Silence is Golden? Evidence from Social Disclosure Gap

Abstract

Social disclosure is available through different internal channels, such as SEC filings, stand- alone sustainability reports, or financial reports and available through external channels, such as business news. Based on analytical models that suggest that investors price social disclosure, as part of their firms’ risk assessment, I analyze whether the social disclosure gap is related to the firms’ cost of equity capital. I employ Latent Dirichlet Allocation, an unsupervised machine leaning technique to compare the thematic content of news articles and company reports, comprising of 5 billion words to compute the social disclosure gap for a sample of 1801 US firms. I find that the social disclosure gap is negatively associated with the cost of equity capital. This result is consistent with the limited attention theory, which suggests that investors tend to focus their attention on the most salient and easily processed social disclosure information and neglect the disclosure gap. I also show that customer awareness and product market competition are channels that link the social disclosure gap to the cost of equity capital. My findings contribute to the debate around the challenges hindering the widespread adoption of sustainability, including the absence of a standard, measurement uncertainty, different measures of materiality, inconsistent reporting methods, boilerplate language, and comparability.