Non-financial Information Disclosures and Firm Risk : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

Recently, world leaders and organisations have realised the seriousness of unsustainable production practices, ethical misconduct and governance failures by businesses that have caused severe environmental hazards, employees’ and customers’ rights violations and financial fraud. As a result, there have been increasing calls by regulators and stakeholders, including firms’ shareholders, to improve the quantity and quality of information disclosures vis-à-vis a firm’s business operations, financial transactions, governance structures, work ethics, environmental and social ramifications. Besides, organisational theories such as the agency, stakeholder and legitimacy theories highlight the importance of a transparent information environment in mitigating concerns such as agency conflicts and legitimacy issues. Generally, firms use conventional financial statements and reports that offer limited information about the firm’s activities. However, more recently, firms started to supplement conventional financial statements with non-financial information (NFI) that encompasses information related to their policies and activities for a sustainable environment, societal well-being, work ethics and governance. This additional disclosure provides opportunities to explore the impact of additional such information disclosure on a firm’s information environment, future performance and risk. Recognizing this opportunity and the knowledge gap in the literature, this study uses the S&P 1200 index firms’ environmental, social and governance (ESG) disclosures for 2008-2018 to investigate their contribution to reducing the uncertainty surrounding firms’ future earnings. The results show that ESG disclosures have a significant negative impact on earnings risk, signifying that the additional disclosures relating to ESG issues reduce the uncertainty surrounding firms’ future earnings risk. The disaggregated analysis of ESG disclosure scores shows a more pronounced effect of the social and environmental dimensions on earnings risk. The results are robust to various sub-sample analyses and endogeneity controls. This study also explores how sensitive industry status augments the extent of a firm’s NFI disclosures as well as the association between NFI disclosures and earnings risk. The results show that sensitive industry firms make higher NFI disclosures and, as a result, have a lower earnings risk than non-sensitive industry firms. This study provides novel evidence concerning the causal impact of the European Union’s NFI reporting regulations on the level of ESG disclosures of regulated firms and the changes in NFI disclosures and earnings risk association after the mandating NFI reporting. The results show that the mandatory NFI reporting regime has not only increased the extent of NFI disclosures for European firms, but has also improved the efficiency of NFI disclosures in alleviating the uncertainty surrounding the future earnings of the sample firms. Our findings provide important implications for corporate managers, stakeholders and regulators. Specifically, the findings suggest that corporate managers can alleviate agency conflicts and legitimacy issues by reporting information regarding firms’ policies and efforts to manage ESG issues. Our finding regarding the efficiency of the EU directive to increase the quantity of NFI disclosures further suggests that regulators from other parts of the world should shift towards mandatory NFI reporting. We propose that mandatory NFI regimes would improve the adoption of sustainable business practices that are necessary to achieve long-term targets such as sustainable development and the Paris Agreement’s targets.