Managers’ Green Investment and Related Disclosure Decisions

Abstract:     
We use experimental markets to examine whether preferences for societal benefits lead managers to invest in unprofitable green projects, what information they disclose regarding such investments, and how investors react to those disclosures. We find that managers who are also shareholders in their company make green investments even when they know this reduces shareholder value, thereby decreasing their own and other current shareholders’ payoffs. Moreover, managers voluntarily disclose to potential investors that they have made such unprofitable green investments and tend to focus their disclosures on the societal benefits of their green investment rather than on the cost to the company. Finally, the cost of making a green investment that is borne by the managers and the other current investors is lower when the managers disclose their green investment because potential investors’ standardized bids for the company are higher when managers disclose their green investments than when they do not. Moreover, this result is stronger when managers’ disclosures focus on the societal benefits of their investment rather than on the cost to the company. Overall, these results are consistent with both managers and potential investors trading off personal wealth for societal benefits and help explain why, given the current voluntary reporting environment, company managers often focus their disclosures of green investments on the benefits to society and to the company rather than on the cost to the company. In addition to these specific findings, our study demonstrates the benefits of using experiments to study important corporate social responsibility issues that are difficult to address using archival data.

Number of Pages in PDF File: 48

Keywords: Corporate Social Responsibility, CSR, socially responsible investing, green investing, CSR reporting, CSR disclosure, environmental disclosure, experimental markets, unprofitable CSR, CSR expeditures, overinvestment in CSR, social responsibility

JEL Classification: M14, M40, M41, M49

working papers series