Managers’ Green Investment Disclosures and Investors’ Reaction

Abstract

Most large companies voluntarily disclose information about their corporate social responsibility (CSR) activities. We use experimental markets to examine how managers’ disclosures of a particular type of CSR, green investment, affect investors’ bidding behavior. We find that, although in our setting such investments have no impact on future cash flows, investors value knowing that a green investment was made and also respond more favorably to disclosures that focus on the societal benefits of the investment versus on the cost to the company. Managers appear to anticipate investors’ positive reaction, overwhelmingly disclosing when they made a green investment and more often focusing their disclosures on the societal benefits rather than on the cost to the company. Although managers and other current shareholders benefit when managers disclose their green investment, the benefit is always lower than the cost of the investment, and thus both the manager and other current shareholder always bear a cost when the manager makes a green investment. This suggests that many managers in our study make green investments because they value the associated societal benefits. Collectively, our results show that both investors and managers trade off personal wealth for societal benefits associated with CSR activities and help explain why voluntary CSR disclosures often focus on the benefits to society rather than on the cost to the company. Our study also demonstrates how experiments can effectively study important CSR issues that are difficult to address using archival data.

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