The Informational Contribution of Social and Environmental Disclosures for Investors

Abstract

Corporations increasingly define their social and environmental initiatives and activities as part of their Corporate Social Responsibility (CSR). Disclosure practices have followed suit as well with social and environmental information typically being combined, often through a CSR report. The emergence of CSR is a response to the demands of activist investors, ethical and green institutional investors as well as rating services (e.g., Jantzi) which evaluate corporations through the lens of CSR, thus going beyond traditional environmental indicators. However, is this trend beneficial to investors? We investigate whether social disclosure and environmental disclosure substitute or complement each other in reducing information asymmetry between managers and investors, taking into account a firm"s environmental performance and governance attributes. Our findings suggest that social disclosure and environmental disclosure substitute each other in reducing stock market asymmetry, as proxied by share price volatility. Our results also show that the reduction in share price volatility is higher for economic (hard) environmental disclosure than for generic (soft) environmental disclosure. Hence, future research in CSR disclosure may fruitfully distinguish between social and environmental disclosures as well as between hard (economic-based) and soft environmental information.Key words: Environmental disclosure, governance attributes, information asymmetry, social disclosure. However, most voluntary disclosure guidelines (e.g., Global Reporting Initiative or GRI)as well as most prior research view corporate social responsibility (CSR) disclosure as an additive process where more is better (e.g., Ingram, 1978;Patten, 1991). In other words, it is assumed that more social and environmental disclosure benefits the disclosing firm as well as its shareholders. There is anecdotal and empirical evidence that, on their own, both social disclosure (e.g. Downing, 1997;Cormier, Aerts, Ledoux and Magnan, 2009) and environmental disclosure (e.g. Cormier, Magnan and Morard, 1993;Barth and McNichols, 1994;Li and McConomy, 1999;Aerts, Cormier and Magnan, 2008) convey value-3 relevant information to investors. However, such evidence is not conducive to the development of efficient disclosure practices since it is likely that there is much overlap in the strategies underlying a firm"s social and environmental actions and performance. Moreover, despite the growth and development of CSR disclosure by many organisations, it is still relatively unknown as to how investors interpret social and environmental disclosures together. Moreover, it is still uncertain as to how investors integrate a firm`s CSR performance into their assessment of CSR disclosure.In this study, we investigate whether social disclosure and environmental disclosure substitute or complement each other in reducing information asymmetry between managers and investors, taking into account a firm"s environmental performance and governance attributes.Our study focuses on a sample...

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