Are Firms’ Disclosed Diversity Targets Credible?

Abstract

Amid growing pressures to comply with ESG standards, firms increasingly disclose their ESG targets. However, given the difficulty in verifiability, it is unclear whether this public commitment to ESG goals is credible or only cheap talk. In this paper, we answer the question of how stakeholders should interpret firms’ disclosure of ESG goals and what they could expect in terms of firms’ future ESG performance. Specifically, we examine whether firms that publicly disclose diversity targets truly increase their diversity levels after the target disclosure. Exploiting a novel dataset of detailed firm employee records, we find that firms that disclosed a diversity target have indeed improved their diversity, but the diversity level already increased substantially prior to the target disclosure. To further explore how certain target characteristics are associated with disclosure credibility, we hand collected and coded firms’ diversity goals from their sustainability reports. We show that numerical, forward-looking, and all-employee targeted goals are more credible than others. We also find that firms that are historically more compliant, with greater institutional pressure, and with greater innovation demand tend to disclose more credible goals, suggesting the importance of examining firms’ incentives rather than the act of disclosure itself. Overall, our results generate practical implications for two groups: investors adjusting their decisions based on ESG disclosure and regulators assessing the necessity and content of ESG disclosure regulations.