Do Investors React Differently to Interim Target Disclosures for Emissions Reduction Goals Depending on the Difficulty of the Target?

Abstract

Regulators are mandating interim target disclosures for firms disclosing long-term emissions reduction goals. I examine how interim target disclosure affects investors’ perceptions of a firm’s commitment to its long-term emissions reduction goal and subsequent investment decisions. I predict that the difficulty of the interim target moderates the effect of interim target disclosure on investors’ perceptions of the firm’s goal commitment. I find consistent results testing these predictions using a 2 × 3 between-participants experiment where I manipulate the presence and difficulty of an interim target. Specifically, goal commitment perceptions increase in response to an interim target disclosure when the target appears difficult. However, this effect backfires and goal commitment perceptions decrease if the interim target does not appear difficult. I also predict and find that this effect on perceptions of goal commitment ultimately affects investment decisions. The finding that interim target disclosures can backfire, and thus mandates can be counterproductive to investors’ interests, is important for regulators and improves theoretical understanding of investors’ decision making.