The Value Relevance of Environmental and Social Disclosures - Evidence from the UK Stock Market

Abstract

Motivated by the requirements of the UK Companies Act 2006 and the subsequent Directive 2014/95/EU of the European Parliament and of the Council, we investigate the relationship between environmental and social disclosures (analyst following) and analyst following (environmental and social disclosures). We do so to investigate the value relevance of information about environmental and social performance, in a context where corporate managers have to gauge the level of disclosures necessary to satisfy the requirements of the Act. Our analysis provides support for the requirements of the UK and EU with respect to disclosures concerning environmental and social performance – the evidence is consistent with their value relevance and an associated demand for such disclosures from informed market participants. It further is consistent with the assumption that corporate managers take into account the demand for such value relevant, environmental and social disclosures in gauging the appropriate amount of such disclosures. Stepping outside the policy dimension to our work, we can also argue that our results also suggest positive links between analyst following and the quality of environmental and social disclosure.

JEL Classification: M4