HC 4 Flashcards
Two strategies acquiring a firm:
- naïve solution (assumption of information symmetry) –> offer: “middle”
- Normative solution (acknowledgement of information asymmetry) –> Optimal offer: “spoilsports”
Information asymmetry: countermeasures
- Signaling: costly signals attractive for good and unatttractive for bad parrticipants.
- Certificates
- Diplomas - Screening:
- Health checks - Monitoring
- Surveillance
- spot checks
Benefits of reporting:
- Disclosur of information can reduce information asymmetry
- Interest of both “sellers” and “buyers”: firms more attractive for investors
- Better conditions (lower costs) at the capital market
- Information transfers/spillovers
- Real effects of reportingC
Costs of reporting
Direct:
- Measuring and gathering of data
- Preparation, certification, dissemination
Indirect:
- “Opportunistic”: maybe you rather want/need to hide something
- Proprietary or sensitive information
- Information transfers/Spillovers
- Real effects of reporting
Financial reporting
- Backward-looking: focus on historic/past data
- Financial “bias” in current accounting
- Usually codified and regulated
- Supplementary:
- Strategy, narrative
- Outlook, expectations, and development
Sustainability reporting
Non-financial data
* Performance driving factors (e.g., customer loyalty)
* Historic data with future orientation
* Harder to quantify/measure
* Less standardized and regulated
* More comprehensive assessment of a company’s “fair value”
Key features of sutainability reporting
- Diversity of topics
- Diversity in measurement
- Diversity of users and uses
- Diversity in objective functions
- Voluntary nature of CSR activities
- Central role of externalities
- Long-term horizon
discussion sustainability reporting
- Heterogeneity in reporting
- Potential benefits of standardization, but challenging to design reporting requirements
- Harder to predict economic consequences of reporting compared to financial reporting
Materiality
Materiality in sustainability reporting refers to the process of identifying and prioritizing those environmental, social, and governance (ESG) issues that are most significant to an organization’s business and its stakeholders
materiality: inside-out perspective
when it peretains to the company’s material actual or potential postive or negative impacts on peoploe or the enviornment over the short-medium or long term
Materiality: outside-in perspective:
If it triggers or could reasonably be expected to trigger material financial effects on the company’s development in the short-, medium-, or long-term
Targeted transparency:
Aim to nudge firms towards changing their business activities in a socially desirable way.
Rationale for Mandatory Reporting
- Disclosure externalities: public value of the disclosed information differs from the private value.
- Consider previous discussion on cost-benefit trade-off
- Addressing such externalities is one of the primary motivations for a CSR reporting regime using double materiality.
- Moreover, CSR reporting can extend to topics and activities beyond the traditional boundaries of the firm (e.g., its supply chain).
Targeted Transparency Action Cycle
- Effect on changes of actual transparency
* Compliance, enforcement
* Information availability, production - Effect on stakeholders’ information set
* Reduced information search costs - Effect on stakeholders’ action
* Social preferences - Effect on changes of firms’ real actions (in response or in expectation)
* Direct transactions
* Increased competition
Challenges of ESG reporting
Ideal world
* Sustainability reporting meets all
stakeholder’s information demands
* Promoting efficient allocation of resources
* Internalization of externalities
Accurate and complete of information
Real world
* Information asymmetry & moral hazard
Disclosure as mechanism to reduce
information asymmetry
