Testing the Separability Condition: Do Investors Price Social Policy Disclosures Correctly?

Authors: Amy Cyr-Jones, Sara Malik, Matthew C. Ringgenberg

Abstract: Corporations increasingly undertake and disclose policies that target social issues like poverty and racism. Theoretically, firms should not implement policies if they have no comparative advantage in executing them — such policies are called separable because their implementation can be easily separated from the regular business of the firm. We examine corporate disclosures to test whether investors distinguish between separable and non-separable activities when evaluating the implications of social policy disclosures. Consistent with theory, we find that both institutional and retail investors are less likely to exit holdings in firms that disclose non-separable policies. Moreover, we find a positive announcement return to non-separable policies but not separable policies. The results help resolve a puzzle regarding the lack of consistent announcement returns around social policy disclosures and suggest that regulators should distinguish between separable and non-separable activities when developing reporting standards.