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
Date Written: June 8, 2017
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: Suggested Citation