Do Analysts’ Forecasts and the Cost of Capital Reflect Deviations in a Firm’s Sustainability Disclosures from its Sustainability Activities?
64 Pages Posted: 8 Nov 2017 Last revised: 18 Dec 2018
Date Written: December 17, 2018
Firms disclose information about sustainability to influence stakeholders. Firms that proactively implement sustainability require financial capital, along with other resources, to achieve their sustainability goals. Transparency about a firm’s sustainability is low, however, thus some firms deceptively disclose information that deviates from actual sustainability activities. This deviation may occur because even appearing proactive is often sufficient to reap the presumptive rewards. In contrast, those firms that merely react to norms and regulations disclose little about sustainability. Together, we expect information asymmetry to be less for proactive than for deceptive or reactive firms. Using a US and non-US sample, our first step is to classify firms as proactive or deceptive using cluster analysis (an outcome approach) and self-selection analysis (an input approach). Our second-stage results support our expectations that the market discerns between firm types; and, are insensitive to alternative specifications, such as that in Lys, Naughton, and Wang (JAE 2015).
Keywords: Sustainability; Voluntary Disclosure; Analysts’ Forecast Errors; Analysts’ Forecast Dispersion; Cost of Capital; PEG
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