The objective of this research is to examine capital market determinants and implications associated with voluntary sustainability disclosures and the extent to which the informativeness of disclosure innovations differs based on given attributes of the financial disclosure and overall information environment.
In determining the quantity of financial information to disclose, managers face a tradeoff between the benefits of reducing information asymmetry among capital market participants and the costs of aiding potential rivals through revelation of proprietary information. Chapter I examines the firm-level disclosure response as competition among potential rivals differs. I operationalize this construct through use of principal component analysis to capture the competition from potential entrants variable.
In Chapter II, I examine the relation between disclosure of nonfinancial information and information asymmetry. I first employ the issuance of a stand-alone sustainability report as a proxy for disclosure of nonfinancial information. I find that the issuance of nonfinancial information is associated with reduced information asymmetry in the market. The relation is stronger for firms with internal control weaknesses and financial statement complexity, indicating a complementary relation between nonfinancial and financial disclosure in the reduction of information asymmetries in these contexts. In the context of increased organizational complexity, the signal appears to be less informative. In Chapter II, I empirically treat the nonfinancial disclosures as homogeneous in nature by assigning a binary variable to disclosing and non-disclosing firms. In reality, substantial variation between ESG disclosures exists.
Thus, in Chapter III, I relax the homogeneity assumption and address the evident variation in ESG disclosure content through illustrating that alterations in the overall nonfinancial disclosure content prompt a reduction in information asymmetry. I provide some evidence suggesting that, on average, changes to the overall content of ESG disclosures increase incremental informativeness in a capital market context. By doing so, I build on the empirical conclusions from Chapter II by empirically illustrating that the content of nonfinancial disclosures is informative in a capital market context. I illustrate that, while information disclosure innovations are disseminated through both financial and nonfinancial disclosure channels, nonfinancial disclosure innovations are incrementally informative in their reduction of information asymmetry. The analyses conducted in Chapter III seek to demonstrate that investors heed changes to the textual content of the nonfinancial information in addition to changes in the textual content of financial information.
The analysis advances the literature by empirically demonstrating the extent to which the content of voluntary nonfinancial disclosures enhances the information environment relative to financial disclosure information. I also conduct the analysis in the context of alternative information environments, namely in the presence of organizational complexity, internal control weaknesses, and financial statement complexity (i.e. diminished readability). I hypothesize that nonfinancial disclosure innovations are more informative in the presence of more organizational complexity, more internal control weaknesses, and less readable financial disclosures.
Taken together, the results are consistent with the argument that capital markets utilize voluntary nonfinancial disclosure information in tandem with financial information. The findings contribute to the understanding of sustainability disclosures and the overarching role of such disclosures.