Market Reactions to Increased Reliability of Sustainability Information

Abstract

This article investigates whether investors consider the reliability of companies' sustainability information when determining the companies' market value. Specifically, we examine market reactions (in terms of abnormal returns) to events that increase the reliability of companies' sustainability information but do not provide markets with additional sustainability information. Controlling for competing effects, we regard companies' additions to an internationally important sustainability index as such events and consider possible determinants for market reactions. Our results suggest that first, investors take into account the reliability of sustainability information when determining the market value of a company and second, the benefits of increased reliability of sustainability information vary cross-sectionally. More specifically, companies that carry higher risks for investors (e.g., higher systematic investment risk, higher financial leverage, and higher levels of opportunistic management behavior) react more strongly to an increase in the reliability of sustainability information. Finally, we show that the benefits of an increase in the reliability of sustainability information are higher in times of economic uncertainty (e.g., during economic downturns and generally high stock price volatilities).

The value relevance of SAM's corporate sustainability ranking and GRI sustainability reporting in the European stock markets

“…; Cheung ; Lackmann et al . ), we choose SAM's index ranking in conjunction with GRI application levels due to their consistent approach in measuring corporate sustainability and sustainability disclosure, respectively. Both SAM and GRI use the three‐pillar approach, which covers economic, social, and environmental dimensions.…”

An equation with many variables: unhiding the relationship between sustainability and investment performance

“…Orlitzky, Schmidt, and Rynes 2003;Kreander et al 2005). The methodology applied in this body of research ranges from event studies (Lackmann, Ernstberger, and Stich 2011), regression and econometric studies (Rennings, Schröder, and Ziegler 2003) to comparisons using different key figures of investment performance (Bauer, Koedijk, and Otten 2005). Important for the question of research of this paper are studies of the second group, especially those analysing the effects of sustainability on the performance of investment portfolios rather than on the performance of individual stocks (De Haan, Lammertjan, and Scholtens 2012).…”

Sustainability assurance and cost of capital: Does assurance impact on credibility of corporate social responsibility information?

“…Corporate disclosures, such as sustainability information, essentially turn private into public information, decreasing the differences between informed and uninformed stakeholders (Diamond & Verrecchia, 1991). The increased availability of voluntary information affords a better understanding of the economic risk for investors and creditors (Lackmann, Ernstberger, & Stich, 2012) and thus reduces the cost of capital for the company (Glosten & Milgrom, 1985;Mazumdar & Sengupta, 2005). As Malik (2015) summarizes, sustainability reports lead to superior increase of market returns, and lower cost of capital and information asymmetry.…”