Abstract
As part of the Securities and Exchange Commission’s revision of Regulation S-K, which lays out reporting requirements for publicly listed companies, many investors proposed the mandatory disclosure of sustainability information in the form of environmental, social and governance (ESG) data. However, progress is contingent on collecting evidence regarding which sustainability disclosures are financially material. To inform this issue, we examine materiality standards developed by the Sustainability Accounting Standards Board (SASB). Firms voluntarily disclosing more SASB-identified sustainability information exhibit greater price informativeness, while the disclosure of non-SASB information does not relate to informativeness. The results are robust to a changes analysis and a difference-in-differences analysis that exploits the staggered release of SASB standards across different industries over time. We also document stronger results for firms with higher exposure to sustainability issues, poorer sustainability ratings, greater institutional and socially responsible investment fund ownership, and coverage from analysts with lower portfolio complexity.
Highlights
The number of companies disclosing and investors using sustainability information has grown exponentially over the past few years
We examine whether firms that voluntarily disclosed information later identified in the standards as investor relevant, exhibited lower stock price synchronicity, consistent with voluntary disclosure of sustainability information enabling the incorporation of firmspecific information in stock prices
We find that material sustainability disclosure according to Standards Board (SASB) standards (MaterialDisc) is on average 17.2% with a standard deviation of similar magnitude, indicating considerable variation in disclosure scores in our data
Summary
The number of companies disclosing and investors using sustainability information has grown exponentially over the past few years. Using sustainability data between 2007 and 2014 for a sample of 1,333 US-listed companies, we find a negative and significant association between our measure of material sustainability information and stock price synchronicity This association is not mediated when we control for whether the firm issues a sustainability report. An emerging literature examines the development of accounting standards for disclosure of sustainability information (Khan, Serafeim and Yoon 2016) We build on this line of work to examine how firm disclosures around material sustainability issues are associated with firm-specific information being reflected in market prices. Our results build on this literature and suggest that market forces, in our case a focal NGO with the participation of companies, investors and information intermediaries, could develop accounting standards that reflect investor relevant firm-specific information, complementing the regulatory process through which financial accounting standards have been developed. In contrast to the prior literature that examines intra-industry information transfers whereby an idiosyncratic event that affects the short-window stock price of one firm affects the contemporaneous short-window stock price of another firm in the same industry (Foster, 1981; Gleason et al, 2008) or that documents cross-firm stock return predictability as a function of accounting quality (Chen et al 2017) we document significantly higher industry-level synchronicity for firms that have low levels of sustainability information disclosure but are members of industries with relatively high levels of sustainability information disclosure
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