The real effects of risk disclosures: evidence from climate change reporting in 10-Ks

We examine the economic impacts of risk disclosures in accounting reports on the real decisions made by information senders (i.e., managers of the disclosing firms). In so doing, we exploit the SEC rule enacted in 2010 regarding climate change risk (CCR) reporting in 10-Ks as a quasi-natural experimental setting in which to apply a difference-in-differences analysis. We focus on CCR because of its vast influence on economic activities and the relative ease of identifying managerial behaviors related to climate change. Our results reveal that CCR-disclosing firms tend to engage more (less) in pro-environmental (anti-environmental) activities after the SEC 2010 rule. These real effects are more pronounced in firms that are under higher pressure from climate-minded external stakeholders and when firms’ businesses are more sensitive to climate change-related risks. We also find improved environmental performance in terms of reductions in the quantity, intensity, and cost of carbon emissions surrounding the SEC 2010 rule. Overall, our findings suggest that CCR disclosures alter corporate behaviors and help curb climate change.

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