Firm Disclosure Research Articles

ESG Reporting: Empirical Analysis of the Influence of Board Heterogeneity from an Emerging Market

Firms are facing pressure to convincingly communicate to stakeholders their environment, society, and corporate governance (ESG) disclosure. In developing countries, where frictions among controlling and non-controlling shareholders are pervasive, the possible dissensus inside boards regarding ESG disclosure remains understudied. We investigate the ways in which boards’ heterogeneity between the interests of controlling groups and the interests of institutional investors influences ESG disclosure of firms in the Latin American context. Using social networks and logit panel data models, we analyze for 2015-17 the probability of ESG disclosure by 124 Chilean listed firms. Our evidence suggests that the influence of controlling shareholders through directorate interlocking has a negative relation with ESG disclosure. Additionally, we observe that the influence of institutional investors on ESG disclosure is not yet critical. Moreover, we find partial evidence of the presence of tension within the boards regarding ESG reporting between the directors that represent controlling shareholders and institutional investors. Considering the importance of institutional investors and the ubiquity directorate interlocking among Latin American’ firms, our results are relevant for regulators involved in advancing the rules of ESG disclosure practices, institutional investors focused on enhancing their ESG investment strategies, and firms engaged in improving the ESG decision-making within their boards.

The Influence of Academic Independent Directors and Confucianism on Carbon Information Disclosure: Evidence from China

As global warming has received widespread attention, the disclosure of firms’ carbon information has been expected by increasing stakeholders. This study extends the previous literature on the determinants of firms’ carbon information disclosure by examining the influence of academic independent directors and Confucianism on the quality of carbon information disclosure. Using a sample of Chinese listed firms in the CSI 300 Index during the period of 2012–2018, our empirical results show that academic independent directors have a significantly positive association with the quality of carbon information disclosure. The results also reveal that Confucianism positively affects the quality of carbon information disclosure. Moreover, Confucianism positively moderates the relationship between academic independent directors and the quality of carbon information disclosure. The results imply that Confucianism, as an informal system, can promote the governance effect of academic independent directors on firms’ carbon information disclosure behaviour. Our findings offer shareholders, regulators, and other stakeholders an integrating perspective on motivating firms to disclose high quality carbon information.

Effectiveness of value congruent disclosures and firm credibility in mitigating legitimacy threats

ABSTRACT This paper examines whether value congruent framing in firm disclosures, and firm credibility, help to repair or restore legitimacy following a legitimacy-threatening event. The methodology consists of two experiments. First, a pretest assesses whether participants judge negative information in a news article about a firm as a legitimacy-threatening event. Second, a main study determines whether participants’ legitimacy judgements and intention to oppose the firm are influenced by firm credibility and value congruent disclosures. Our findings demonstrate that firm credibility, in the form of past performance, partially repairs judgements of legitimacy and fully mitigates intention to oppose the firm. However, value congruent disclosures, in the form of firm messages that align with values strongly held by individuals making the legitimacy judgement, do not influence legitimacy judgements or behavioural intentions after a legitimacy-threating event, even when firm credibility is high. Taking both value congruence and firm credibility into consideration, this research indicates something rather challenging – value congruent disclosures do not matter but firm credibility does. The study contributes to the debate on the relative importance of what firms say compared with what they do by demonstrating the inefficacy of disclosures (what firms say) and, instead, the importance of firm credibility (what firms do) in legitimacy.

Investigating Abnormal Disclosure Tone in Corporate Narratives: Evidence from an Emerging Market

This study aims to investigate abnormal disclosure tone levels (i.e., extent of management’s tone manipulation) in narrative disclosures of earnings press releases of Egyptian firms. Net disclosure tone is measured by applying manual textual analysis using the financial-domain wordlist of Henry (2008). Then, abnormal disclosure tone is estimated using the model proposed by Huang et al. (2014). Results show that net disclosure tone in the narratives of earnings press releases of firms in all industry sectors tend to be positive and optimistic. In addition, while estimating abnormal disclosure tone levels, using Huang et al (2014) model, it is found that firms that are more profitable, larger, with less growth opportunities and more business segments tend to provide more positive and optimistic tone in their narrative disclosures. Moreover, results provide evidence for the existence of levels of abnormal tone in the narrative disclosures of earnings press releases (both upward and downward tone management), indicating the existence of some levels of tone manipulation by management in the Egyptian firms’ disclosures. Firms in the materials and the real estate sectors are found to have higher levels of abnormal disclosure tone in their earnings press releases. This study contributes to the existing literature, by providing insights regarding management’s use of abnormal tone (i.e., Tone management) in the narrative disclosures of Egyptian firms, which is an unexplored area yet in the Egyptian market or any other emerging market.

Corporate Control Contests and the Asymmetric Disclosure of Bad News: Evidence from Peer Firm Disclosure Response to Takeover Threat

ABSTRACTWe examine the voluntary disclosure behavior of peer firms of hostile takeover targets. We find that peer firms under control threat use a disclosure strategy that emphasizes bad news: they provide more bad news forecasts, tend to bundle bad news forecasts with earnings announcements, use more negative tone in conference call presentations, and more evenly distribute negative tonal words throughout the presentation to heighten the visibility of bad news. This asymmetric disclosure of bad news is concentrated in firms whose managers have greater incentives to mitigate the control threat—firms with younger CEOs, CEOs with higher total compensation, and firms with weaker anti-takeover provisions. Further tests show that peer firms also manage accruals downward. We contribute to the sparse literature on the impact of corporate control contests on voluntary disclosure by demonstrating that peer firms under control threat emphasize bad news to preempt control threat.JEL Classifications: G14; G32; M4; M41.

Female directors and CSR disclosure in Bangladesh: the role of family affiliation

PurposeThis paper aims to investigate the impact of female director affiliations to governing families on corporate social responsibility (CSR) disclosures in the context of Bangladeshi firms.Design/methodology/approachThis study uses a quantitative empirical research method grounded in Socioemotional Wealth (SEW) theory. Data was sourced from Bangladeshi publicly listed non-financial sector companies’ annual reports and stock exchange trading and publication reports and consists of 2,637 firm-year observations from 1996 to 2011. Pooled multivariate regression models are used to test the association between corporate social and environmental disclosure and female directors, and the family affiliation (or not) of those directors.FindingsThe findings provide strong evidence that female directors who are affiliated to the governing family, founders and other board members reduce CSR disclosure in family firms; unaffiliated female board directors enhance CSR disclosure, and this effect is significant in both family and non-family firms.Research limitations/implicationsDefinitions of family firms and affiliated directors may lead to over-generalization in the results.Originality/valueThe study highlights variation in the nature of female board appointments in emerging market family-controlled firms. The findings bring attention to the role of affiliated female director appointments in family ownership structures and speak directly to family business owners, advisors and policy makers about the importance of unaffiliated female directors as catalysts of improved CSR disclosure in family and non-family firms.

The impact of boardroom internationalisation on online disclosures of S&P 500

PurposeThe purpose of this study is to analyse the level of online disclosure of firms in the USA and to evaluate the impact of diversity in terms of director nationality (boardroom internationalisation) on online disclosure.Design/methodology/approachThe authors apply, for the first time, a new modified scoring system to measure online disclosure levels by securing more detailed information on each of the items in the voluntary disclosure index. Regarding the percentage of foreign board members, unlike in previous research, the authors calculate two additional proxies to more accurately specify the level of international diversity on the board: the Blau Index and the Shannon Index. Moreover, the authors use a cross-sectional model for the sampled non-financial S&P500 firms using both ordinary least squares (OLS) and heteroskedasticity-corrected estimates to analyse the impact of boardroom internationalisation on the level of online disclosure.FindingsThe findings reveal that the average online disclosure level for the sample in question is 64% for the 0–1 index and 57% for the 0–4 index. In addition, the results of the regression analysis confirm the study’s proposed hypothesis, which is that the presence of international board members correlates with an improvement in the level of online disclosure. This can be attributed to the fact that foreign directors bring unique skills and knowledge from their home countries and thus, increase board discussion, creativity and innovation, which has a positive impact on the level of online disclosure.Research limitations/implicationsFinancial firms are subject to capital requirement regulations; consequently, disclosure practices can be influenced. Therefore, these firms were excluded from the sample of the study.Originality/valueThis research contributes to the body of literature on nationality diversity of firm boards and corporate online disclosure in several respects. Firstly, the study adds an international dimension to the existing literature. Secondly, this study provides new evidence that foreign diversity on the board can improve firm value, insofar as the corresponding enhancement of online disclosure leading to positive capital market implications. Thirdly, the authors use, for the first time, a new scoring system approach to measure the level of online disclosure. Finally, it contributes to the corporate governance literature by basing its analysis on a multi-theoretical approach.

How do external auditor attributes impact corporate social responsibility disclosures: empirical evidence from ADX-listed companies

PurposeThis paper aims to highlight the relationship between the attributes of external auditor companies and voluntary corporate social responsibility (CSR) disclosures of audited firms using a sample of Abu Dhabi Securities Exchange (ADX)-listed companies.Design/methodology/approachBased on a sample of 410 firm-year observations for the period 2010–2016, this study first computes an eight-item CSR disclosure index, then ran a multivariate regression analysis between CSR disclosure scores and external auditor attributes, along with client firm characteristics and additional control variables. Finally, this paper performs various additional robustness checks.FindingsThe results reveal that external auditor attributes have a significant impact on shaping the CSR disclosures of ADX-listed firms. Overall, auditor age, size, industry specialisation and portfolio diversification positively affect the level of customers’ CSR disclosures. By contrast, the magnitude of audit fees and auditor experience in the UAE has no impact on the CSR disclosures of ADX-listed firms. This study controls for client firm size, financial leverage, ownership concentration and the proportion of independent directors on companies’ board of directors. The results remain robust to additional sensitivity checks such as audit company CSR practices, extreme quartiles of CSR disclosures and the panel data estimation method.Research limitations/implicationsThe research exhibits some limitations. First, this paper uses a simple index to measure CSR disclosures based on previous empirical studies, especially those related to emergent markets, which are not free from bias due to the lack of voluntary disclosure transparency for some companies listed on ADX. Second, although this study uses a seven-year observation period, the total number of observations remains limited due to ADX size. Third, other context-specific disclosures should be included such as cultural and governance variables (royal families ownership).Practical implicationsThe study highlights the role of external attributes that can affect companies’ CSR disclosure policy, rather than firm-specific factors. The study also reshapes the concept of auditor quality beyond the dichotomy (“Big Four”/non-Big Four) used in the current literature.Originality/valueThe research adds to the current literature on CSR by revealing the impact of external auditor attributes on client firm CSR disclosure policy in an emerging market, the ADX.

Disclosure Processing Costs and Market Feedback Around the World

We study how disclosure processing costs affect managers’ ability to learn from their own firms’ stock price and incorporate this information into their investment decisions. To provide evidence on this issue, we examine country-level adoptions of centralized electronic disclosure systems. These systems, which digitize and centralize firm disclosures, are among regulators’ most critical technological interventions to reduce disclosure processing costs for investors. Consistent with CEDS crowding out investors’ private-information acquisition, which induces managers to learn less from their stock price, we find a significant decrease in managers’ investment sensitivity to price following these adoptions. Leveraging country-level variation, we also show these effects are heterogeneous across several country-specific dimensions. We find that decreased managerial learning is greatest in places that benefit most from CEDS: smaller and more opaque countries and those with better-developed platforms. Overall, our results show technology that reduces disclosure processing costs have real effects on the global economy.

Predicting corporate carbon footprints for climate finance risk analyses: A machine learning approach

Abstract Corporations have come under pressure from investors and other stakeholders to disclose and reduce their greenhouse gas emissions (GHG). Corporate GHG footprints, proxying for transition risk, are dominated by carbon emissions from energy use. Thus the growing attention on the carbon emissions of corporations from, principally, their energy use, motivates firms to invest in energy efficiency and renewable energy. However, only a subset of corporations disclose their GHG/carbon footprints. This paper uses machine learning to improve the prediction of corporate carbon emissions for risk analyses by investors. We introduce a two-step framework that applies a Meta-Elastic Net learner to combine predictions from multiple base-learners as the best emission prediction approach. It results in an accuracy gain based on mean absolute error of up to 30% as compared with the existing models. We also find that prediction accuracy can be further improved by incorporating additional predictors (energy production/consumption data) and additional firm disclosures in particular sectors and regions. This provides an indication of where policymakers should concentrate their efforts for greater level of disclosure.

The Impact of Country Institutional Factors on Firm Disclosure: Cybersecurity Disclosures in Chinese Cross-Listed Firms

Protection of intellectual property and sensitive data on customers pose significant challenges in the current economy. The institutional setting for cybersecurity differs tremendously by country. In China, the government plays a central role in overseeing cybersecurity. In the US, however, cybersecurity protection has been primarily left up to individual companies, with regulations focused more on disclosure of cyber events rather than on their prevention. This paper explores differences in qualitative disclosures reflecting cybersecurity awareness between Chinese firms that cross-list in the US and their US domestic counterparts. We argue that the Chinese firms frame disclosures based upon the context of the Chinese institutional setting. Consistent with the strong regulatory framework in China externalizing cybersecurity and thus reducing the need to disclose individual company cybersecurity awareness, we find that Chinese firms have lower levels of cybersecurity disclosure. Market valuation of this qualitative disclosure is higher for Chinese cross-listed firms than for US firms, suggesting that the market favorably views Chinese firm disclosures that communicate a greater level of internalized cybersecurity awareness. To further explore the effect of institutional setting on market valuation of cybersecurity awareness, we perform an event study for the time period surrounding arrest of Huawei’s CFO. This event potentially challenged the effectiveness of Chinese cybersecurity policies since cybersecurity weaknesses at the company were highlighted. We find a negative stock market reaction to the event, but only for Chinese companies. Our results thus provide evidence that the market’s view of company cybersecurity awareness is sensitive to changes in perceptions of the company’s institutional setting.

Cheap Talk and Cherry-Picking: What ClimateBert has to say on Corporate Climate Risk Disclosures

Disclosure of climate-related financial risks greatly helps investors assess companies' preparedness for climate change. Voluntary disclosures such as those based on the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD) are being hailed as an effective measure for better climate risk management. We ask whether this expectation is justified. We do so with the help of a deep neural language model, which we christen ClimateBert. We train ClimateBert on thousands of sentences related to climate-risk disclosures aligned with the TCFD recommendations. In analyzing the disclosures of TCFD-supporting firms, ClimateBert comes to the sobering conclusion that the firms' TCFD support is mostly cheap talk and that firms cherry-pick to report primarily non-material climate risk information. From our analysis, we conclude that the only way out of this dilemma is to turn voluntary reporting into regulatory disclosures.

Voluntary risk disclosure and values of FTSE350 firms: the role of an industry-based litigation risk

Voluntary risk disclosure and values of FTSE350 firms: the role of an industry-based litigation risk

Signing blank checks: The roles of reputation and disclosure in the face of limited information

In this study we examine the role of disclosure and managerial reputation in firms’ ability to raise capital, by studying Special Purpose Acquisition Companies (SPACs or “blank check companies”). These firms IPO prior to having any commercial operations or substantive assets with the promise to acquire or merge with a private firm, generally within two years. Given the limited information, it is unclear how these firms attract investors. We find evidence that language contained in the prospectus disclosures are associated with funds raised. Moreover, the relation between the language used and the capital raised depends on where the language is found in the S-1. Our evidence also suggests that managers with SPAC experience, as well as former CEOs and celebrity sponsors raise more funds than management teams lacking these characteristics. Finally, we find some evidence that investors rely on disclosure differently when the management team has relevant (i.e., SPAC) experience.

Voluntary risk disclosure and values of FTSE350 firms: The role of an industry-based litigation risk

There is conflicting research on whether litigation risk affects voluntary disclosure positively or negatively. This study thus aims to examine how litigation risk affects the voluntary disclosure ...

Technology Rhetoric and Institutional Ownership

We compare actual R&D spend with the managerial rhetoric around technology and innovation contained within corporate disclosures of US-listed firms. We find that, whilst actual R&D spend and patents do not entice institutional investors to increase their stock holdings, firms that espouse technology and innovation in their corporate disclosures are quite successful in drawing in short-term horizon investors. Yet, such firms are more prone to future sudden idiosyncratic stock price crashes. Although it may seem that talk of technology and innovation represents a self-interested managerial effort to retain investors’ expectations, this would not explain why so many short-term horizon investors opt for such stocks in the face of persistent evidence of adverse market performance outcomes. As suggested by the economics of expectation, investors may become reluctant to timely face up to bad news in terms of unfulfilled technology and innovation outcomes, a behaviour that can hype investors’ expectations and overinflate stock prices for long periods. Eventually, when such investors become disillusioned by unjustifiable expectations that enables them to better discern the firm’s true state of economic fundamentals, the sudden and abrupt decline in their expectations triggers extreme firm-specific left-tail outcomes.

Mutual Fund Liquidity Management, Stock Liquidity, and Corporate Disclosure

This study presents novel evidence that mutual fund liquidity management affects stock liquidity. Exploiting a proposal by the U.S. Securities and Exchange Commission (SEC) as an exogenous shock to mutual fund liquidity management, I find that mutual fund liquidity management improves stock liquidity of firms in mutual fund portfolios. This improvement is more pronounced when mutual funds have stronger incentives to improve portfolio liquidity and more resources to influence firms and when portfolio firms have lower stock liquidity prior to the SEC proposal. Consistent with mutual funds influencing portfolio firms to be more transparent, I further show that improving disclosure among portfolio firms is one mechanism through which stock liquidity is improved. Overall, the results indicate that liquidity management at the fund level has important implications for stock liquidity and information disclosure of portfolio firms.

Determinants of environment, social and governance disclosures by top Malaysian companies

Using the resource-based view theory (RBVT) as the underlying theory, this study has aimed to determine the extent of environmental, social, and governance (ESG) disclosures and specifically, to identify the factors that influence the extent of ESG disclosures by Malaysian companies. An index which is known as the modified environmental, social, and governance index (MESGi) was developed to measure the extent of ESG disclosures in the annual reports and sustainability reports of the 67 top Malaysian public-listed companies for the year 2015. The study used hierarchical regression to analyse the relationships between firm internal factors and ESG disclosures. The findings indicated that the extent of ESG disclosures by Malaysian companies was low. The results found that the ISO certification and research and development expenditure had moderate significant relationships with the extent of ESG disclosures by Malaysian companies. The government and policy makers may consider enhancing the existing regulations by requiring the listed companies to provide more ESG disclosures to the stakeholders. It is hoped that the MESGi is able to assist the Malaysian Government to have a more comprehensive and standardised guideline in disclosing ESG information by Malaysian companies.

Disclosure standards and communication norms: Evidence of voluntary disclosure standards as a coordinating device for capital markets

In this paper, we examine how the emergence of voluntary disclosure standards can alter the nature of information available to capital market participants. Using industry-specific dictionaries of sustainability terms contained in voluntary disclosure standards developed by the Sustainability Accounting Standards Board (SASB), we find a significant increase in earnings call sustainability disclosures following the release of SASB standards, particularly for firms that had little or no coverage of sustainability issues historically. This trend begins around the time when SASB released a provisional disclosure standard for a given company’s industry and continues in the years after. We also find a stronger impact of SASB standards on sustainability disclosures of firms operating in industries with high uncertainty around sustainability reporting. Overall, these results inform our understanding of the conditions under which standards created in response to market forces are likely to affect voluntary disclosures and communication norms.

Political costs of disclosure

The purpose of this study is to investigate whether firm disclosures determine firms’ political costs. I proxy for firms’ political costs using a novel measure of firms’ regulatory burden that varies across 45,451 U.S. industry-years between 1969 and 2012. I identify variation in firm disclosures using the promulgation of fourteen FASB standards between 1972 and 2009. Using a time-varying difference-in-differences research design, I document increases in firms’ regulatory burden following FASB standard promulgation, relative to an entropy-balanced control group. This evidence suggests that political costs of disclosure 1) exist and 2) suppress the production of information in the economy. An event-time specification corroborates and documents the validity of the parallel trends assumption in the setting. Supplementary analyses reveal that more credible disclosures drive the association. Placebo tests illustrate that FASB standards delivering little new information to firm stakeholders elicit no regulatory response.