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Shaping Corporate Actions Through Targeted Transparency Regulation: A Framework and Review of Extant Evidence

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Abstract

This paper discusses targeted transparency regulation by securities regulators: corporate disclosure regulation aimed at nudging firms towards changing their business activities in socially desirable ways. Using Corporate Social Responsibility disclosures and other prominent examples, we first document disclosure regulators’ public policy objectives. Based on a framework that develops the causal chain linking a disclosure mandate to the desired corporate action, we review empirical evidence on the effectiveness of targeted transparency implemented via securities regulation. The paper concludes with a discussion of opportunities and challenges for future research in this area.

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Notes

  1. For a range of examples of targeted transparency regulations, refer to Fung et al. (2007, p. 52).

  2. We acknowledge that corporate disclosure regulation can be implemented through different channels, which we discuss in Sect. 2.1. We thank an anonymous reviewer for this point.

  3. The title of a speech by Hans Hoogervorst, Chairman of the International Financial Reporting Standards Board (IASB), at the IOSCO conference in Rio de Janeiro, 2 October 2014.

  4. In addition, arguably going back as far as the 17th century French Code Savary (e. g., Howard 1932), another objective of corporate financial reporting regulation is to improve the management of firms and hold managers, who act as stewards of firms’ assets, accountable towards their capital providers.

  5. We follow Leuz and Wysocki (2016, p. 530) in defining ‘real effects’ as “situations in which the disclosing person or reporting entity changes its behavior in the real economy (e. g., investment, use of resources, consumption) as a result of the disclosure mandate”.

  6. Specifically, Art. 1 of Regulation 1606/2002 states: “This Regulation has as its objective the adoption and use of international accounting standards in the Community with a view to harmonising the financial information presented by the companies … in order to ensure a high degree of transparency and comparability of financial statements and hence an efficient functioning of the Community capital market and of the Internal Market.” Brüggemann et al. (2013) documents that these objectives are consistent with the objectives stated by securities regulators implementing IFRS in other jurisdictions.

  7. The effectiveness of corporate disclosure regulation aiming at price efficiency is questionable. For example, more public disclosure about fundamentals does not necessarily lead to more information being reflected in prices (e. g., Banerjee et al. 2018; Goldstein and Yang 2017), and greater price efficiency does not necessarily lead to greater economic efficiency (Kanodia and Sapra 2016).

  8. The ‘pecking order’ among these three regulatory tools in terms of effectiveness and efficiency (net benefits) is an important question (see also Weil et al. 2013) that is beyond the scope of this paper.

  9. For empirical evidence on the determinants of successful shareholder engagement in CSR issues, see Dimson et al. (2015).

    Table 2 Examples of targeted transparency in securities regulation
    Full size table

  10. By contrast, the previous definition used by the Commission emphasized the voluntary nature of CSR (in excess of what firms are legally required to provide).

  11. Specifically, the Directive applies to certain large undertakings so that the scope does not strictly depend on firms’ listing status. De facto, many of the affected firms will, however, be public.

  12. See, for example, Humbert (2019).

  13. “It is therefore anticipated that, by increasing the quantity of and quality of information available, a disclosure requirement would also positively affect the way companies are perceived in terms of their accountability towards society. More and better reporting could increase consumers’ trust and have a positive effect on the demand side, creating new entrepreneurial opportunities and better management of externalities” (European Commission 2013, p. 38).

  14. “The direct impact of the proposal cannot be estimated with precision, however the result of the public consultations as well as consolidated research suggest that more transparency and better quality of information on companies’ environmental performance could increase the level of environmental awareness and, as a consequence, contribute to better environmental performance” (European Commission 2013, p. 41).

  15. “It is estimated that the preferred options would have a beneficial impact on fundamental rights as they would encourage EU companies to regularly review their policies and internal procedures in various aspects, mainly due to larger public scrutiny” (European Commission 2013, p. 41).

  16. The Extraction Payments Disclosure Rule was repealed in early 2017.

  17. For a discussion on the complementary role of ‘social’ disclosures in private law, refer to Choudhury (2015, pp. 202–04).

  18. “Most obviously, whether one views the SEC as a disclosure agency or an enforcement agency, sociopolitical issues such as conflict minerals and extractive resources, while perhaps worthy of attention by the right entities, should not be part of the SEC’s agenda. Rulemakings for such issues contribute neither to the maintenance of fair, orderly, and efficient markets, nor the facilitation of capital formation, nor investor protection” (Securities and Exchange Commission 2014).

  19. Langevoort and Thompson (2013) and Dombalagian (2016) provide further discussions on the appropriate scope of securities regulation, including whether and how firms’ ‘publicness’ should depend on their impact on society.

  20. Whereas we focus on a causal chain that is consistent with the regulatory rationales described in Sect. 2, we acknowledge that targeted transparency regulation might matter for firms’ actions in many different ways. For example, the disclosed information could be used strategically by competitors (Rauter 2017) or enhance monitoring by investors with purely monetary preferences (Amel-Zadeh and Serafeim 2017). In these cases, the costs and benefits of targeted transparency regulation are similar to those of ‘traditional’ disclosure regulation and have been reviewed elsewhere (Leuz and Wysocki 2016).

  21. See, e. g., the rationale for the E.U.’s CSR Directive discussed in Sect. 2.2.1.

  22. For a similar argument and pertaining empirical evidence, refer to Bischof and Daske (2013).

  23. In Duflo et al. (2013), treatment firms are exposed to enhanced auditing because of random auditor assignments, fixed pay from a central pool, backchecks of the audit, and incentives pay.

  24. As explained in the previous subsection, targeted transparency regulation can also matter because it enhances firms’ internal information sets (Steinmeier and Stich 2018). We do, however, not focus on this mechanism, as the link between firms’ internal information and the specific corporate actions typically targeted by regulators is more subtle. For example, it is not clear a priori how an increase in firms’ internal CSR-related information affects their level of investment in CSR-related activities.

  25. See project description. Accessed November 2018. Available at: http://www.publishwhatyoupay.org/our-work/using-the-data/the-data-extractors/.

  26. Firms engaging in social media monitoring and appointing Chief Listening Officers is consistent with this notion.

  27. We note that our review is necessarily selective and subjective. Generating a complete picture is complicated by the fact that research on targeted transparency regulation is rapidly emerging as well as dispersed across a broad range of publication outlets that cater to researchers in diverse academic fields with little overlap.

  28. It has to be noted that Fiechter et al. (2018) dependent variable (the ASSET4 CSR score), while not being a direct measure of ‘real’ CSR activities, is assumed to be directly related to these activities (Fiechter et al. 2018, p. 14).

  29. Notably, some studies try to circumvent this problem by relying on pre-existing proxies (e. g., broad CSR ratings), presumably at the expense of measurement accuracy. Ironically, if the information of interest were already available before the treatment, the justification for the disclosure requirement would be unclear.

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Acknowledgements

We thank Tanja Zohner, two anonymous reviewers and Alfred Wagenhofer (the editor) for valuable comments. Alexander Paulus provided excellent research assistance.

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  1. Frankfurt School of Finance and Management, Frankfurt, Germany

    Katharina Hombach

  2. Ludwig-Maximilians-University Munich, Munich, Germany

    Thorsten Sellhorn

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Hombach, K., Sellhorn, T. Shaping Corporate Actions Through Targeted Transparency Regulation: A Framework and Review of Extant Evidence. Schmalenbach Bus Rev 71, 137–168 (2019). https://doi.org/10.1007/s41464-018-0065-z

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