Market Response to Environmental Information Produced Outside the Firm .

Abstract ABSTRACT: Over the last ten years, large corporations, have significantly increased their voluntary disclosures of socially-oriented information in annual reports. External organizations such as the Council on Economic Priorities (CEP) also have been active in producing information bearing on firms' social performances--particularly with respect to pollution control. This study investigates whether security price movements are associated with the release of externally produced information about companies' performances in the pollution-control area--information which has attributes of consistency and comparability not typically found in voluntarily reported, socially-oriented data. Specifically, the study investigates security price movements associated with the release of eight major studies conducted by the CEP of firms' environmental performances in four industries. The observed price movements are consistent with changes in investors' perceptions of the probability distributions of future cash flows of the sample firms at the times of release of the CEP studies. The reported results also are consistent with investors using the information released by the CEP to discriminate between companies with different pollution-control performance records.