To Disclose or Not to Disclose Climate-Change Risk in Form 10-K: Does Materiality Lie in the Eyes of the Beholder?

60 Pages Posted: 14 Jul 2017 Last revised: 4 Nov 2017

See all articles by Ella Mae Matsumura

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems

Rachna Prakash

University of Mississippi - Patterson School of Accountancy

Sandra C. Vera-Munoz

University of Notre Dame - Department of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: June 8, 2017

Abstract

We examine the relation between managers’ decisions whether to disclose climate-change risk (CCR) in Form 10-K and firm risk. Ambiguity about the materiality of CCR and the SEC’s inconsistent enforcement of CCR disclosures cause uncertainty about whether disclosing CCR is mandatory or voluntary. We hand-collect data over a seven-year period from about 3,000 Form 10-K filings of S&P 500 firms on whether they disclosed CCR. We use SASB’s Materiality Map™ to proxy for report users’ judgments of the materiality of CCR. We find that the cost of equity (COE) of disclosing firms is 21.3 bps lower than the COE of non-disclosing firms. More importantly, we find that for firms where report users judge CCR as material, the COE of disclosers is 49.1 bps lower than that of non-disclosers. In contrast, we find no association between disclosing CCR and COE for firms where report users judge CCR as not material.

Keywords: Regulation S-K; risk assessment; voluntary disclosure; mandatory disclosure; enforcement; Sustainability Accounting Standards Board’s (SASB) Materiality Map™; cost of equity capital; self-selection.

JEL Classification: M14, M41, G18, G32

Suggested Citation

Matsumura, Ella Mae and Prakash, Rachna and Vera-Munoz, Sandra C., To Disclose or Not to Disclose Climate-Change Risk in Form 10-K: Does Materiality Lie in the Eyes of the Beholder? (June 8, 2017). Available at SSRN: https://ssrn.com/abstract=2986290 or http://dx.doi.org/10.2139/ssrn.2986290

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-9731 (Phone)
608-265-6040 (Fax)

Rachna Prakash (Contact Author)

University of Mississippi - Patterson School of Accountancy ( email )

200 Conner Hall
University, MS 38677
United States

Sandra C. Vera-Munoz

University of Notre Dame - Department of Accountancy ( email )

248 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-9041 (Phone)
574-631-5255 (Fax)

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