Corporate sustainability performance and informativeness of earnings
ISSN: 1935-5181
Article publication date: 7 December 2021
Issue publication date: 3 August 2022
Abstract
Purpose
With the growing awareness about the environment and climate, sustainability has gained increased attention of investors. Many investors now factor in the long-term sustainability of successful and responsible companies when making their investment choices. The purpose of this paper is to investigate whether or not the sustainability performance of a company affects the informativeness of its earnings by exploring the mediating effect of sustainability performance on the association between stock returns and earnings changes.
Design/methodology/approach
Using a sample of firms for the period 2009–2016 with available sustainability data from TruValue Labs' database, the authors investigate how the sustainability performance of a firm mediates the relationship between stock returns and earnings (changes). The authors use ordinary least squares (OLS) regressions to test their hypotheses.
Findings
Consistent with the voluntary disclosure and environmental, social and governance (ESG) performance literature, the authors find that higher sustainability performance improves the stock price informativeness of earnings. The authors find evidence in support of increased earnings response coefficient with increased sustainability performance.
Research limitations/implications
This study adds to the literature supporting the notion of sustainability investing indicating that sustainability performance of a firm affects the stock price informativeness and predictability of earnings (changes) of the firm.
Originality/value
This study has value for, both, investors and managers regarding the importance of sustainability performance of the firm. Sustainability performance of the firm sends signals to market participants, increasing the informational content of the reported earnings as well as predictability of future earnings.
Keywords
Citation
Saini, J.S., Feng, M. and DeMello, J. (2022), "Corporate sustainability performance and informativeness of earnings", American Journal of Business, Vol. 37 No. 3, pp. 120-138. https://doi.org/10.1108/AJB-12-2020-0198
Publisher
:Emerald Publishing Limited
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