Publications
"A Rising Tide Lifts All Boats: The Effects of Common Ownership on Corporate Social Responsibility" (with Mark Desjardine and Kala Viswanathan). Organization Science, forthcoming.
Common owners hold shares in multiple firms across an industry. Thus, an action (or inaction) by one firm that affects industry peers is felt more severely by common owners than by non-common owners. Drawing on research showing that one firm’s corporate social responsibility (CSR) can produce positive spillovers for peer firms and that its irresponsibility can harm its peers, we argue that common owners increase firms’ CSR to produce spillovers that reduce systematic risk and multiply investment returns. Consistent with our theory, we find common ownership is positively associated with CSR. Unpacking that relationship, we find that increases in CSR are driven by common owners with long-term orientations. We use a natural experiment with a quasi-exogenous shock to rule out alternative explanations. Our study provides a new perspective on how common owners shape corporate strategic behavior.
Common owners hold shares in multiple firms across an industry. Thus, an action (or inaction) by one firm that affects industry peers is felt more severely by common owners than by non-common owners. Drawing on research showing that one firm’s corporate social responsibility (CSR) can produce positive spillovers for peer firms and that its irresponsibility can harm its peers, we argue that common owners increase firms’ CSR to produce spillovers that reduce systematic risk and multiply investment returns. Consistent with our theory, we find common ownership is positively associated with CSR. Unpacking that relationship, we find that increases in CSR are driven by common owners with long-term orientations. We use a natural experiment with a quasi-exogenous shock to rule out alternative explanations. Our study provides a new perspective on how common owners shape corporate strategic behavior.
"Material Sustainability Information and Stock Price Informativeness" (with Clarissa Hauptmann and George Serafeim). Journal of Business Ethics 171(3), 2021.
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 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. 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.
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 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. 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.
"Market Reaction to Mandatory Nonfinancial Reporting" (with Eddie Riedl and George Serafeim). Management Science 65(7), 2019.
We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance, and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an average negative market reaction of –0.79% across all firms, (ii) a less negative market reaction for firms having higher predirective nonfinancial performance, and (iii) a less negative reaction for firms having higher predirective nonfinancial disclosure levels. In addition, results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Finally, we find that the negative market reaction is concentrated in firms with weak preregulation ESG performance and disclosure, which exhibit an average return of –1.54%; in contrast, firms with strong preregulation disclosure and performance exhibit an average positive return of 0.52%. Overall, the results are consistent with the equity market perceiving net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure around key events surrounding the mandatory disclosure regulation of nonfinancial information.
We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance, and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an average negative market reaction of –0.79% across all firms, (ii) a less negative market reaction for firms having higher predirective nonfinancial performance, and (iii) a less negative reaction for firms having higher predirective nonfinancial disclosure levels. In addition, results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Finally, we find that the negative market reaction is concentrated in firms with weak preregulation ESG performance and disclosure, which exhibit an average return of –1.54%; in contrast, firms with strong preregulation disclosure and performance exhibit an average positive return of 0.52%. Overall, the results are consistent with the equity market perceiving net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure around key events surrounding the mandatory disclosure regulation of nonfinancial information.
"The Equity Value Relevance of Carbon Emissions" (with Peter Clarkson and Gord Richardson). The Handbook of Business and Climate Change, Edward Elgar Publishing, 2022.
This chapter presents a selected review of studies that speak to the two related questions of whether capital markets view a firm’s carbon emissions as value relevant and if so, the importance of mandated carbon disclosure in facilitating investors’ assessment. The empirical literature consistently documents an inverse relation between the volume of carbon emissions and firm value, suggesting that markets assess a latent carbon liability commensurate with the firm’s carbon emissions. Importantly, the more recent literature confirms significant benefits to mandated carbon emissions disclosures, largely related to the enhanced ability to benchmark a firm’s carbon performance relative to its industry or sector peers. These studies reveal that the assessed latent carbon liability is related to a firm’s relative carbon intensity rank and that both internal discovery and external pressure effects resulting from enhanced benchmarking, lead to reductions in carbon emissions.
This chapter presents a selected review of studies that speak to the two related questions of whether capital markets view a firm’s carbon emissions as value relevant and if so, the importance of mandated carbon disclosure in facilitating investors’ assessment. The empirical literature consistently documents an inverse relation between the volume of carbon emissions and firm value, suggesting that markets assess a latent carbon liability commensurate with the firm’s carbon emissions. Importantly, the more recent literature confirms significant benefits to mandated carbon emissions disclosures, largely related to the enhanced ability to benchmark a firm’s carbon performance relative to its industry or sector peers. These studies reveal that the assessed latent carbon liability is related to a firm’s relative carbon intensity rank and that both internal discovery and external pressure effects resulting from enhanced benchmarking, lead to reductions in carbon emissions.
"Research on Corporate Sustainability: Review and Directions for Future Research" (with George Serafeim). Foundations and Trends in Accounting 14(2): 73-127, 2021.
We review the literature on corporate sustainability and provide directions for future research. Our review focuses on three actions: measuring, managing and communicating corporate sustainability performance. Measurement is the least developed of the three and represents promising opportunities for research. Compelling evidence now exists on the role of management control systems, investor pressure and mandated disclosure in improving corporate sustainability outcomes. Research has moved beyond weighing the importance of all sustainability issues equally, with recent studies drawing distinctions between the financial materiality of different sustainability issues. Collectively, this new line of inquiry suggests that improving performance on material sustainability metrics is related to improved financial performance, helping to resolve four decades of inconclusive evidence on the relation between sustainability and financial outcomes. Finally, we review research on how disclosure mediums, accounting standards, information monitors and intermediaries shape the communication of sustainability performance. We conclude with a call for research on how to measure performance in the 21st century when corporate purpose extends beyond shareholder value maximization.
We review the literature on corporate sustainability and provide directions for future research. Our review focuses on three actions: measuring, managing and communicating corporate sustainability performance. Measurement is the least developed of the three and represents promising opportunities for research. Compelling evidence now exists on the role of management control systems, investor pressure and mandated disclosure in improving corporate sustainability outcomes. Research has moved beyond weighing the importance of all sustainability issues equally, with recent studies drawing distinctions between the financial materiality of different sustainability issues. Collectively, this new line of inquiry suggests that improving performance on material sustainability metrics is related to improved financial performance, helping to resolve four decades of inconclusive evidence on the relation between sustainability and financial outcomes. Finally, we review research on how disclosure mediums, accounting standards, information monitors and intermediaries shape the communication of sustainability performance. We conclude with a call for research on how to measure performance in the 21st century when corporate purpose extends beyond shareholder value maximization.
Works-In-Progress
"Effects of Mandatory Carbon Reporting on Greenwashing" (with Gord Richardson and Jingjing Wang).
We study whether mandatory carbon reporting reduces the disclosure of favorable versus unfavorable environmental information (greenwashing). Our setting is a regulation mandating firms to report carbon emissions, or mandatory carbon reporting (MCR). Measuring greenwashing as the difference between how much a firm discloses and how much of the disclosure is indicative of the firm’s overall environmental damage, we find that MCR leads to a decline in greenwashing, consistent with MCR requiring firms to disclose environmentally impactful carbon information that they did not report when disclosure was voluntary. We also find MCR curtails firms’ greenwashing of other, non-carbon environmental information disclosed voluntarily before and after MCR. Further analyses reveal worse carbon performers had higher levels of greenwashing prior to MCR, and their revealed poor carbon performance impels them to decrease greenwashing more after MCR. Firms experiencing a reduction in greenwashing around MCR also reduce their carbon emissions.
We study whether mandatory carbon reporting reduces the disclosure of favorable versus unfavorable environmental information (greenwashing). Our setting is a regulation mandating firms to report carbon emissions, or mandatory carbon reporting (MCR). Measuring greenwashing as the difference between how much a firm discloses and how much of the disclosure is indicative of the firm’s overall environmental damage, we find that MCR leads to a decline in greenwashing, consistent with MCR requiring firms to disclose environmentally impactful carbon information that they did not report when disclosure was voluntary. We also find MCR curtails firms’ greenwashing of other, non-carbon environmental information disclosed voluntarily before and after MCR. Further analyses reveal worse carbon performers had higher levels of greenwashing prior to MCR, and their revealed poor carbon performance impels them to decrease greenwashing more after MCR. Firms experiencing a reduction in greenwashing around MCR also reduce their carbon emissions.
"Mandated Disclosure of Customer-Supplier Payment Practices" (with Aditya Mohan and Gerardo Perez-Cavazos).
We exploit the introduction of Payment Practices Disclosure Regulation in the United Kingdom (UK) to examine the effects of mandating disclosure of customer-supplier payment practices. We find that non-disclosing small and medium-sized enterprises (SMEs) reduce their accounts receivable by 8.3%. Using the newly-disclosed information required by the mandate, we show that large firms accelerate their payments to SMEs and increase the fraction of invoices paid within agreed-upon terms. We survey managers from large firms and SMEs and find support for two external and two internal mechanisms. Externally, the required disclosures raise large firms’ reputational concerns and shift the bargaining power between large firms and SMEs. Internally, the required disclosures result in internal learning and increased accountability. In terms of broader implications, SMEs exhibit fewer financial constraints after the regulation, consistent with the regulators’ intent.
We exploit the introduction of Payment Practices Disclosure Regulation in the United Kingdom (UK) to examine the effects of mandating disclosure of customer-supplier payment practices. We find that non-disclosing small and medium-sized enterprises (SMEs) reduce their accounts receivable by 8.3%. Using the newly-disclosed information required by the mandate, we show that large firms accelerate their payments to SMEs and increase the fraction of invoices paid within agreed-upon terms. We survey managers from large firms and SMEs and find support for two external and two internal mechanisms. Externally, the required disclosures raise large firms’ reputational concerns and shift the bargaining power between large firms and SMEs. Internally, the required disclosures result in internal learning and increased accountability. In terms of broader implications, SMEs exhibit fewer financial constraints after the regulation, consistent with the regulators’ intent.
"How Voluntary Disclosers Respond to Mandatory Reporting: Evidence from Greenhouse Gas Emissions".
Data
I study whether mandated reporting generates real effects for firms that already voluntarily disclose the mandated information. My setting is a regulation requiring firms to disclose greenhouse gas emissions (GHG). I find that firms voluntarily disclosing GHG prior to the regulation reduce GHG levels and intensity following mandated reporting. The change in a voluntary discloser’s GHG ranking after mandated reporting predicts its subsequent GHG reductions. In addition, the GHG ranking of a voluntary discloser’s industry predicts the firm’s GHG reductions. These effects are stronger for firms that perceive higher reputational and regulatory risks from climate change. The results suggest that mandated reporting provides voluntary disclosers with information about first-time disclosers that allows them to (1) set competitive benchmarks and (2) preempt and/or prepare for future regulation. While prior research focuses on first-time disclosers, my study shows that among voluntary disclosers, mandated reporting can improve corporate social responsibility outcomes.
Data
I study whether mandated reporting generates real effects for firms that already voluntarily disclose the mandated information. My setting is a regulation requiring firms to disclose greenhouse gas emissions (GHG). I find that firms voluntarily disclosing GHG prior to the regulation reduce GHG levels and intensity following mandated reporting. The change in a voluntary discloser’s GHG ranking after mandated reporting predicts its subsequent GHG reductions. In addition, the GHG ranking of a voluntary discloser’s industry predicts the firm’s GHG reductions. These effects are stronger for firms that perceive higher reputational and regulatory risks from climate change. The results suggest that mandated reporting provides voluntary disclosers with information about first-time disclosers that allows them to (1) set competitive benchmarks and (2) preempt and/or prepare for future regulation. While prior research focuses on first-time disclosers, my study shows that among voluntary disclosers, mandated reporting can improve corporate social responsibility outcomes.
"Science-Based Carbon Emissions Targets" (with David Freiberg and George Serafeim).
We examine the effect of voluntarily adopting a standard for setting science-based carbon emissions targets on target difficulty and investments to achieve those targets. We find that firms with a track record of setting and achieving ambitious carbon targets are more likely to set science-based targets. Firms are also more likely to set science-based targets if they perceive climate change-related risks and have carbon-intensive operations. Using a difference-in-differences research design that compares the science and non-science targets of a firm, we find that targets become more difficult when firms adopt the science-based standard for the target, consistent with the standard increasing target difficulty and inconsistent with firms relabeling their existing targets. The increase in target difficulty is accompanied by more investment in carbon-reduction projects and higher expected emissions and monetary savings from these projects. Given that the science-based standard is determined externally of the adopting organization, our results suggest that external standards for target setting could have both target and investment effects.
We examine the effect of voluntarily adopting a standard for setting science-based carbon emissions targets on target difficulty and investments to achieve those targets. We find that firms with a track record of setting and achieving ambitious carbon targets are more likely to set science-based targets. Firms are also more likely to set science-based targets if they perceive climate change-related risks and have carbon-intensive operations. Using a difference-in-differences research design that compares the science and non-science targets of a firm, we find that targets become more difficult when firms adopt the science-based standard for the target, consistent with the standard increasing target difficulty and inconsistent with firms relabeling their existing targets. The increase in target difficulty is accompanied by more investment in carbon-reduction projects and higher expected emissions and monetary savings from these projects. Given that the science-based standard is determined externally of the adopting organization, our results suggest that external standards for target setting could have both target and investment effects.