We examine the relation between managers’ decisions whether to disclose climate-change risk (CCR) in Form 10-K and firm risk. Ambiguity about the materiality of CCR and the SEC’s inconsistent enforcement of CCR disclosures cause uncertainty about whether disclosing CCR is mandatory or voluntary.

We hand-collect data over a seven-year period from about 3,000 Form 10-K filings of S&P 500 firms on whether they disclosed CCR. We use SASB’s Materiality Map™ to proxy for report users’ judgments of the materiality of CCR.

We find that the cost of equity (COE) of disclosing firms is 21.3 bps lower than the COE of non-disclosing firms. More importantly, we find that for firms where report users judge CCR as material, the COE of disclosers is 49.1 bps lower than that of non-disclosers. In contrast, we find no association between disclosing CCR and COE for firms where report users judge CCR as not material.

By: Ella Mae Matsumura, University of Wisconsin-Madison – Department of Accounting and Information Systems, Rachna Prakash, University of Mississippi – Patterson School of Accountancy, and Sandra C. Vera-Munoz, University of Notre Dame – Department of Accountancy

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