AAA Spark Meeting of Regions

The Impact of Water Risk Disclosures on Firm-Value: Toward Increased Corporate Voluntary Disclosure

• In Event: Accounting and the Public Interest

Abstract

Water information is asserted to be a basic human right (Hazelton, 2013). In an effort to decrease information asymmetry, corporations must disclose water risks to investors and other stakeholders. This study predicts that water risks have a negative impact on firm value. This suggests that higher disclosures of firm-induced water stress reduces firm-value given that stakeholders expect firms to care about more than profit maximization. Consistent with the signaling theory in evaluating managers’ decisions to disclose, my study predicts that firms that voluntarily disclose water risk have higher total firm-value compared to firms that do not disclose water risk. This suggests that firms that chose to disclose are signaling that they are better firms in that they have sufficient resources to accommodate the cost imposed by the signal. Overall, my study has implications to provide increased incentives for U.S. corporations to voluntarily disclose such information to investors and other stakeholders.
To test my predictions, data will be collected from the annual CDP survey results for U.S.-based S&P 500 firms who answered the water security questions for the years 2017, 2018, and 2019. Water Risk is measured using two proxies. First, the “grade” given to each firm by the CDP for their water security behavior is converted to a numerical scale. Second, Water Risk is measured using the Corporate Water Disclosure Index developed in 2020 by Zeng et al. (see Appendix B). In keeping with prior research, firm-value is measured using both the market value of common equity and Tobin’s Q (Aboud & Diab, 2018; Bhandari & Javakhadze, 2017; Matsumura et al., 2014). I will obtain other necessary information from the Center for Research and Security Prices (CRSP), Compustat, and MSCI KLD 400 Social Index rating databases.
Ordinary Least Squares (OLS) regression modeling will be used to test the hypotheses. For Hypothesis 1, differences in firm-value for corporations who disclosed water risk to the CDP will be analyzed and compared to the “grades” assigned them by CDP. For Hypothesis 2, total firm-value for corporations who chose to disclose water risk to the CDP will be compared to the total firm-value for corporations who did not disclose water risk to the CDP.

Author

• Melissa A. Nelson, University of Wisconsin at Whitewater