The Mix of Soft and Hard Information in ESG Reports and Impression Management

Abstract

We use textual analysis to measure the mix of soft and hard information disclosures in voluntary Environmental, Social, and Governance (ESG) reports and extrapolate the impact of a proposed mandatory disclosure regime. We proxy for hard information with the use of quantitative or specific disclosures and soft information with the use of boilerplate and forward-looking language. We find that firms with poor ESG performance and other motivations for impression management disclose more soft information and less hard information. We also find soft information to be less predictive of future ESG performance than hard information. We find that firms are not successful at using soft information for impression management: soft information is not associated with enhanced stakeholder perception of ESG performance, while hard information is, as evidenced in reduced shareholder activism and increased third-party awards. Given disclosure mandates tend to constrain soft information and promote hard information, we expect a mandatory ESG disclosure regime to improve disclosure quality though have limited impact on sophisticated stakeholders.