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Dec 07, 2020

IR papers: ESG and retail investors

A roundup of academic research from the world of IR studies

The irrelevance of ESG reporting

SRI – now encompassing more than 25 percent of professionally invested dollars in the US – has sparked enormous demand for ESG disclosure. But virtually none of that demand, it appears, is coming directly from retail investors. A unique analysis of trading data from popular online brokerage Robinhood Markets detects no reaction to issuer-sourced ESG press releases.

‘Every single disclosure we looked at generated some kind of investor portfolio response – except for the ESG disclosures,’ explains study co-author James Naughton, associate professor of accounting at the University of Virginia. He adds that his results suggest individual investors regard ESG press releases as equivalent to the firm ‘not issuing any press release’.

The inferences from these ‘real world’ observations are at odds with prior experimental literature, which found that individual investors valued ESG disclosures. Pointing to social pressure and a lack of financial consequences as influencing laboratory findings, Naughton offers alternative explanations for his own results: ‘Either retail investors don’t care [about ESG data] or they do care but just don’t understand what the company is disclosing.’

Either way, Naughton suggests more uniform and readable texts that better connect the dots from ESG to the bottom line would likely boost their investment relevance. ‘Having read through many, many ESG press releases, my experience is that they sure don’t make things easy for individual investors,’ he concludes.

It’s OK to pay well if you write well

Despite the SEC’s Plain English requirement, executive pay disclosures are generally long, complex and unengaging. How this low readability affects shareholder say-on-pay voting patterns has been unclear. Some evidence points to obfuscation leading to lower levels of dissent. Alternatively, other research suggests diminished readability increases suspicions about the appropriateness of CEO pay. A new study of S&P 1500 firms resolves this question by demonstrating that the effects of readability depend on the perceived degree of pay excess.

‘The processing fluency effect comes in as executive pay levels increase,’ explains study co-author Danial Hemmings, lecturer in finance at Bangor University. ‘It seems investors are looking for justifications. And if they can’t find them in the compensation discussion & analysis (CD&A), they are less trusting and more inclined to vote against – so you really need an easy-to-read compensation story to justify high executive pay.’

By contrast, Hemmings’ data suggests the obfuscation effect of low readability is limited to cases where excess pay is moderate. ‘Still, there are no clear benefits to obfuscation,’ he points out. ‘But there are definitely benefits to be had from approaching the CD&A as a tool for shareholder outreach and engagement.


World o’ disclosure

Disclosure duds

  • Investors ignore audit materiality disclosures. Researchers conclude that’s because no one understands them.
  • Creating a more positive tone in earnings calls – without substance – doesn’t register with investors, either.
  • Investors in the smaller FTSE 350 firms respond negatively to announcements via the CDP. Researchers suggest that management accompanies its carbon disclosures with ‘more explicit statements of reasons for carbon initiatives and the benefits arising from them.’

Inter-culture business communicators take note

  • A cross-cultural comparison shows US CEOs’ letters to shareholders project an impression of confidence and conviction, whereas Chinese CEOs’ letters project modesty and caution.
  • When conveying the concept of ‘transparency’ in IR communication policy texts, Finnish companies focus on the efficient communication of information, while Italian companies highlight their commitment to constant dialogue with stakeholders.
  • Retail investors in China’s Shenzhen Stock Exchange are likely to increase their positions after the release of a firm’s annual report, whereas institutional investors do the opposite.
  • Firms that promptly reported on Covid-19 in early-released annual reports saw lower volatility and better returns than those that did not.

For IRO eyes only

Investors are known to be susceptible to the Big Fish effect when it comes to framing numerical data. Now an experimental study demonstrates a similar phenomenon for CSR data, with ‘bigger’ achievements in ‘smaller’ areas leading to better investor perceptions about CSR performance. Scientists say images boost the effect.


This article originally appeared in the Winter 2020 issue of IR Magazine