision-making behavior. Data were collected from investors who were actively engaged in stock exchange trading, i.e., buying and selling shares. The research instrument (Survey) was distributed among brokerage houses to be filled out by investors and to individual investors via investor groups on WhatsApp. These questionnaires were developed from previous surveys in behavioral economics and finance and then altered according to reviewer comments to enhance comprehensiveness. The five-point Likert scale is used by researchers in the social sciences mainly because it is simple to use, straightforward, and realistic [114]. The paper relies on cross-sectional survey data collected from investors working on the Pakistan Stock Exchange. The final number of responses for analysis in this study is 390, which fulfills both criteria mentioned by multiple researchers, such as more than ten responses against each variable.

Table 1. Respondent’s Profile.

		Percent
Gender	Male	92.6
	Female	7.4
Source of Information	Company Financial Statement	42.3
	Sustainability Reports	9.2
	Financial Advisors Brokers	33.3
	Friends and Colleagues	15.1
Experience of investment	0–5	22.1
	6–10	53.6
	11–15	22.6
	Above 15	1.8
Qualification	Intermediate	6.7
	Bachelors	42.6
	Masters	47.7
	M. Phil.	2.1
	Ph.D.	0.3
	Certification	0.8

shows the profile of 390 respondents.

Common method bias (CMB) was assessed to ensure it does not affect the study results. Harman’s single-factor test showed that no single factor accounted for the majority of the variance (47%), which is below the critical threshold of 50%, indicating that CMB is not a serious concern.

3.2. Measurement

• Environmental disclosures (ED): The determinants of environmental issues include carbon emissions, product carbon footprint, environmental impact of financing activities and climate change vulnerability, water issues, biodiversity, and land-use issues. Other measures include sourcing raw materials for manufacturing, controlling toxic emissions and waste, minimizing packaging and the release of electronic waste into the market, incorporating clean technologies, advocating for green construction, and using renewable energy resources, among others. The investor’s concern is with an organization’s responsiveness to the conservation of the natural environment. This covers the implementation of sustainability and environmental management within the organization’s tactical and strategic framework, solving problems related to the production of its products, its services, and its overall environmental footprint.
• Social disclosures (SD): An organization’s efforts to enhance its social impact focus on fostering positive change both internally and within the broader community. These initiatives encompass various areas, including labor management, workplace health and safety, human capital development, and adherence to ethical labor standards across the supply chain. The organization places significant emphasis on product safety and quality, chemical safety, consumer financial protection, data privacy and security, as well as responsible investment practices. Additionally, it addresses critical societal challenges such as health and demographic risks, controversial sourcing, community engagement, and equitable access to essential services like communication, finance, and healthcare. Furthermore, it seeks to create opportunities in nutrition and health, striving to improve overall societal well-being through comprehensive and responsible actions.
• Governance disclosures (GD): The organization also prioritizes business ethics by upholding integrity in all operations and ensuring tax transparency to build trust with stakeholders and the broader community. Protecting shareholder rights is another critical focus, ensuring that all shareholders have equitable access to information and influence in corporate decisions. These efforts collectively aim to enhance trust, sustainability, and long-term value creation for all stakeholders, reinforcing the organization’s role as a responsible and forward-thinking leader in its industry. This study has adapted questions for Environmental, Social, and Governance disclosure from Sultana et al., [68].
• Corporate reputation (CR): The combination of affective and cognitive components highlights that corporate reputation is conceptualized as an attitudinal construct, where attitude encompasses subjective, emotional, and cognitive mindsets. Evaluating corporate reputation, therefore, involves assessing subjective perceptions of a company’s attributes, such as performance and competence, while also reflecting an intrinsic orientation toward these attributes in terms of likeability and trust. The affective component of corporate reputation captures the emotional responses investors have toward the invested company. In contrast, the cognitive component reflects investors’ subjective knowledge or perceptions, along with their intended rational evaluations of the company’s attributes. These include aspects such as management excellence, economic and financial performance, and the value delivered to investors. This study adopts affective reputation items that represent perceptions of the company’s ethics, culture, corporate social responsibility, and overall emotional appeal. The measurement items for corporate reputation have been adapted previously [89,98].
• Investors’ behavior (IB): Individuals make financial decisions through assessment procedures that combine forecasting and evaluation levels with reevaluation processes of their strategies. Individual investors’ investment behaviors tend to show themselves through how frequently they trade [115,116,117].

4. Data Analysis and Results

4.1. Measurement Model

The measurement and structural models were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) in SmartPLS 4. PLS-SEM is suitable for exploratory research, exhibits strong adaptability to non-normal data, and accommodates small to medium sample sizes, which align closely with the characteristics of this study, hence its adoption for empirical analysis.

According to Hair et al. [118], reporting the mean and standard deviation of each indicator is not a prerequisite when applying this method. In the present study, the evaluation of the measurement model included internal consistency reliability, indicator reliability (outer loadings), as well as convergent and discriminant validity. Internal consistency was examined through Cronbach’s alpha and composite reliability (CR), with thresholds of 0.7 and 0.8, respectively, regarded as acceptable benchmarks [119].

Table 2. Validity and reliability of constructs.

Constructs		Alpha	Loading	AVE	CR
Environmental Disclosures	EDI	0.933	0.811	0.715	0.934
	ED2		0.824
	ED3		0.869
	ED4		0.841
	ED5		0.832
	ED6		0.796
	ED7		0.938
Social Disclosures (SD)	SD1	0.949	0.855	0.739	0.951
	SD2		0.868
	SD3		0.856
	SD4		0.858
	SD5		0.87
	SD6		0.879
	SD7		0.86
	SD8		0.829
Governance Disclosures (GD)	GD1	0.932	0.783	0.647	0.933
	GD2		0.815
	GD3		0.815
	GD4		0.802
	GD5		0.816
	GD6		0.782
	GD7		0.798
	GD8		0.787
	GD9		0.837
Affective Corporate Reputation (ACR)	ACR1	0.88	0.813	0.674	0.884
	ACR2		0.826
	ACR3		0.794
	ACR4		0.823
	ACR5		0.849
Cognitive Corporate Reputation (CCR)	CCR1	0.942	0.888	0.743	0.944
	CCR2		0.864
	CCR3		0.838
	CCR4		0.861
	CCR5		0.856
	CCR6		0.85
	CCR7		0.874
Investors’ Behavior (IB)	IB1	0.938	0.926	0.889	0.947
	IB2		0.961
	IB3		0.941

indicates that the Cronbach’s alpha and CR values meet the recommended thresholds, confirming that the study constructs possess internal consistency reliability. Indicator reliability and convergent validity were assessed through factor loadings, average variance extracted (AVE), and composite reliability (CR). A factor loading of 0.708 or higher is considered acceptable, while AVE values should exceed 0.50 [119]. All the constructs and items meet the threshold criteria. Figure 2 presents the measurement model, including the constructs and their respective indicators.

Discriminant validity confirms that constructs are distinct and not excessively correlated with each other. It is assessed using two approaches: the Fornell–Larcker criteria and the Heterotrait–Monotrait (HTMT) ratio. According to the Fornell–Larcker criteria, the square root of the AVE (placed on the diagonal) should be greater than the corresponding inter-construct correlations. As shown in

Table 3. Fornell–Larker Criteria.

	ACR	CCR	ED	GD	IB	SD
ACR	0.821
CCR	0.276	0.862
ED	0.337	0.407	0.846
GD	0.315	0.393	0.502	0.804
IB	0.324	0.317	0.372	0.359	0.943
SD	0.252	0.3	0.494	0.415	0.315	0.86

, this criterion is satisfied in the present study.

Henseler et al. [120] proposed HTMT as an alternative method for assessing discriminant validity, with HTMT values below 0.85 considered acceptable by Ringle et al. [121].

Table 4. Heterotrait–Monotrait (HTMT) ratios.

	ACR	CCR	ED	GD	IB	SD
ACR
CCR	0.302
ED	0.37	0.431
GD	0.341	0.414	0.537
IB	0.353	0.333	0.394	0.381
SD	0.272	0.314	0.52	0.441	0.33

indicates that all HTMT values are below 0.85, thereby meeting the threshold for discriminant validity.

4.2. Structural Model

Following the validation of the measurement model, the structural model was evaluated in the second step. As PLS-SEM employs nonparametric statistical techniques, it does not require normally distributed data [122]. To avoid multicollinearity, the variance inflation factor (VIF) should be below 5, and in some cases below 3.3 [119]. The results indicate no multicollinearity among the independent constructs (environmental disclosures, social disclosures, and governance disclosures) or among the mediating constructs (affective corporate reputation and cognitive corporate reputation). As shown in

Table 5. Collinearity statistics via the variance inflation factor (VIF).

	ACR	CCR	ED	GD	IB	SD
ACR					1.188
CCR					1.297
ED	1.538	1.538			1.657
GD	1.406	1.406			1.502
IB
SD	1.391	1.391			1.404

, all VIF values are below the recommended thresholds of 5 and 3.3. This confirms the absence of multicollinearity and any potential cross-association between the variables.

In the structural model assessment, direct relationships were examined using the bootstrapping method with 5000 resamples (see

Table 6. Structural estimates (direct relation hypothesis testing).

	Std. Beta	Std. Error	t-Value	p-Values	Decision
ACR → IB	0.171	0.059	2.899	0.004	Supported
CCR → IB	0.124	0.053	2.34	0.019	Supported
ED → ACR	0.212	0.064	3.283	0.001	Supported
ED → CCR	0.25	0.061	4.087	0	Supported
ED → IB	0.14	0.061	2.317	0.021	Supported
GD → ACR	0.178	0.057	3.118	0.002	Supported
GD → CCR	0.234	0.055	4.242	0	Supported
GD → IB	0.142	0.055	2.574	0.01	Supported
SD → ACR	0.073	0.054	1.362	0.173	Not Supported
SD → CCR	0.08	0.055	1.461	0.144	Not Supported
SD → IB	0.106	0.05	2.142	0.032	Supported

). The results revealed that affective corporate reputation (ACR) had a positive and significant effect on investment behavior (IB) (β = 0.171; p = 0.004), as did cognitive corporate reputation (CCR) (β = 0.124; p = 0.019). Environmental disclosures (ED) significantly influenced ACR (β = 0.212; p = 0.001), CCR (β = 0.250; p < 0.001), and IB (β = 0.140; p = 0.021). Governance disclosures (GD) also demonstrated a significant positive effect on ACR (β = 0.178; p = 0.002), CCR (β = 0.234; p < 0.001), and IB (β = 0.142; p = 0.010).

In contrast, social disclosures (SD) did not significantly affect either ACR (β = 0.073; p = 0.173) or CCR (β = 0.080; p = 0.144), although they did have a positive and significant relationship with IB (β = 0.106; p = 0.032). These findings indicate that environmental and governance disclosures contribute to both dimensions of corporate reputation (affective and cognitive) as well as investment behavior, whereas social disclosures directly influence investment behavior without significantly shaping corporate reputation.

The study further examined the mediating roles of cognitive corporate reputation (CCR) and affective corporate reputation (ACR) in the relationships between environmental disclosures (ED), governance disclosures (GD), social disclosures (SD), and investment behavior (IB). Mediation was assessed using the bootstrapping method with 5000 resamples and evaluated based on the confidence interval criterion proposed previously [123,124]. Mediation is considered significant when zero does not fall within the lower (LL) and upper (UL) bounds of the confidence interval. As shown in

Table 7. Structural estimates (Mediation hypothesis testing).

Hypothesis	Std. Beta	Std. Error	t-Value	p-Values	Decision	Confidence Interval
						LL	UL
ED → CCR → IB	0.031	0.016	1.995	0.046	Supported	0.005	0.065
ED → ACR → IB	0.036	0.017	2.086	0.037	Supported	0.008	0.076
GD → CCR → IB	0.029	0.015	1.913	0.056	Supported	0.004	0.063
GD → ACR → IB	0.031	0.015	2.01	0.045	Supported	0.007	0.064
SD → CCR → IB	0.01	0.008	1.187	0.235	Not Supported	−0.003	0.029
SD → ACR → IB	0.013	0.011	1.101	0.271	Not Supported	−0.005	0.039

, CCR significantly mediated the relationship between ED and IB (β = 0.031; p = 0.046; LL = 0.005, UL = 0.065) as well as between GD and IB (β = 0.029; p = 0.056; LL = 0.004, UL = 0.063). Similarly, ACR significantly mediated the relationship between ED and IB (β = 0.036; p = 0.037; LL = 0.008, UL = 0.076) and between GD and IB (β = 0.031; p = 0.045; LL = 0.007, UL = 0.064). However, neither CCR (β = 0.010; p = 0.235; LL = –0.003, UL = 0.029) nor ACR (β = 0.013; p = 0.271; LL = –0.005, UL = 0.039) significantly mediated the relationship between SD and IB, as the confidence intervals included zero.

These findings indicate that both CCR and ACR serve as significant mediators in the effects of environmental and governance disclosures on investment behavior, but do not mediate the impact of social disclosures on investment behavior.

5. Discussion and Conclusions

The results of the study are consistent with the works of Khemakhem and Turki [125], Holm and Rikhardsson [126], and Iatridis [127]. Khemir [128] also reported regarding ESG disclosure positive effects on investment decisions. However, results are contradictory with [129,130]. Moreover, individual dimension results have shown consistency with existing studies, such as in the case of corporate environmental disclosures [68,131,132,133], corporate social disclosures [66,134,135], and corporate governance disclosures [136,137,138,139]. The research proves that the signaling theory is applicable within Pakistan Stock Exchange operations by showing that Pakistani investors interpret ESG data similarly to investors from both developing and emerging markets. The research evaluates how ESG components influence investment decisions by showing that all three dimensions enhance their perceived reputation toward firms and investment decisions. The most vital factor affecting individual investors’ willingness to take risks is corporate governance, according to study results.

The study determines that governance stands out as the most vital factor that investors consider, but social disclosures hold minimal impact on their investment decisions. The decision-making process of Pakistani investors heavily relies on governance quality together with thorough environmental reporting, which helps form corporate reputations. The research demonstrates that ESG information disclosure deeply influences investors’ sentiment, with governance disclosure (GD) standing out as the foremost influence, followed by environmental (ED) and social (SD) disclosures, in determining financial market value relevance. Individual investors’ choices in Pakistan about which companies to invest in are significantly impacted by ESG information disclosure (p-values < 0.05) across all three dimensions.

The significant impact of environmental disclosures on corporate reputation suggests that investors are increasingly concerned about corporate sustainability practices. Firms that actively disclose their environmental impact, carbon footprint reduction strategies, and resource conservation efforts tend to garner a favorable reputation consistent with previous results [77,140,141]. This aligns with signaling theory, which suggests that transparency in environmental performance enhances trust and credibility among investors, customers, and regulators. The positive effect of environmental disclosures increases corporate reputation. Similar findings have been reported previously [142,143,144].

The mediation analysis reveals varying degrees of mediation for the environmental disclosure (ED), social disclosure (SD), and governance disclosure (GD) pathways influencing investors’ behavior (IB) through corporate cognitive reputation (CCR). The results indicate that CCR mediates the relationship between ED and IB, as the effect is significant (β = 0.031, p = 0.046). Similarly, GD also exhibits mediation, with a significant effect (β = 0.029, p = 0.05). In contrast, SD demonstrates no mediation, as the effect is insignificant (β = 0.01, p = 0.235). This suggests that corporate cognitive reputation does not explain the influence of social disclosure on investors’ behaviors, whereas environmental and governance disclosures impact investors’ behaviors through corporate cognitive reputation.

Similarly, the mediation analysis examines the role of ACR (affective corporate reputation) in the relationship between different dimensions of environmental disclosures (ED), social disclosure (SD), governance disclosure (GD), and investors’ behavior (IB). The results indicate that ACR mediates the relationship between ED and IB, as the effect (β = 0.036, p = 0.037) is significant. This suggests that while ED influences IB directly, ACR plays a meaningful intermediary role in enhancing this effect. Similarly, ACR mediates the relationship between GD and IB, with a significant effect (β = 0.031, p = 0.045). This implies that governance-related disclosures impact investors’ behaviors both directly and through their influence on attitudes toward corporate responsibility. In contrast, ACR does not significantly mediate the relationship between SD and IB (β = 0.013, p = 0.271). This suggests that social disclosures directly impact investors’ behaviors, not through ACR. The findings highlight the critical role of ACR in shaping how different types of disclosures influence investors, with governance and economic disclosures exerting both direct and indirect effects, whereas social disclosures rely entirely on investors’ perceptions of corporate responsibility.

This study concludes that individual investors should incorporate ESG information cautiously when making investment decisions. In particular, investors are encouraged to integrate non-financial information into their stock selection process, as it provides a more comprehensive reflection of a company’s long-term sustainability and going concern. However, the impact of ESG disclosures on investment decisions is largely influenced by investors’ perceptions of a company. Corporate reputation, used as a mediating variable in this study, plays a critical role in shaping these perceptions. This study contributes to the signaling theory by conceptualizing corporate reputation through two distinct dimensions: cognitive reputation—which reflects a company’s competence and performance—and affective reputation—which captures investors’ likeability, trust, and perceptions of the company’s integrity.

6. Implications, Limitations, and Future Directions

The study offers a novel perspective on individual investors’ behavior in Pakistan by examining the impact of ESG disclosures on investment decisions through affective and cognitive corporate reputation. This study contributes to the existing literature by emphasizing the dual role of corporate reputation, where affective reputation encompasses investors’ likeability and trust (emotional aspects), while cognitive reputation reflects a company’s competence and performance. By bridging these dimensions, the study extends the current body of knowledge and provides valuable insights for policymakers, brokers, and stock market regulators in Pakistan. Additionally, the findings enhance our understanding of how corporate reputation influences investment decisions, helping investors make more informed and strategic choices. For listed companies, transparent ESG reporting can strengthen reputation, enhance investors’ trust, and improve long-term competitiveness. For regulators, the results support the development of standardized and potentially mandatory ESG disclosure frameworks to increase market transparency and facilitate better investment decisions.

This study, while offering valuable insights, has several limitations that future research should address. It relied solely on self-reported survey data, which may introduce response or social desirability bias, and would benefit from the inclusion of secondary data sources like company reports and financial records to enhance validity. The cross-sectional design limits the understanding of long-term trends in investors’ behavior, suggesting a need for longitudinal studies. Additionally, since the research focused solely on the Pakistan Stock Exchange, the findings may not be generalizable to other markets with different regulatory and investor contexts; comparative studies across emerging and developed markets are recommended.