Transparency versus Performance in Financial Markets: The Role of CSR Communications

TL;DR

This paper examines how firms' strategic emphasis influences their voluntary disclosures, especially ESG information, and finds that positive earnings firms disclose more ESG data, while financial performance measures do not significantly differentiate firms.

Contribution

It provides empirical evidence on the boundary conditions affecting firms' disclosure choices based on strategic emphasis and performance, highlighting the role of ESG disclosures.

Findings

Positive earnings firms disclose more ESG information.

Financial performance measures do not distinguish firms.

Less transparent firms tend to underperform and have more negative news stories.

Abstract

Although companies are exhorted to provide more information to the financial community, it is evident that they choose different paths based upon their strategic emphasis and competitive environments. Our investigation explores the empirical boundary conditions under which firms choose to disclose versus withhold information from investors based upon their strategic emphasis. We found significant differences in terms of voluntary information disclosures between firms that consistently delivered positive earnings surprises versus those that delivered negative earnings surprises. We investigated this effect in a more granular fashion by separately examining differences in environmental, social, and governance disclosures between the two pools of firms. We found that in essence, the differences remained consistent and positive earnings firms were significantly more likely to disclose information about their ESG activities than their counterparts. Interestingly, none of the measures of financial performance were instrumental in distinguishing between the two pools of firms. However, our measures of reach -- as measured by the number of -- negative news stories lends credence to our findings. From a fund manager-s perspective, this finding should raise an immediate red flag firms that are likely to underperform are likely to be less transparent than overperformers.