Market Reaction to Mandatory Nonfinancial Disclosure

Jody  Grewal; Edward J. Riedl; George  Serafeim

Article | Management Science | July 2019

Market Reaction to Mandatory Nonfinancial Disclosure

by Jody Grewal, Edward J. Riedl and George Serafeim

Abstract

We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an on average negative market reaction, (ii) a less negative market reaction for firms having higher pre-directive nonfinancial performance, and (iii) a less negative reaction for firms having higher pre-directive nonfinancial disclosure levels. Results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Overall, the results are consistent with the equity market perceiving that this disclosure regulation of nonfinancial information would lead to net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure.

Keywords: nonfinancial information; nonfinancial performance; ESG; ESG (environmental, social, governance) performance; investor behavior; disclosure; disclosure regulation; regulation; sustainability; Corporate performance; Information; Corporate Disclosure; Governing Rules, Regulations, and Reforms; Performance; Environmental Sustainability; Corporate Governance; Outcome or Result;

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Citation:

Grewal, Jody, Edward J. Riedl, and George Serafeim. "Market Reaction to Mandatory Nonfinancial Disclosure." Management Science 65, no. 7 (July 2019): 3061–3084.

Case | HBS Case Collection | January 2020 (Revised July 2020)

BlackRock: Linking Purpose to Profit

Rohit Deshpandé, Aiyesha Dey and George Serafeim

The case revolves around the actions that Barbara Novick, co-founder and Vice-Chair of Blackrock, and Michelle Edkins, Global Head of Investment Stewardship, would need to take in response to the controversial CEO letters from Laurence (Larry) Fink, Chairman and CEO of BlackRock. Fink’s letters focused on the importance of corporate purpose and investing considering environmental, social, and governance (ESG) issues. The case also discusses Blackrock’s plans for a new model of shareholder engagement to help drive the changes proposed in the letters. The case presents the opportunity to discuss the governance role played by major institutional investors as well as how the responsibilities and actions of one large investor, BlackRock, should evolve in this role going forward. It is not clear whether BlackRock should play such a role and, if so, whether they have the ability to enforce corporate compliance and to carry out this role given they are primarily an index investor. The case is likely to generate spirited debate about the merits of BlackRock’s pronouncements and the importance of corporate investments in ESG themes and allow for discussions on measurement and disclosure strategies that can judge progress on these dimensions.

Keywords: boards of directors; Institutional investors; disclosure; transparency; corporate purpose; Corporate profits; ESG; ESG disclosure metrics; corporate sustainability; engagement strategy of institutions; stewardship role of institutions; Corporate Governance; Governing and Advisory Boards; Institutional Investing; Accounting; Corporate Disclosure; Mission and Purpose; Profit; Environmental Sustainability; Climate Change; Diversity; Corporate Accountability;

Citation:

Deshpandé, Rohit, Aiyesha Dey, and George Serafeim. "BlackRock: Linking Purpose to Profit." Harvard Business School Case 120-042, January 2020. (Revised July 2020.) View Details

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Using data from a top-five global executive placement firm, the authors explore how an organization's financial misconduct may affect pay for former employees not implicated in wrongdoing. Drawing on stigma theory, they hypothesize that although such alumni did not participate in the financial misconduct and they had left the organization years before the misconduct, these alumni experience a compensation penalty. The stigma effect increases in relation to the job function proximity to the misconduct, recency of the misconduct, and an employee's seniority. Collectively, results suggest that the stigma of financial misconduct could reach alumni employees and need not be confined to executives and directors that oversaw the organization during the misconduct.

The coronavirus disease 2019 (COVID-19) pandemic has demonstrated that response demands involvement from every sector of society. As a major example, some businesses have stepped up in ways previously unimaginable. Garment companies have repurposed production to face masks and other protective equipment. Alcohol distilleries and perfumeries have shifted production to hand sanitizers. Automobile companies, both voluntarily and as compelled by the Defense Production Act, have worked with the ventilator industry to increase production. More broadly, an early analysis estimates that 64% of the US’s 100 largest publicly traded companies have made customer accommodations to COVID-19, including deferred bill payments; 43% have expanded paid sick leave, including, in some cases, for part-time and hourly employees. Such positive changes, however, are in contrast to a host of other public concerns, including that future vaccines and therapeutics may not be affordable for much of the world. In the next phase of the crisis, the safe reopening of society will require intense interactions between the health and business sectors to address these and other issues.

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Market Reaction to Mandatory Nonfinancial Disclosure

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