The Effects of Negative Incidents in Sustainability Reporting on Investors’ Judgments–an Experimental Study of Third‐party Versus Self‐disclosure in the Realm of Sustainable Development

This study examines how the disclosure of negative sustainability‐related incidents affects the investment‐related judgments of decision‐makers. Participants in a sequential 2 × 2 between‐subjects experiment first received a company's financial information before viewing additional sustainability information (by the company and by a non‐governmental organization (NGO); with and without negative disclosure). Results indicate that self‐reporting of negative incidents does not affect decision‐makers’ stock price estimates and investment decisions compared with judgments based on financial information only. However, third‐party disclosure of these incidents by a NGO has a negative affect on these investment‐related judgments. Furthermore, the magnitude of the NGO reporting effect depends on whether the company itself simultaneously reports these incidents. Thus, disclosing negative incidents in sustainability reporting could lose some of its apparent stigma. Instead of avoiding negative reporting altogether, managers might use it as a risk mitigation tool in their reporting strategy. The results also emphasize the power of the often‐mentioned ‘watchdog’ function of NGOs acting as stakeholder advocates. Copyright © 2013 John Wiley & Sons, Ltd and ERP Environment