Incremental information content of firm-level and segment-level water information for investors' judgments of future earnings

Abstract

This study examines the information content of sustainability reports that include information designed to assist users to assess firms' operational risk associated with water sufficiency. In particular, it examines the impact on investors' earnings predictions of information indicating that mining firms have either sufficient or insufficient water to meet their planned levels of production without incurring high costs. It also investigates the impact of segment-level water information on investors' earnings predictions. The study adopts an experimental research method and focuses on the future earnings judgements of non-professional investors. Drawing upon prior literature on the value relevance of non-financial information and risk disclosures (Coram, 2010; Fortin & Berthelot, 2012), the study finds that the provision of firm-level water information is associated with a decrease in investors' judgements of future earnings. Moreover, consistent with negativity bias theory (Coram, 2010; Kahneman & Tversky, 1984), the results show that the provision of firm-level water information is associated with a greater change in investors' judgements of future earnings when the water information indicates that there is likely to be insufficient water (high operational risk) compared to when it indicates sufficient water to meet future production needs (low operational risk). The results also reveal that when firm-level water information suggests there is likely to be insufficient water to meet future production needs, the provision of segment-level water information that indicates that both segments will have insufficient water to meet future production is associated with a further decrease in investors' judgements of future earnings. In contrast, when the firm-level water information indicates a sufficient water supply, the provision of consistent segment-level water information is not associated with an increase in investors' future earnings judgements. Consistent with the belief adjustment theory, management earnings forecast literature, and literature on investors' risk judgements, the study also finds that when the firm-level water information suggests sufficient (insufficient) water firm-wide to meet future production, the provision of segment-level water information that suggests that at least one segment has insufficient (sufficient) water to meet future production is associated with lower investors' judgements of future earnings. Together, these findings provide evidence that firm-level information that informs investors about firms' operational risk relating to water insufficiency is relevant to investors' future earnings judgements. Segment-level operational risk information also provides insight into the firm's possible future performance, which could differ due to different segment levels of operational risk relating to water sufficiency. This study adds to the extant literature by providing evidence that disclosure about operational risk provides information incremental to financial reports in influencing investors' judgements of future earnings. It does so by showing for the first time that the usefulness of segment information to investor' judgements translates into a non-financial, segment-level operational risk context. Furthermore, the study contributes to the developing discipline of water accounting by investigating the value relevance of water information. Show more