Andrew Belnap is Assistant Professor of Accounting at the University of Texas at Austin McCombs School of Business. This post is based on his recent paper, forthcoming in the Journal of Accounting & Economics.
A fundamental factor in a firm’s disclosure choice is the extent to which market participants can process the information the firm discloses. Because market participants have limited attention and resources, they often rely on intermediaries to reduce processing costs by collecting, analyzing, and distributing firms’ disclosures and other information. By easing these frictions, intermediaries play a key role in capital markets and can significantly affect the cost-benefit equilibrium that firms face when making optimal disclosure decisions.
However, the ways in which intermediaries affect disclosure are relatively unexplored, in part due to several empirical challenges. First, intermediary coverage often occurs simultaneously with firm disclosure and other intermediaries’ coverage, making it difficult to isolate the effects of any one intermediary. Second, firm and disclosure characteristics typically drive intermediary coverage, introducing selection problems. Third, intermediaries often discuss multiple topics, making it difficult to isolate coverage of a particular disclosure.
In this paper, I examine the effect of coverage from two key intermediaries—non-governmental organizations (NGOs) and the media—on firms’ disclosure decisions. Specifically, I study whether coverage of a deficient disclosure can affect the targeted disclosure, how the disclosure changes, and why coverage affects the disclosure. To do this, I conduct a field experiment that, by randomizing intermediary coverage, can address the empirical challenges of this literature. In addition, I supplement the field experiment with a survey of tax executives, cross-sectional tests, and spillover tests that shed light on the roles played by stakeholders for which processing costs are reduced.
The Proposed SEC Climate Disclosure Rule: A Comment from Shivaram Rajgopal
More from: Shivaram Rajgopal
Shivaram Rajgopal is the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School. This post is based on his comment letter submitted to the U.S. Securities and Exchange Commission regarding the Proposed SEC Climate Disclosure Rule.
Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.
This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by Professor Rajgopal. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.
I write in support of your proposed climate risk disclosures. To frame my comments, it is useful to summarize what the climate risk disclosure rule would require registrants to disclose:
My support is based on my assessment of the costs and benefits of the proposal. Let us start with the costs.
1. Compliance costs are not a significant portion of market capitalization
On page 390 of the proposal, the SEC estimates costs in the first year of compliance to be around $640,000 and annual costs in subsequent years to be $530,000 for larger companies. On page 399, the SEC estimates assurance costs for large companies to be around $75,000 to $145,000. A well-done academic paper by Alexander et al. (2013) estimated the average annual costs of complying with section 404(b) for accelerated filers at $1.2 million.
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