Voluntary disclosure and information asymmetry: do investors in US capital markets care about carbon emission?
Authors: Adhikari Ajay , Zhou Haiyan 
Published: August 2021

Purpose
This paper aims to exploit the varying level of responses to the carbon disclosure project (CDP) to assess the economic consequences of carbon emission disclosure by disclosure level. Economic theory suggests that increased disclosures by a firm should lower the information asymmetry component of the firm’s cost of capital. Using CDP disclosures by US firms, the authors study the effect of voluntary carbon emission on the information asymmetry risk in capital markets.

Design/methodology/approach
The authors conduct cross-sectional analyses to examine whether, from the investor perspective, firms with varying CDP disclosure levels experience differential information asymmetric risk. The authors also conduct a pre- and post-disclosure comparison to examine whether the market responds to first-time carbon emission disclosure with decreases in the relative bid-ask spread.

Findings
In the cross-sectional analysis, the authors find that firms that decline to disclose carbon emission information, firms that provide incomplete information and firms that do not respond to the CDP survey have higher information asymmetry than firms that provide complete information and opt to make it available to the public. Using a pre- and post-disclosure comparison, the authors find that the market responds to first-time carbon emission disclosure with decreases in the relative bid-ask spread. Additionally, only firms that participate, provide complete disclosures and opt to make it available to the public enjoy the largest reduction in bid-ask spreads, which is followed by firms that provide incomplete information. Other firms do not experience a reduction in information asymmetry.

Research limitations/implications
This study examines the impact of CDP disclosures on information asymmetry using a US sample. The results of the study may not be generalizable to other countries that have different institutional arrangements and settings.

Practical implications
The study has important social and policy implications. The findings on the role of carbon emission disclosures in reducing information asymmetry in the capital markets suggest the need for policymakers to promote greater carbon emission disclosures in the USA and other countries where such disclosures have been traditionally less emphasized. As to stakeholders, bringing corporate carbon emission disclosure in line with recommended guidelines will require them to exercise more direct stakeholder pressure to encourage firms to fully participate in the CDP project. This is particularly critical in settings of regulatory inaction and weak enforcement with respect to environmental policies and disclosure such as the USA.

Social implications
The results span the current gap between two broad perspectives on corporate social responsibilities. The traditional shareholder perspective argues that companies only participate in socially responsible activities which increase shareholder value, while an alternate perspective argues that companies also undertake social responsibilities to benefit society even at the cost of shareholders (Moser and Martin, 2012). The study demonstrates that the two perspectives are not always at odds, carbon emission disclosure not only provides important information on the corporate social responsibility of the firm but also contributes to enriching the information environment leading to reduced information asymmetry in the equity markets for US firms. Thus, from both a stakeholder and capital market perspective, firms have incentives to provide carbon emission disclosures voluntarily. More direct stakeholder pressure may be helpful to encourage more firms to provide complete carbon emission information and opt to make it available to the public.

Originality/value
Few studies investigate the impact of CDP disclosure on the information environment of public companies. The lack of research on this key connection between new disclosures on carbon emissions and information asymmetry in the capital markets is the primary motivation for the paper. The study also provides important insights on disclosure level; just participating in the CDP survey is not enough, the degree of participation is also important. The results of the study suggest that the varying level of disclosure matters, the greatest benefits in terms of reduction of information asymmetry accrue to firms that provide complete information and opt to make it available to the public.