Sustainability Disclosure, Dominant Owners and Earnings Informativeness

Abstract

Focusing on an environment where ownership concentration is prevalent and where sustainability disclosure is not a new phenomenon, we show that communication via social responsibility reporting has a positive effect on earnings informativeness. Moreover, this positive effect is greater as the dominant owner’s voting-cash flow wedge increases. We use the Global Reporting Initiative (GRI) guidelines to proxy for sustainability disclosure. Our results are consistent with insiders’ legitimacy threats and/or reputation concerns driving sustainability disclosure. To the extent that market participants interpret this reporting policy as leading to increased long-term value for the firm, sustainability reporting would be expected to positively affect earnings informativeness. Thus, the findings highlight the importance of sustainability reporting in reducing information asymmetries between dominant owners on the one side and minority shareholders and other relevant stakeholders on the other, particularly in those firms where dominant owners show a voting-cash flow wedge.

Keywords: voting-cash flow wedge, earnings informativeness, sustainability disclosure, dominant owners.

JEL Classification: G34, M14, M41