Company investment announcements and the sustainability agenda

Abstract

This thesis empirically investigates the impacts of environmental (E), social (S), and governance (G) credentials, managerial tone, and information complexity on the stock market’s valuation of corporate investment decisions, with and without a sustainability agenda, in the UK from 2013 to 2021. The motivation behind this study is derived from the exposure of listed companies to investor scrutiny of sustainability strategies and disclosures to identify whether or not markets encourage the sustainability agenda. Using company investment announcements as the basis of investigations, this study examines the stock market reaction to a set of sustainable and non-sustainable investments. An event study is conducted to evaluate the abnormal returns to the investment announcements. The study addresses how a set of firm-specific ESG credentials affect the stock market’s valuation of investment decisions. Additionally, this study examines the effect of the tone conveyed by managers and the information complexity of investment announcements on the stock market’s valuation of investment decisions. Textual analysis using the Loughran and McDonald dictionary is employed in examining managerial tone and information complexity. The empirical tests of hypotheses are conducted using pooled ordinary least squares (OLS) regressions. The findings reported in this thesis indicate that the stock market positively values sustainable investment, although slightly lower than their non-sustainable counterparts. The discount on market valuation is pronounced for environmental and social credentials and weak ESG engagements increase the market’s valuation of corporate investment decisions. Of the two key environmental measures (resource use efficiency and emissions scores) examined, weaker emission credentials increase the stock market valuation of corporate investment decisions with a sustainability agenda, whereas weaker emission credentials reduce the stock market valuation of corporate investment decisions without a sustainability agenda. Furthermore, the effect of governance credentials, particularly governance scores (G), on the stock market’s valuation of investment decisions is impacted by profitability, leverage, growth opportunities, and sustainability-based compensation. Finally, the tone employed in investment announcements by managers contains incremental information that the stock market responds to, particularly in investments with a sustainability agenda. However, high information complexity reduces the market’s valuation of investment decisions, but slightly less so for sustainable investments. The evidence documented in this thesis has implications for allocative efficiency and suggests that new sustainable investments should be encouraged for pecuniary reasons.