The Verbal Tone in Mandatory Environmental Disclosures: Evidence from Changes in Disclosures Following SEC Guidance

This study investigates whether the verbal tone of environmental disclosures in companies’ annual reports changed following SEC interpretive guidance released in 2010. The content analysis software DICTION is used to construct measures of verbal tone and size of the disclosures. For a sample of companies in both environmentally sensitive and non-sensitive industries, we find an increase in the degree of ‘realism’ and ‘certainty’ of the disclosures following the release of the SEC guidance. The results hold after controlling for environmental performance and firm specific characteristics. In addition, the size of environmental disclosures increased in the year preceding the release of the guidance, suggesting that companies may have anticipated an interpretive release from the SEC. Furthermore, there were no significant changes in the size and verbal tone of voluntary environmental disclosures over the same time period, suggesting that the changes in the annual reports filed with the SEC resulted primarily from companies’ responses to the interpretive guidance. These findings show that impressions management is less prevalent in mandated environmental disclosures.