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Corporate
Market reactions to the first-time sustainability
issuance of corporate reports
sustainability reports
33
Evidence that quality matters
Ronald P. Guidry and Dennis M. Patten
Illinois State University, Normal, Illinois, USA

Abstract
Purpose The paper attempts to determine whether market participants see value in the corporate
choice to begin publishing a standalone sustainability report. It also seeks to investigate whether
differences in market reactions are associated with the quality of the sustainability report.
Design/methodology/approach The paper uses standard market model methods to isolate the
unexpected change in market returns in the period surrounding the announcement of the release of a
first-time sustainability report.
Findings The paper finds, on average, no significant market reaction to the announcement of the
release of the sustainability reports. However, in cross-sectional analyses, it is found that companies
with the highest quality reports exhibited significantly more positive market reactions than companies
issuing lower quality reports. These results hold when we control for firm size and membership in
socially exposed industries.
Research limitations/implications The paper examines only the US firms and the measure of
quality is based on an assessment of the extent to which reports provide disclosures recommended by
the Global Reporting Initiative. The sample is also relatively small. Finally, the analysis examines
perceived value for only one potential stakeholder group shareholders. Future research could address
any of these shortcomings.
Practical implications The evidence suggests that companies seeking value from their
sustainability reporting need to carefully consider the quality of their presentations.
Originality/value The finding that quality of sustainability reporting is important to investors
provides valuable evidence to support improvements in the implementation of sustainability
accounting and reporting.
Keywords Sustainable development, Corporate social responsibility, Market forces, Reports
Paper type Research paper

Introduction
Ballou et al. (2006, p. 65) argue that increasing pressure from both internal and
external stakeholders is leading to an increase in corporate reporting on social and
environmental performance. And while corporations have long used their annual reports
as a medium for such disclosure (Ernst & Ernst, 1978; Patten, 1995), the past decade
has seen a dramatic increase in the publishing of standalone sustainability-type reports[1].
Sustainability Accounting,
Erusalimsky et al. (2006, p. 12) note, for example, that: Management and Policy Journal
Vol. 1 No. 1, 2010
[. . .] data from organizations such as Corporate Register, SustainAbility, TruCost and KPMG pp. 33-50
q Emerald Group Publishing Limited
suggest that something in the region of 1500 standalone reports including both web and 2040-8021
hard copy are produced annually in the world. DOI 10.1108/20408021011059214
SAMPJ Many firms choose to highlight the issuance of their sustainability reports through
1,1 company press releases[2], suggesting that management may believe there is a
business benefit associated with the decision to publish. The intent of this examination
is to identify whether shareholders also see value in this action.
Based on a sample of 37 US companies issuing their first sustainability report over
the period from 2001 to 2008, inclusive, we find, on average, no significant market
34 reaction to the releases. However, cross-sectional analysis documents that investor
reaction varies based on the quality of the report being issued. Using a coding scheme
based on Global Reporting Initiative (GRI) guidelines, we find firms with the highest
quality reports exhibit significantly more positive market reactions than companies
issuing lower quality reports. These results hold when we control for firm size and
membership in socially exposed industries.
In general, the findings from this analysis are consistent with Godfreys (2005)
argument that stocks of reputational value are increased only when actions are viewed
as meaningful representations of a firms underlying corporate social responsiveness.
Acts considered as disingenuous, in our case, the issuance of lower quality reports,
appear to be viewed by market participants as actually eroding reputational value. This
finding is also consistent with Godfreys (2005) claims. As such, to the extent that
corporations want to use sustainability reporting as a tool for enhancing their
reputational capital, greater use of GRI reporting standards and recommendations
appears to be both warranted, and necessary. We begin our paper with the development
of our hypotheses.

Background and hypotheses development

Prior studies
Most prior studies of the market valuation of corporate social responsibility (CSR)
disclosures focus either on the reaction to the release of disclosure through the annual
report or the indirect value of disclosures at the time of other social-cost-inducing
events. Results of investigations in the former area have been mixed. For example,
while Belkaoui (1976) and Jaggi and Freedman (1982) both report positive market
valuation of CSR disclosures, Freedman and Jaggi (1986) failed to detect any significant
market reactions. Both Ingrams (1978) and Anderson and Frankles (1980) studies
yielded mixed results. Ingram (1978) finds no significant results for his overall sample,
but does report some positive valuation effects for selected subsets of disclosures.
Anderson and Frankle (1980) indicate that disclosing firms significantly outperform
non-disclosing counterparts in the market, but primarily only for the month preceding
annual report releases. More recently, both Murray et al. (2006) and Jones et al. (2007)
test for the impact of CSR disclosure on longer term market valuation effects for sample
firms in the UK and Australia, respectively. While Murray et al. (2006) report no
significant short-term associations between disclosure and market valuation, they do
find that over a nine-year period of time, higher levels of disclosure appear to correlate
with higher market valuation. Jones et al. (2007) on the other hand, report that
disclosure for their sample appears to be negatively, but only weakly associated with
longer term market valuation effects.
Supplementing the market-based research into the value of social and
environmental information, a number of recent studies also investigate the impact of
these disclosures using experimental designs. Chan and Milne (1999), for example,
examine whether disclosure of positive or negative environmental information Corporate
influences investment decisions for a sample of accountants and investment analysts. sustainability
They report negative disclosures lead to decreased investment choice, but positive
environmental information has little impact. In contrast, Holm and Rikhardsson (2008) reports
find positive environmental performance disclosure positively influences investment
choice across both differing investment time horizons and the experience level of the
investor. Milne and Patten (2002) report evidence of the legitimating impact of 35
disclosure in that positive environmental disclosures were found to mitigate the
impacts of negative environmental performance information. Finally, Milne and Chan
(1999), using social rather than environmental disclosures, find that the information has
little impact on investment decisions.
In contrast to the mixed findings summarized above, studies of the mitigating effect
of prior CSR disclosure at times of social-cost-inducing events consistently indicate a
significant positive association with market impact. For example, Blacconiere and
Patten (1994) investigate the market reaction for a sample of US chemical firms at the
time of Union Carbides disastrous Bhopal, India chemical leak (Union Carbide was not
included in the sample). The authors report that while the overall intra-industry market
reaction was significantly negative, the extent of prior environmental disclosure in test
firms 10-K reports served to mitigate the extent of the reaction. Similar results are
reported by Blacconiere and Northcut (1997) for reactions to Congressional debates over
Superfund legislation, Patten and Nance (1998) for market reactions to the Exxon
Valdez oil spill, Freedman and Stagliano (1991) for reactions to changes in occupational
safety cotton dust regulations, and Freedman and Patten (2004) for market reactions
to the initial release of Toxics Release Inventory data. None of these studies,
however, examines the market reactions at the time the financial report disclosures
were actually made.
In general, prior research suggests that, at least in some situations, CSR disclosure
may have positive market effects. All of the studies outlined above, however, rely on
disclosures included as part of other financial reporting documents. We are aware of no
studies that specifically examine for market impacts related to the issuance of
standalone sustainability-type reports[3].

Sustainability reporting and shareholder value

Traditional economic analysis assumes that investors are driven by the desire to
increase their risk-adjusted returns (Murray et al., 2006, p. 230). However, Ballou et al.
(2006) argue that the past decade has seen a growing recognition that maximizing
shareholder value requires corporations to carefully address the demands of multiple
stakeholder groups. Sustainability reports have increasingly been used for this purpose,
and language in many of the issuances clearly indicates that investors are seen as one of
the targets of the reporting. For example, Hormel Foods President Jeffrey M. Ettinger
states in his companys report (Hormel Foods, 2007, p. 3) We believe our employees,
shareholders, consumers, and other important stakeholders deserve to know more about
our initiatives (our emphasis). What is less clear is the degree to which reporting on
sustainability issues might be expected to influence market participants perceptions of
firm value. One common argument for such an impact centers on the reportings
potential to enhance the reputational capital of the issuing firm.
SAMPJ Many proponents of sustainability reporting emphasize pragmatic benefits to the
1,1 action, particularly with respect to reputational enhancement. Group of 100 (2004,
pp. 14 16)[4] in its report on sustainability reporting guidelines for example, argues
there are numerous potential benefits to companies from reporting on CSR issues.
These include:
.
protecting and enhancing corporate reputation;
36 .
attraction and retention of high-caliber employees;
.
establishing a position as a preferred supplier; and
.
establishing a sound basis for stakeholder dialogue, among others.

Similarly, GRI, the organization perhaps most acknowledged as the leader in the
development of sustainability reporting guidelines (Ballou et al., 2006; Gray, 2006;
Woods, 2003), claims reporting can accrue benefits with respect to networking and
communications, as well as brand and reputation enhancement (www.globalreporting.
org). To the extent that shareholders interpret such benefits as leading to increased
long-term value for the firm, the initiation of sustainability reporting would be
expected to lead to positive market reactions[5].
It is not entirely clear, however, that merely beginning the practice of sustainability
reporting will be viewed as a positive reputational action. Godfrey (2005, p. 784) argues
that in order for an act to generate positive reputational capital, it must meet two criteria.
First, the acts underlying ethical value must be consistent with the ethical values of the
community; and second, the act must not be perceived as an ingratiating attempt at
garnering public favor. Godfrey (2005, pp. 784-5) asserts that only acts perceived as
genuine manifestations of the firms underlying character can improve reputation and
because actions perceived as ingratiating tend to be viewed as morally negative, they
can actually lead to an erosion of reputational capital. There is substantial evidence that
society is demanding corporations to be more socially responsive (Ballou et al., 2006).
As such, the choice to begin reporting on sustainability issues would appear to be in line
with the values of society. Whether sustainability reporting is perceived as a genuine
manifestation of firms underlying social character is more debatable. Corporate social
reporting, in general, and standalone sustainability reporting in particular, has been
criticized as being incomplete (Gray, 2006), self-serving (Unerman et al., 2007) and even
disingenuous (Aras and Crowther, 2009). Therefore, on average, it is not clear whether
the choice to begin issuing sustainability reports will indeed increase the reputational
capital of disclosing firms.
While it is unclear whether the issuance of a standalone sustainability report in and
of itself might be seen in the market as a positive or negative action, it seems likely that
report quality might influence the perception of the act as meaningful or insincere. The
choice to issue a sustainability report is entirely voluntary, and as noted above, many of
the issuances are argued to be partial and fairly trivial (Gray, 2006; Gray and
Bebbington, 2007). This perhaps helps explain Burson-Marstellers (2003) claim that
fewer than half of the non-governmental organizations (NGOs) it surveyed found
corporate sustainability reports believable. Burson-Marsteller also noted, however, that
NGOs suggested that comprehensive performance metrics and standardization of
reporting boosted their confidence in the information being disclosed[6]. It seems
plausible that investors would also be more likely to consider higher quality reports
(those with more standardized reporting and more comprehensive performance Corporate
information) to lead to an enhancement of corporate reputation. Alternatively, investors sustainability
may also be more likely to interpret reports lacking in quality as disingenuous
attempts at garnering favor. In support of the argument that disclosure quality may reports
impact reputational perceptions, Toms (2002) finds that the quality of annual report
environmental disclosures is positively associated with senior executive ratings of
corporations community and environmental responsibility in the UK. 37
In summary, if market participants view the first-time issuance of a standalone
sustainability report as leading to increased stocks of reputational capital, a positive
market reaction would be expected. In contrast, if they view the action as an ingratiating
attempt at garnering favor, the issuance of a report may actually lead to decreased
market values (due to the perceived erosion of reputational capital)[7]. The intent of our
examination is to empirically examine this issue. We formally state our first hypothesis
(in null form) as:
H1. There will be no significant market reaction to the publication of a standalone
sustainability report.
In addition to identifying the market reaction to the first-time issuance of sustainability
reports, in general, we also attempt to determine whether higher (lower) quality reports
lead to more positive (negative) market reactions. We state this hypothesis (in
alternative form) as:
H2. Ceteris paribus, market reactions to the issuance of standalone sustainability
reports will be more positive for higher quality reports than for lower quality
reports.

Research methods and results

Sample selection
To be included in our analysis, sample firms had to meet the following criteria:
.
They had to be a US-based publicly traded corporation with a dated press release
announcing the first-time issuance of a standalone sustainability report over the
period 2001-2008, inclusive.
.
They had to have all required data available on the Center for Research in
Security Prices (CRSP) and Research Insight databases.
. They had to have their sustainability report available for review.
.
They had to have no confounding events (e.g. earnings announcements and
major news items) in the period from two days before to two days after the
sustainability report press release.
We used the Academic Universe Lexis-Nexis database to search for press releases
announcing the publication of standalone sustainability reports. In total, we found
124 such announcements over the years 2001-2008. However, only 47 of these were for
the first-time issuance of a standalone sustainability report. Two of the firms included
in the press release sample did not have necessary CRSP data available, and seven had
confounding events. We were unable to access the report of one announcing company.
Our final sample therefore consists of 37 firms. Table I identifies our sample companies
and their control matches (discussed below), while Table II presents descriptive data on
SAMPJ
Year report
1,1 Company released Control company

Agilent Technologies 2001 Becton Dickinson & Company

Arch Coal, Inc. 2007 Massey Energy
Ball Corp. 2008 Crown Holdings, Inc.
38 Becton Dickinson & Company 2004 Boston Scientific
Brown Forman Corporation 2007 Constellation Brand
CA, Inc. 2008 Adobe Systems, Inc.
Cabot Corporation 2008 Cytec Industries
Campbell Soup Co. 2008 HJ Heinz
Caterpillar, Inc. 2006 Deere & Company
Chesapeake Corp. 2008 Caraustar Industries
CVS Caremark Corp. 2008 Walgreens
Deere & Company 2007 Illinois Tool Works
DTE Energy 2005 AEP Industries, Inc.
Duke Energy Corp. 2007 Nisource, Inc.
El Paso Corp. 2008 OGE Energy
GAP, Inc. 2004 TJX Companies
General Electric 2005 Berkshire Hathaway
Green Mountain Coffee Roasters 2006 Reddy Ice Holdings
Hormel Foods 2007 Sara Lee
KB Home 2008 Lennar Corporation
Manpower, Inc. 2007 Kelly Services
Mattel, Inc. 2004 Hasbro, Inc.
McDonalds 2002 Wendys International
Mirant Corporation 2001 Reliant Energy
Nike 2001 VF Corporation
Norfolk Southern 2008 CSX Corporation
OfficeMax, Inc. 2007 Staples, Inc.
Praxair 2003 Eastman Chemical
Spectra Energy 2008 Centerpoint Energy, Inc.
Symantec 2008 CA, Inc.
Tyson Foods 2006 Archer Daniels Midland
United Parcel Service 2003 Federal Express
United Technologies 2005 Lockheed Martin
Verizon Communications 2005 Sprint
Table I. Wisconsin Energy 2002 Puget Energy
Sample firms and control Xerox Corporation 2006 Apple, Inc.
matches Yum Brands, Inc. 2008 Starbucks Corporation

the firms and other variables used in our analysis. Table III reports Pearson
product-moment correlations for the variables.
Overall, our sample firms range in size (based on revenues in the year of
sustainability report release) from $225 to $148,559 million with a mean (median) of
$19,204 million ($9,022 million). The companies represent 20 different industries based
on two-digit primary Standard Industrial Classification codes, with largest
concentration, seven firms, coming from the 20XX (food and beverage) industry.
The distributions across both size and industry groups suggest our sample is
reasonably reflective of the overall market.
 Corporate
n Mean Maximum Minimum
sustainability
CAR 37 2 0.1690 0.0396 20.1192 reports
DiffCar 37 2 0.0059 0.0354 20.0782
CAScore 37 37.3500 74.0000 5.0000
SEI 37 0.3200 1.0000 0.0000
Size 37 22.9752 25.7200 19.2300 39
Notes: CAR cumulative abnormal return for a three day window surrounding the announcement of
the issuance of a first time CSR; DiffCAR difference in cumulative abnormal return for a three day
window surrounding the announcement of the issuance of a first time CSR between test firms and
control firms; CAScore firm is content analysis score at time t; SEI a zero/one indicator variable
where 1 signifies firm i is from a socially exposed industry; Size the natural log of company is Table II.
revenues in the year of the report issuance Descriptive statistics

CAR DiffCAR CAScore SEI Size

CAR
DiffCAR 0.575 * *
CAScore 0.395 * 0.376 *
SEI 20.060 2 0.065 20.195
Size 0.058 2 0.071 20.014 2 0.295
Notes: Significance at: *0.05 and * *0.01 levels, (two-tailed); n 37; CAR cumulative abnormal
return for a three day window surrounding the announcement of the issuance of a first time CSR;
DiffCAR difference in cumulative abnormal return for a three day window surrounding the
announcement of the issuance of a first time CSR between test firms and control firms; CAScore firm
is content analysis score at time t; SEI a zero/one indicator variable where 1 signifies firm i is from a Table III.
socially exposed industry; Size the natural log of company is revenues in the year of the report Pearson product-moment
issuance correlations

Market reaction
We used standard market model methodology to calculate the unexpected stock
returns surrounding the announcement of the issuance of the sustainability reports.
For each security i, the abnormal return on event day t is measured as follows:
ARit Rit 2 ai Bi Rmt
where Rit is the rate of return on security i on day t, Rmt is the overall market return on
day t, and ai and Bi are the ordinary least squares estimates of the intercept and the
slope of the market model regression. Our market model parameter estimates are based
on a 200 trading day estimation period ending on day 2 2 (where day 0 is the date of
the press release announcing the issuance of the report). The market return was
measured using the New York Stock Exchange value-weighted index and all stock
return data were collected from the CRSP database. Cumulative abnormal returns
(CARs) were calculated by summing daily ARs over the three-day event period
beginning on day 2 1 (relative to the press release date) and ending on day 1[8].
The small sample size employed in our analysis increases the chance that our firms
differ in systematic ways from the overall market population and therefore, the results
SAMPJ we obtain may be biased. Accordingly, we use a control group matched on firm size
1,1 within industry classification to adjust for any industry-specific effects (Ricks, 1982;
Larcker, 1983). We matched firms, where possible, based on four digit primary
Standard Industrial Classification (SIC) codes. With the exception that we had to use
Staples (SIC 5940) as the control match for OfficeMax (SIC 5110), all firms were
matched at the two-digit SIC level at worst[9]. For the overall market reaction, we
40 compare the mean three-day CAR of the test firms (as reported above) with the mean
three-day CAR for the control group. Each control firms market return was centered
on the press release date of its matched test company.
As reported in Table IV, the mean three-day CAR for our sample firms was a
negative 1.69 percent. However, our control group, on average, also experienced negative
abnormal returns over the sample period (mean CAR of 21.10 percent). The difference
between the sample and control group CARs is not statistically significant[10]. As such,
we use the difference between the test firm CAR and its control company CAR (labeled
DiffCAR) as our measure of the unexpected market reaction. The mean DiffCAR, 20.59
percent, is not statistically significant at conventional levels ( p 0.160, two-tailed)[11],
indicating that, on average, the market exhibits no significant reaction to the
announcement of a first-time issuance of a sustainability report.

The impact of report quality

We use cross-sectional analysis to test whether differences in report quality impact the
extent of market reactions across sample firms. We anticipate that higher (lower)
quality reports will be associated with more positive (negative) market reactions. To
measure the quality of our sample companies sustainability reports, we used content
analysis. This approach has been used extensively in social and environmental
disclosure research (Blacconiere and Patten, 1994; Freedman and Wasley, 1990;
Wiseman, 1982), and requires analyzing the document for the presence or absence of
disclosure across a set of information items. As argued by Ballou et al. (2006), Woods
(2003), and others, the GRI is viewed as having the most dominant reporting regulations
in the social and environmental arena. Therefore, we used GRI recommendations to
develop a measure of quality. More specifically, based on the GRIs (2002, 2006) G2 and
G3 reporting guidelines, we developed a coding scheme identifying 55 environmental
and social performance indicators (see the Appendix, Table AI). Following Wiseman
(1982), we coded disclosures including quantitative or financial information as three
points, disclosures with company-specific information in a non-quantitative form as
two points, and items disclosed in only general form as one point. One member of the
research team reviewed each of the sample reports for the presence or absence of

Mean CAR t-statistic Significance a

Panel A difference in CARs, test firms versus control firms
Test firms 2 0.0169
Control firms 2 0.0110 0.769 0.445
Mean score Z-statistic Significance a
Panel B mean differences (CARtest CARcontrol )
Table IV. DiffCAR 2 0.0059 1.392 0.160
Cumulative abnormal
a
returns Note: Significance level is two-tailed
disclosure across each of the indicators and one point was awarded for each area of Corporate
disclosure. To assure accuracy of the coding, reports were then independently reviewed sustainability
by a second member of the research team. All discrepancies were discussed and
reconciled. reports
As highlighted in the Appendix, Table AI, the disclosure areas most often included
in our sample company sustainability reports were diversity or non-discrimination
programs (31 reports), impacts on communities (30 reports), rates of work-related 41
injury/illness/death (28 reports), programs for skills management/career enhancement
(28 reports), initiatives to mitigate the environmental impacts of products or services
(26 reports), and greenhouse gas emissions (25 reports). Only two disclosure areas
included in our metric, minimum notice periods for operational changes and ratio of
basic salary of men to women were not disclosed by any of our sample companies.
Overall, report quality content analysis scores (designated as CAscores) ranged from five
to 74 with a mean (median) of 37.35 (36)[12].
A potential concern with report quality is the possibility that later first-time
reporters, due to the availability of better guidance and a richer pool of comparative
reports, might be expected to release higher quality reports than the companies
beginning the practice earlier in our sample period. To investigate this issue, we
examine the difference in mean CAscores for the 19 companies releasing their first
report in either 2007 or 2008 versus the 18 firms with earlier publications. As noted in
Panel A of Table V, the later reports actually exhibit a lower quality score, on average.
The mean CAscore for the later reporters is 32.7, in comparison to an average score of
42.3 for the firms releasing their reports in the earlier period. This difference is
statistically significant at the p 0.080 level, two-tailed. A major factor contributing to
this difference is that the company with the lowest overall score is a late releaser, while
the two firms tying with the highest CAscore are both early releasing companies. When
these three scores are deleted, the difference in scores across the two time period
sub-samples (reported in Panel B of Table V) is not significantly different.
As reported in Table III, the Pearson product-moment correlation between the
CAscore and DiffCAR variables (0.376) is positive and statistically significant
(at p , 0.05, two-tailed)[13]. This indicates a positive association between the quality of
the reports and the market reaction to their issuance and supports H2. To better
illuminate the relation between report quality and market reaction, we partitioned the
sample into intervals based on their CAscores. As shown in Panel A of Table VI,

Mean score t-statistic Significancea

Panel A difference in CAscores, full sample

Early (n 18) 42.3
Late (n 19) 32.7 1.803 0.080
Panel B difference in CAscores, extremes removed
Early (n 16) 38.3
Late (n 18) 34.3 0.867 0.393
Table V.
a
Notes: Significance level is two-tailed; early designates firms releasing their first standalone Differences in CAscores,
sustainability report from 2001 to 2006, inclusive; late designates firms releasing their first standalone early versus later
sustainability report in 2007 or 2008 reporters
SAMPJ the DiffCAR for the seven firms with the highest report quality scores (CAscore $ 50) is
a positive 1.40 percent. In contrast, mean DiffCARs are negative for the other two
1,1 groups, and most negative (mean DiffCAR of 2 2.01 percent) for the group of nine firms
with the lowest quality scores (CAscore # 25). A t-test of the difference in mean market
reaction for the highest quality report issuers versus other announcing companies (see
Panel B of Table VI) indicates the difference is highly significant ( p 0.006, one-tailed).
42 The results of these analyses suggest that investors appear to believe that only very
high-quality sustainability reports add value to the issuing company, and that the
issuance of a lower quality report actually decreases firm value. Of course, it must be
noted, that our measure of quality is centered on information suggested by the GRI and
that other potential aspects of quality signaling (e.g. governance structures and/or
management strategy or systems) are not captured by our design.

Sensitivity analysis
Although we assume that report quality is the factor driving differences in market
reaction to their issuance, it is possible that perceptions of the value of the report could
be due to differences in their perceived legitimating effects. Proponents of legitimacy
theory (Deegan, 2002; Hackston and Milne, 1996; Patten, 1992, 2002) argue that social
disclosure can benefit companies by reducing their exposure to the social and political
environment. According to Patten (1992, p. 472), for example, in contrast to economic
legitimacy, which is evaluated in the marketplace, social legitimacy is monitored
through the public policy process. As such, corporations can use social disclosure as a
tool to attempt to influence that process either directly, by addressing issues of social
concern, or indirectly by projecting an image of the company as being socially aware.
Disclosure could lead to future cash flow benefits for the firm by reducing the
likelihood of future adverse social and political actions. If investors believe that the
issuance of standalone sustainability reports is an effective tool for reducing social
exposure, it would lead to a positive market reaction to the initiation of the process.
Prior studies of the legitimizing nature of social disclosures (Patten, 1991, 1992;
Hackston and Milne, 1996; Milne and Patten, 2002) suggest that the exposure
companies face with respect to the social and political environment varies in systematic
ways. More specifically, these studies argue that larger companies face greater
exposure than smaller firms and that companies from industries deemed to be more
socially sensitive also face greater exposure than firms from less socially sensitive
industries. If the value of sustainability reports relates to their role in reducing
exposures to the social and political environment, an expectation could be formed that

n DiffCAR t-statistic Significancea

Panel A DiffCARS for subsamples based on content analysis scores

CAScore (CAScore $ 50) 7 0.0140
CAScore (25 , CAScore ,50) 21 2 0.0064
CAScore (#10) 9 2 0.0201
Panel B difference in market reactions
Table VI. High-quality reporters 7 0.0140
Differences in cumulative Other reporters 30 2 0.0105 2.904 0.006
abnormal returns across
a
report quality Note: Significance level is one-tailed
the reports carry more value for firms facing greater exposures, and the differences in Corporate
market reaction reported above could be due to these factors. sustainability
To control for the possibly confounding legitimacy effects, we estimate the
following multiple regression model: reports
CARi a1 b1 CAscorei b2 SEIi b3 Sizei
Where: 43
CARi the three-day cumulative abnormal return surrounding firm is
sustainability report issuance.
CAscorei the content analysis score for firm is sustainability report.
SEIi a one/zero indicator variable where one designates firm i is from a
socially exposed industry[14].
Sizei the natural log of firm is sales for the year of its sustainability report
issuance.
Table VII reports the results of our multiple regression analysis. As indicated in the
table, neither of the legitimacy variables is statistically significant. In contrast, the
CAscore variable remains positively, and statistically significantly (at p 0.015,
one-tailed) associated with differences in the sample firms market reactions[15]. These
results thus provide additional evidence that it is report quality that appears to be
driving the differences in market reaction.
As a final sensitivity check, we examine whether the differences in market reaction
we report might be due to differences in the press releases announcing the publication
of the sustainability reports. In non-tabulated tests, we find no statistically significant
differences in either the size of the press releases (number of words) on average, or the
percentage of companies including quantitative or monetary information in the press
releases across the seven sample firms with the highest CAscores and the remaining
companies[16]. Further, correlations between the press release measures and market
reactions are not statistically significant (using either Pearson product-moment or

Variable Expectation Parameter estimate t-statistic Significance (t-statistic)a

Constant None 0.634 0.072 0.943

CAScore () 0.061 2.265 0.015
SEI () 20.073 2 0.074 0.941
Size () 20.152 2 0.409 0.685
Adjusted R 2 0.068
F-statistic 1.878
Prob. .F 0.153
n 37
Notes: a Signifiance levels are one-tailed; DiffCAR a b1 CAScore b2 SEI b3 Size 1;
DiffCAR difference in cumulative abnormal return for a three day window surrounding the
announcement of the issuance of a first time CSR between test firms and control firms; CAScore firm Table VII.
is content analysis score at time t; SEI a zero/one indicator variable where 1 signifies firm i is from a Multiple regression for
socially exposed industry; Size the natural log of company is revenues in the year of the report report quality controlling
issuance for size and industry
SAMPJ Spearmans r-correlation measures). The positive market reaction for high quality
1,1 reporters, therefore, does not appear to be driven by differences in the press releases.
Conclusion
The past decade has seen substantial growth in corporate sustainability reporting,
largely driven by claims that the practice can lead to significant business benefit. The
purpose of our study was to examine the market effects of first-time releases of
44 sustainability reports in an effort to determine if investors assign value to the issuance
of the report. Overall, our results indicate, on average, no significant market reaction.
However, our findings also show that the quality of the report in terms of the breadth
of social and environmental indicators being reported on, significantly influences that
reaction. Companies issuing high-quality reports exhibit significantly more positive
market reactions than firms releasing lower quality reports.
Our findings would appear to have meaningful implications both for corporations
relative to their use of sustainability reporting and for the GRI. As to the former, our
results indicate that if firms are indeed seeking increased reputational value from the
practice of sustainability reporting, merely engaging in the action is not sufficient.
Instead, at least as interpreted in the market, the report must include meaningful
disclosure of social and environmental information. The quality of the report matters.
As for implications for the GRI, our findings that broader reporting of the types of
information being recommended for disclosure by the organization are more favorably
evaluated in the market might certainly be seen as support for its goals. Of course, it
must be acknowledged that not all proponents of improved sustainability reporting
believe the GRI standards adequately capture business sustainability (Gray, 2006;
Moneva et al., 2006; Milne et al., 2008).
Our study is not without limitations. Our sample size is small and is limited to an
assessment of investor perceptions in only the US market. We therefore cannot
generalize the extent to which sustainability reports may be valued by investors in
other parts of the world. Further, our measure of quality is based on recommendations
of the GRI. There are certainly other guidelines available for sustainability reporting
(e.g. Sustainability/UNEP, ISO 14031), and other ways of assessing its quality (ACCA,
2008; Adams, 2004). Related to this point, we note that we applied our content scale
equally across all sample firms. More careful focus on only issues particularly relevant
to specific companies could lead to differing assessments of quality. Given these
limitations on quality, a potentially valuable extension to our research would be
examining whether alternative measures of quality yield differing results. We also
concede that, although we have attempted to control for other possible factors
influencing the market reactions, our findings could be due to some unidentified
omitted variable. Finally, our focus is only on stockholder perceptions of value. It
seems likely that other stakeholder groups may interpret the issuance of sustainability
reports differently. But, our finding that the quality of such reports appears to matter
to investors provides at least some evidence in support of efforts to improve the
practice of corporate sustainability reporting.

Notes
1. These reports are published under a number of differing names including, for example,
Social Responsibility Report, Social and Environmental Report, Corporate Citizenship
Report, and Sustainability Report, among others.
 2. As we report below, for example, we found more than 100 such press releases issued over the Corporate
period from 2001 to 2008.
sustainability
3. Jones et al. (2007) do include standalone reports as one source of disclosure in their
investigation. The study, however, does not separately provide results for standalone report
reports
disclosure.
4. Group of 100 is an organization representing top management from 100 of Australias
largest corporations. 45
5. We focus on first-time issuances of sustainability reports because it would appear to signal a
definitive shift in reporting focus for the firms.
6. NGOs also reported third-party certification boosted confidence in the sustainability reports.
Only one of the 37 reports our study relies on included a third-party certification. As such, we
do not formally include this factor in our analyses. However, in unreported multivariate
sensitivity tests we control for this factor. It was not significant and did not alter any
reported results.
7. Murray et al. (2006, p. 232) note an alternative argument for a negative market reaction to
sustainability reporting. They argue that any major activity by the company management
which investors cannot see as being of a relatively direct and foreseeable economic benefit to
the organization is, a priori, likely to be penalized by [. . .] the selling of shares.
8. We repeat our analysis using both four-day (21 to 2) and five-day (2 1 to 3) periods.
Results, not reported, were qualitatively similar to those using the three-day CARs.
9. We repeated all sensitivity tests deleting OfficeMaxs observations and results were
qualitatively unchanged.
10. We repeat all tests of means using a non-parametric Mann-Whitney test. In all cases,
statistical inferences are comparable to those reported for the parametric tests.
11. To measure the statistical significance of the reaction, each firms daily abnormal returns
were standardized using the mean standard deviation of the companys prediction error over
the estimation period adjusted for prediction outside of the estimation period and then
summed over the three-day event period. We tested the samples mean standardized
DiffCAR for statistical significance using the Z-statistic as in Seiler (2004, p. 268).
12. In an effort to identify the extent to which the sustainability reports increase company
disclosure, we coded the social and environmental disclosures included in the annual report
immediately preceding the release of the sustainability report for each firm (two companies
annual reports were not available). The average score for the sustainability reports was 37.6
in comparison to an average score of 9.8 for the annual reports. This difference is statistically
significant at p , 0.001, two-tailed. We were not able, however, to identify the extent to
which the sustainability information may have been provided on corporate web pages prior
to the issuance of the sustainability reports and this limitation needs to be noted given Jones
et al.s (2007) findings on the use of the web for sustainability reporting.
13. Results are similar using a non-parametric Spearmans r-correlation.
14. Following Brammer and Millington (2005), we classify companies from the chemical,
extractive, paper, pharmaceutical, alcoholic beverage, and defense industries as being socially
exposed. Because of their exposures due to greenhouse gas emissions, we also include utilities
as being socially exposed. Industry classification was based on each firms primary SIC code
as listed in Research Insight.
15. We also estimated models with interaction variables. In no cases were the interaction terms
statistically significant and the legitimacy variables remained insignificant in all cases.
SAMPJ 16. We also examine for differences in the press releases across the high-quality reporters and
only the nine firms with the lowest quality sustainability reports. Neither press release size
1,1 nor the percentage of press releases including quantitative or monetary disclosure differs
significantly.

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Appendix Corporate
sustainability
reports
Area Item Reports citing

Env. Environmental performance indicators

1 Material use 6 49
2 Percentage of input that is recycled 5
3 Discussion of recycling efforts 20
4 Direct energy consumption 18
5 Indirect energy consumption 1
6 Energy saved due to conservation and efficency 6
7 Initiatives to reduce energy consumption 20
8 Water use disclosures 13
9 Water recycling 2
10 Impacts on biodiversity rich habitats 8
11 Habitats protected or restored 13
12 Strategies or plans for managing impacts on biodiver 3
13 Greenhouse gas emissions 25
14 Initiatives to reduce greenhouse gas emissions 18
15 Other emissions disclosure 16
16 Wastewater disclosures 7
17 Weight of waste and disclosure methods 19
18 Disclosures of significant spills 9
19 Hazardous waste disclosures 11
20 Initiatives to mitigate env impacts of products/services 26
21 Product packaging impacts on the environment 5
22 Fines and sanctions for environmental citations 20
23 Impacts of transportation of goods or employees 5
24 Environmental expenditures 6
Soc. Social performance indicators
1 Human rights screening on investment agreements 6
2 Human rights screening on suppliers 6
3 Employee training on human rights policies 5
4 Diversity or non-discrimantion programs 31
5 Policies on freedom of association/coll. Bargaining 6
6 Policies on child labor 9
7 Policies on forced and compulsory labor 7
8 Training of security personnel on human rights 1
9 Policies or programs on indigenous rights 1
10 Total workforce by employee type or region 21
11 Disclosures on employee turnover 4
12 Discussion of significant benefit programs provided 12
13 Employees covered by collective bargaining 12
14 Minimum notice periods for operational changes 0
15 Rates of work-related injury/illness/deaths 28
16 Education/training on serious illnesses 8
17 Average hours of training per employee 6
18 Programs for skills management/career enhancement 28
19 Percentage of employees receiving regulars reviews 1
20 Ratio of basic salary of men to women 0 Table AI.
21 Impacts on communities 30 Report quality disclosure
(continued) coding scheme
SAMPJ Area Item Reports citing
1,1
22 Anti-corruption programs and policies 6
23 Discussion of public policy involvement 16
24 Political contributions 9
25 Policies regarding anti-competitive behavior 9
26 Fines or sanctions for non-compliance 2
50 27 Assessments of products or services for safety issues 14
28 Product labeling requirements 4
29 Practices related to assessing customer satisfaction 10
30 Marketing-related laws and codes 5
Table AI. 31 Policies regarding customer privacy 11

Corresponding author
Dennis M. Patten can be contacted at: dmpatte@ilstu.edu

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