Objective: This study aims to examine the impact of environmental, social, and governance (ESG) disclosure on stock liquidity and to investigate the moderating role of financial distress in companies listed on the Tehran Stock Exchange. Given the growing importance of sustainability reporting and the influence of firms’ financial conditions on investors’ responses, this research explores how financial distress changes the strength of the relationship between ESG disclosure and stock liquidity.

Methodology: The statistical population of this study consists of companies listed on the Tehran Stock Exchange during the period from 2017 to 2024. The selection of 2017 as the beginning of the study period is due to the increased availability and consistency of information related to the disclosure of ESG components in companies’ published reports, which allows for a more reliable measurement of the ESG index. After applying the screening criteria, 147 companies were selected as the final sample. The required data were collected from audited financial statements, board of directors’ reports, corporate governance reports, and information published on the Codal system. The research hypotheses were tested using panel data regression models while controlling for firms’ financial characteristics.

Findings: The results indicate that ESG disclosure has a positive and statistically significant effect on stock liquidity; that is, higher levels of environmental, social, and governance disclosure are associated with improved stock liquidity. This finding suggests that ESG disclosure can facilitate more trading activity and reduce market frictions by decreasing informational ambiguity and increasing investor assurance. Moreover, the results for the second hypothesis show that financial distress plays a significant moderating role in the relationship between ESG disclosure and stock liquidity. In other words, although ESG disclosure directly increases liquidity, this positive effect is weakened for financially distressed firms. This implies that capital market participants consider a firm’s financial health when assessing the informational content of ESG disclosure and exhibit a less favorable reaction when signs of financial distress are present.

Conclusion: The findings of the study indicate that ESG disclosure has a positive and significant relationship with stock liquidity; however, financial distress weakens this effect. Therefore, the effectiveness of ESG reporting depends not only on the quality of disclosure but also on the financial condition of the firm, and improving financial health can enhance the benefits arising from sustainability information disclosure.Therefore, the effectiveness of ESG reporting depends not only on the quality of disclosure but also on the financial condition of the firm, and improving financial health can enhance the benefits arising from sustainability information disclosure. Furthermore, the findings indicate that simultaneously considering the quality of sustainability information disclosure and firms’ financial condition is essential for analyzing capital market behavior. From a practical perspective, the findings can assist corporate managers in developing ESG disclosure strategies, investors in assessing stock risk and liquidity, and regulatory authorities in developing sustainability reporting requirements and enhancing market transparency.

Innovation and Originality: The novelty of this study lies in the simultaneous examination of the impact of ESG disclosure on stock liquidity and the moderating role of financial distress in this relationship. Furthermore, by providing evidence from the Tehran Stock Exchange, this research offers a deeper understanding of the role of firms’ financial conditions in the effectiveness of sustainability reporting in emerging markets.