Climate Change and Asset Prices: Are Corporate Carbon Disclosure and Performance Priced Appropriately?

This paper empirically assesses the relevance of information on corporate climate change disclosure and performance to asset prices, and discusses whether this information is priced appropriately. Findings indicate that corporate disclosures of quantitative greenhouse gas (GHG) emissions and, to a lesser extent, carbon performance are value relevant. We use hand‐collected information on quantitative GHG emissions for 433 European companies and build portfolios based on GHG disclosure and performance. We regress portfolios on a standard four factor model extended for industry effects over the years 2005 to 2009. Results show that investors achieved abnormal risk‐adjusted returns of up to 13.05% annually by exploiting inefficiently priced positive effects of (complete) GHG emissions disclosure and good corporate climate change performance in terms of GHG efficiency. Results imply that, firstly, information costs involved in carbon disclosure and management do not present a burden on corporate financial resources. Secondly, investors should not neglect carbon disclosure and performance when making investment decisions. Thirdly, during the period analysed, financial markets were inefficient in pricing publicly available information on carbon disclosure and performance. Mandatory and standardised information on carbon performance would consequently not only increase market efficiency but result in better allocation of capital within the real economy.     

Carbon disclosure,emission intensity and cost of equity capital: multi-country evidence

This study examines the joint effect of carbon disclosure and greenhouse gas (GHG) emissions on firms’ implied cost of equity capital (COC). Based on 4655 firm-year observations across 34 countries, we find firms’ GHG emission intensity to be positively associated with COC. However, we find also that the penalty linked with higher COC is moderated by extensive carbon disclosure. We provide evidence that the extent of carbon disclosure helps reduce the premium required by investors to compensate for poor carbon performance. Our study provides insights to policymakers, investors and managers on the combined effect of carbon disclosure, and emission intensity.     

Peer effects in corporate disclosure decisions

This study examines peer effects in corporate disclosure decisions. Peer effects suggest that the average behavior of a group influences the behavior of individual group members. Consistent with peer effects, I find that disclosures made by industry peers induce firm disclosure. Peer effects in disclosure are more pronounced when a firm's strategic uncertainty is higher, indicating that peer firm disclosure reduces the external uncertainty arising from the firm's interaction with its industry peers and thus increases the precision of managerial private information. I also find that peer effects are stronger when a firm's dependence on external financing is greater, suggesting that peer firm disclosure increases the costs on firm visibility and reputation in capital markets. Overall, these findings suggest that peer firm disclosure shapes a firm's information environment.     

Women on boards and greenhouse gas emission disclosures

We apply institutional and board capital theory to examine whether women on boards are associated with disclosure and quality of corporate greenhouse gas (GHG) emissions related reporting. We examine the research problem in Australia in a period when no requirements existed for listed companies to appoint female directors or to report GHG emissions. This environment allows us to examine the association between women on boards and GHG emissions related disclosure in annual and sustainability reports in a voluntary setting. We find that companies with multiple female directors make GHG emissions related disclosures that are of higher quality.     

Voluntary disclosure,greenhouse gas emissions and business performance: Assessing the first decade of reporting

This study explores the empirical relationships between GHG emissions and an extensive range of business performance measures for UK FTSE-350 listed firms over the first decade or so of such reporting. Despite the popular and policy generated environmental imperatives over this period—along with growing evidence of the corporate added-value of having an ‘environmental conscience’, voluntary disclosure of emissions has been slow to adopt by firms. The leading contribution is to present clear evidence of a non-linear relationship, initially increasing with firm performance and then decreasing. An extensive pattern of non-reporting of emissions is also observed over time, and prior literature has introduced questions of endogeneity existing between firm performance and emissions. Steps are taken to ensure confidence/robustness of the results to these concerns. Accordingly, a two-stage (Heckman-type) selection model is used to analyse the emissions-performance nexus conditional upon the firm choosing to report (i.e. treating the choice to report as being endogenously determined with firm performance). From this—in addition to confirming the robustness of the non-linear relationship—it can be observed that the decision to report emissions is not directly influenced by wider social/governance disclosure attitudes of a firm, thus suggesting that firms disassociate environmental responsibility from social responsibility.     

The environmental disclosures of the electricity generation industry: a global perspective

The electricity generation industry has been under close regulatory and public scrutiny for decades for the significant impacts its activities have on the environment. The industry is responsible for a large proportion of greenhouse gas (GHG) emissions, which has intensified public and regulatory scrutiny of late. Therefore, electricity generation firms face immense pressure to show environmental responsibility. Firms respond with environmental disclosures in their annual reports, in stand-alone-reports, and on websites. In this study, we use comprehensive disclosure indices to measure the quality (or comprehensiveness) of the CO₂ emissions related disclosure and the overall environmental disclosure of 205 electricity generation firms in 35 countries. We find that firms in countries with a high commitment towards the environment and a carbon emissions trading scheme (measures of social concern for environmental protection and emissions), are likely to disclose more comprehensive environmental information. In addition, we find that firm size, age of the assets, listing status, and media exposure influence disclosure. Environmental performance, measured by CO₂ emissions, is not significantly related to environmental disclosure among our sample firms. The theoretical implication of these findings is that social beliefs (that are different in different countries) prompt a legitimating disclosure response from firms that is not significantly affected by their performance against that social belief.     

Disclosing Physician Ratings: Performance Effects and the Difficulty of Altering Ratings Consensus

I examine effects of a health care system's policy to publicly disclose patient ratings of its physicians. I find evidence that this policy leads to performance improvement by the disclosed, subjective ratings and also by undisclosed, objective measures of quality. These effects are consistent with multitasking theory, in that physicians respond to the disclosure by providing more of a shared input—time with patients—that benefits performance by ratings and underlying quality. I also find, as predicted by information cascade theory, that the ratings become jammed to some degree near initially disclosed values. Specifically, raters observe the pattern of initial ratings and follow suit by providing similar ratings. Finally, I find evidence that physicians anticipate rating jamming and so concentrate their effort on earlier performance in order to set a pattern of high ratings that later ratings follow. These results demonstrate that the disclosure of subjective ratings can benefit performance broadly but can also shift effort toward earlier performance.     

Inter-and intra-organizational stakeholder arrangements in carbon management accounting

This research investigates the role of inter-organizational arrangements and intra-organizational activities as sub-parts of carbon management accounting to reduce greenhouse gas (GHG) emissions. We apply the concept of stakeholder engagement, normally utilized in sustainability reporting, to carbon management accounting and performance. We also examine if carbon management projects that encompass many functional areas aid in GHG emissions performance. Using a sample of firms headquartered in the United States with data available from the CDP, we apply the three-stage least squares (3SLS) method to test for the endogeneity of GHG emissions reporting and performance. We find that both inter-organizational and intra-organizational arrangements improve GHG emissions performance through carbon management processes and procedures. Our research contributes to the literature by providing insight into how companies work externally with their stakeholders and internally with multiple functional areas to implement carbon management projects that reduce GHG emissions.     

Halo effect or fallen angel effect? Firm value consequences of greenhouse gas emissions and reputation for corporate social responsibility

Greenhouse gas (GHG) emissions are perceived to have negative consequences for society at large by contributing to potential climate change and represent a potential cash drain from firms from exposure to future regulatory, abatement, and compliance costs. Beginning in 2010, US companies are required to report their GHG emissions to the Environmental Protection Agency (EPA). We utilize these data for 2010–2014 to examine whether the possible adverse firm value impact of these GHG emissions is alleviated or exacerbated by the firm’s reputation for corporate social responsibility. Our findings suggest that there is no halo effect, i.e., a firm’s reputation for social responsibility (as reflected in its CSR score) does not protect the firm from the adverse firm value effects of GHG emissions. Rather, our findings suggest a fallen angel effect, i.e., for any given level of GHG emissions, the higher the firm’s CSR score, the greater the adverse impact on firm value. In other words, the decline in firm value due to the adverse impact of GHG emissions is compounded by the hit to the firm’s reputation for corporate social performance. Our paper contributes to the sparse prior US literature on the firm value effects of GHG emissions. Further, by providing scholarly evidence on the existence of a fallen angel effect, our findings suggest that boards and managers of firms that provide voluntary CSR disclosures cannot afford to be complacent about their GHG emissions.     

The Effect of Mandatory Extraction Payment Disclosures on Corporate Payment and Investment Policies Abroad

I examine how mandatory extraction payment disclosures (EPD)—a policy solution intended to discourage corporate payment avoidance in the oil, gas, and mining industries—affect fiscal revenue contributions and investments by multinational firms in foreign host countries. Using the staggered adoption of EPD across firms headquartered in Europe and Canada, I find that disclosing companies increase their payments to host governments, decrease investments, and obtain fewer extraction licenses relative to non-disclosing competitors. These effects are stronger for firms that face a high risk of public shaming, operate in corrupt host countries, and have a high exposure to bribery-prone payments, suggesting that EPD increases the reputational cost of corporate behavior that could be perceived as exploitative. The resulting reallocation of investments from disclosing to non-disclosing firms reduces drilling productivity and resource production in host countries, consistent with uneven disclosure regulation distorting capital allocation.     

Estimating the impact of green ESIF in Romania using input-output model

This study develops one of the first estimates of the effects of European Structural and Investment Funds (ESIF) in Romania, in the context of supporting the transition to a low carbon economy across sectors. Using the green Leontief Input-Output model for the Romanian economy, aggregated at the NACE Rev.2 economic sectors, the analysis decomposes the direct, indirect, and induced effects of ESIF on the reduction of greenhouse gas (GHG) emissions, following data related to both completed and contracted projects in the programming period 2014–2020. The empirical results reveal the minor, but positive, impact of ESIF on environmental degradation. Green funds under ESIF lead to a reduction of 1.14 million tonnes in the GHG emissions. Larger effects are expected due to the contribution of projects still under development, estimated to reduce GHG emissions by 4.48 million tonnes. Based on the results, the main policy implications were evidenced, given the important role that the state has to play in resource allocation and ensuring the efficiency of funds dedicated to green transition.     

Corporate carbon assurance and the quality of carbon disclosure

Based on an international sample, this study examines the association between corporate carbon assurance and carbon disclosure. We find that companies that adopt carbon assurance tend to have better carbon disclosure quality than their unassured peers. Cross-sectional analyses demonstrate that the positive relationship is stronger in stakeholder-oriented countries. We also document that carbon assurance plays a substitutive role for country-level carbon regulation and social trust. Further analyses suggest that carbon assurance has differential impacts on specific types of carbon disclosure and the quality of carbon disclosure increases with the percentage of reported emissions assured and the level of carbon assurance.     

The impact of SFAS No. 141 on earnings predictability of merging firms: Evidence from the initial year of implementation

This study examines the impact of SFAS 141 on earnings predictability of merging firms. I expect a relative improvement in analysts’ earnings forecast accuracy for merging firms versus non-merging peers after SFAS 141 adoption. I restrict the post-SFAS 141 sample to the initial year of SFAS 141 implementation. This research design disentangles effects of SFAS No. 141 from those of SFAS No. 142. The evidence from analysis of 48 pairs of merging and matched non-merging firms is consistent with expectations and confirms the increase in earnings predictability for merging firms versus their non-merging peers post-SFAS 141. Results of additional tests suggest that earnings predictability improvement more likely follows from extended disclosure requirements and the other changes in the Purchase Method (“better purchase” issue) than from the elimination of Poolings-of-Interest (“purchase vs. pooling” issue).     

Governance and Climate Change: A Success Story in Mobilizing Investor Support for Corporate Responses to Climate Change

Until fairly recently, the main approach to getting business to respond to climate change has been top‐down efforts to regulate emissions and enact various forms of “carbon pricing.” The aim of such efforts has been to make businesses “internalize” the costs associated with greenhouse gas (GHG) emissions. Governments are expected to set the environmental protection rules for companies in their respective countries, and markets are expected to adjust to the new regulations and carbon prices. But this classical approach to economic policy does not work when applied to a global “public goods” challenge like trying to limit the extent and effects of climate change. Instead of a top‐down approach, in which economic actors are forced to respond to regulations imposed on them, the Paris climate agreement of 2015 was reached using a bottom‐up approach centered on the concept of Intended Nationally Determined Contributions (INDCs)—along with a process that ended up encouraging the participation of all economic actors, not just governments. The authors provide an account of how the Paris agreement was reached, and why the “Portfolio Decarbonization Coalition” under the auspices of the United Nations is the most important of several private‐sector initiatives that are changing the way corporations operate. Thanks in large part to the PDC, investors can now undertake meaningful corporate governance action on climate change. With GHG emissions from a particular companies’ operations now much easier to measure, objective performance metrics on GHG emissions can now be set by boards and verified by shareholders. And current decarbonized indexes can be used as performance benchmarks for asset managers’ compensation, which can be tied to return outperformance relative to a “decarbonized” index.     

The consequences of deviating from financial reporting industry norms: Evidence from the disclosure of foreign cash

This study examines how investors respond to firms’ disclosure practices that deviate from the majority of industry peers (i.e., industry norms). The SEC has made repeated calls for the disclosure of foreign cash in order for investors to have more information in determining firms’ liquidity positions. We examine the association between firm value and the non-disclosure of foreign cash in industries where the majority of firms choose to disclose foreign cash. We define partial disclosure as disclosing permanently reinvested earnings (PRE), but withholding the disclosure of foreign cash, and find that when the majority of industry peers disclose foreign cash, investors discount the firm-specific partial disclosure of foreign operations. This finding suggests that investors have similar information demands as the SEC, and that withholding foreign cash results in a valuation discount. We also find that this discount is more pronounced for firms predicted to have higher levels of foreign cash and higher levels of PRE. The discount in firm value is also concentrated among firms with managers who have more career concerns, suggesting that managers shift the cost of partial disclosure to shareholders instead of bearing the personal reputational cost of full disclosure. Our results are robust to multiple matched samples and entropy balancing. While previous literature has considered the valuation implications of foreign cash disclosures, we reveal the consequences of opting to withhold the disclosure of foreign cash. Our findings should be of interest to both managers and policy-setters in forming their disclosure protocols.     

Unintended consequences of compensation peer groups on corporate innovation

When companies select and use compensation peers to determine chief executive officer (CEO) compensation, they create unintended peer effects on corporate innovation due to the similarities between these companies and their compensation peers in terms of product markets, CEO characteristics, and compensation schemes. After controlling for industry and geography peer groups, the findings confirm that the average innovation activity of compensation peers is a significant and distinct predictor of corporate innovation. Further analysis showed that (1) the peer effect is stronger in firms and compensation peers that pay their CEOs using long-term compensation, in firms with stronger labor market competition and board monitoring, and in peer companies that experience higher innovation competition and are closer to the median peer company in the peer group; (2) the obtained results are likely not attributable to the knowledge spillover mechanism and are more consistent with the peer pressure mechanism; and (3) the Securities and Exchange Commission's 2006 executive compensation disclosure rules may have generated peer effects.     

Discretionary disclosure and the market reaction to restatements

This paper presents evidence that management’s disclosure choices related to a restatement are associated with the market reaction at the time the restatement is announced. The two aspects of pre-restatement disclosure choice we examine are the amount of disclosure, hypothesized to reduce information asymmetries, and the tone of disclosure, hypothesized to exacerbate the effect of subsequently-disconfirmed market expectations. Our results provide support for both hypothesized effects, controlling for characteristics that previous research has shown to affect market reaction to restatements—financial attributes of restatements, and concurrent disclosure choices such as prominence of the announcement. We also find that concurrent and prior disclosure characteristics have equivalent and complementary power in explaining market reaction to restatements, while interactive effects indicate that pre-restatement disclosure choices reduce the marginal market impact of concurrent disclosure characteristics.     

Information Complementarities and the Dynamics of Transparency Shock Spillovers

We show that information complementarities play an important role in the spillover of transparency shocks. We exploit the revelation of financial misconduct by S&P 500 firms, and in a “Stacked Difference-in-Differences” design, find that the implied cost of capital increases for “close” industry peers of the fraudulent firms relative to “distant” industry peers. The spillover effect is particularly strong when the close peers and the fraudulent firm share common analyst coverage and common institutional ownership, which have been shown to be powerful proxies for fundamental linkages and information complementarities. We provide evidence that increase in the cost of capital of peer firms is due, at least in part, to “beta shocks.” Disclosure by close peers—especially those with co-coverage and co-ownership links—also increases following fraud revelation. Although disclosure remains high in the following years, the cost of equity starts to decrease.     

The effects of board characteristics and sustainable compensation policy on carbon performance of UK firms

This study examines the effects of board characteristics and sustainable compensation policy on carbon reduction initiatives and greenhouse gas (GHG) emissions of a firm. We use firm fixed effect model to analyse data from 256 non-financial UK firms covering a period of 13 years (2002–2014). Our estimation results suggest that board independence and board gender diversity have positive associations with carbon reduction initiatives. In addition, environment-social-governance based compensation policy is found to be positively associated with carbon reduction initiatives. However, we do not find any relationship between corporate governance variables and GHG emissions of a firm. Overall, our evidence suggests that corporate boards and executive management tend to focus on a firm's process-oriented carbon performance, without improving actual carbon performance in the form of reduced GHG emissions. The findings have important implications for practitioners and policymakers with respect to the effectiveness of internal corporate governance mechanisms in addressing climate change risks, and possible linkage between corporate governance reform and carbon related policies.     

Contracting in Peer Networks

We consider multiagent multifirm contracting when agents benchmark their wages to those of their peers, using weights that vary within and across firms. When a single principal commits to a public contract, optimal contracts hedge relative wage risk without sacrificing efficiency. But compensation benchmarking undoes performance benchmarking, causing wages to load positively on peer output, and asymmetries in peer effects can be exploited to enhance profits. With multiple principals, a “rat race” emerges: agents are more productive, with effort that can exceed the first best, but higher wages reduce profits and undermine efficiency. Wage transparency and disclosure requirements exacerbate these effects.