“You Cannot Hide Forever Luke”: Understanding the Strategic Use of Sustainability Disclosure in the Short and Long Term

Abstract

This study investigates the relationships among firms’ sustainability disclosure, sustainability performance, and financial performance. Based on legitimacy theory and signaling theory, it argues that sustainability disclosure participates in two distinct mechanisms: a conformity mechanism through which disclosure shows conformity to the norms and a revelation mechanism through which disclosure reveals or hides a firm’s achieved degree of sustainability. In an attempt to contrast and reconcile the two mechanisms, the study assesses their impact on financial performance in the short and long term. Hypotheses are tested using longitudinal data (2002–2010), which cover 10,814 observations of firms from major indexes of stock exchanges worldwide. The results show that the conformity mechanism is effective in both the short and long terms, whereas the revelation mechanism is only effective in the short term. As a consequence, firms with poor sustainability performance may hide their detrimental impact and achieve higher financial performance in the short term by limiting their disclosure but not in the long term in which their lack of conformity is punished. In the long term, only conformity to the norms of disclosure leads to higher financial performance, even in the case of poor sustainability results.

The Role and Effectiveness of Corporate Social Responsibility Assurance in a Mandatory Setting: Professional Accountants’ Perceptions

“…Due to this information advantage, companies have extensive latitude in choosing what to report. More specifically, in the case of CSR reporting, Touboul and Kozan (2020) noted that firms with high CSR performance use extensive disclosure to reveal their performance, whereas firms with low performance tend to limit their disclosure and to provide low-quality (or noisy) information. Faced with this difficulty, the reader alone is unable to judge the quality of information and, in particular, if it is true.…”