Companies often face a dilemma about how much detail to share with investors about topics that aren’t strictly required by regulators, such as certain sustainability and data privacy information. It turns out that business leaders who voluntarily report the industry standards they’re following often help clarify what topics are most relevant to a firm’s performance—and prompt more informed discussions between corporate leaders and the capital markets.
Public companies typically must meet strict disclosure requirements for financial results, but the rules around environmental, operational, customer, or employee-related data have—until recently—been far less consistent. Various regulators worldwide have weighed in with different approaches, creating added complexity.
Even in the absence of a legal mandate, voluntarily sharing industry-specific standards can serve as a “coordinating device” that can improve communication between companies and investors, explains George Serafeim, the Charles M. Williams Professor of Business Administration at Harvard Business School and one of the authors of a new study to be published in the Review of Accounting Studies.
If an accounting standard helps an organization learn what is likely to be most important for investors, it focuses the organization.
When a reputable standard-setter pinpoints which topics are likely to affect a firm’s performance and which metrics are important to track, managers gain confidence that these subjects genuinely matter to investors. That prompts a richer discussion in the quarterly calls with analysts—especially for firms that historically have not disclosed much information on those subjects.
He wrote “Disclosure Standards and Communication Norms: Evidence of Voluntary Sustainability Standards as a Coordinating Device for Capital Markets” with Khrystyna Bochkay, associate professor at the University of Miami, and Jeffrey Hales, professor at the University of Texas at Austin.
Coordinating expectations and reducing uncertainty
The study results reveal that standards help managers and investors learn from each other by steering the conversation toward subjects likely to be financially relevant. Before such clarity existed, many executives hesitated to share more than the bare minimum: Uncertain whether any given topic (for instance, workforce safety or data security) would strike analysts as relevant, companies might simply remain silent.
Using natural language processing to analyze more than 50,000 earnings conference call transcripts of US companies, the authors demonstrate that once standards are released for an industry, earnings-call discussions of those specific topics increase meaningfully. Notably, companies that had rarely broached such issues before show the largest jump, suggesting that standards help these “low disclosure” firms overcome uncertainty about what investors want to hear.
The researchers also found that when industry experts faced higher disagreement about which topics were financially relevant in their industry, the coordinating effect of the standards was stronger. In those industries, once the standards clarified what investors most cared about, firms and research analysts made larger adjustments in their communications—underscoring that standards have the most pronounced impact where the baseline level of uncertainty is highest.
Focusing on what matters
Importantly, the study finds that this new consistency in earnings-call dialogue replaces “noise.” That is, firms reduce time spent on topics tangential to their core operations and zero in on metrics the standards identify as financially relevant. Over time, that shift can create better benchmarks, allowing analysts to compare similar information across different companies.
“Benchmarking and relative performance evaluation is a very important mechanism for driving performance because if you don't benchmark against competitors, then you can always think that you're doing well,” says Serafeim.
In other words, standards do more than guide company communications—they create a more coherent framework for learning within the market. Investors and analysts can ask more precise questions; companies can respond with more consistent data; and, collectively, the conversation about performance becomes better aligned to focus on both material risks and opportunities.
A broader lesson for capital markets
While the study focuses on sustainability standards created by the Sustainability Accounting Standards Board, the findings hold a broader lesson for how capital markets evolve. Voluntary guidelines—when developed collaboratively with corporate insiders, analysts, and investors—can gain traction even without legal requirements. By helping all parties clarify expectations, these standards reduce the friction that often keeps useful information from surfacing.
The ecosystem comes together to create an institution because it understands that in the absence of it, that learning process could eventually happen, but it might take significantly more time.
As new rules and frameworks continue to emerge globally, the research shows why the market itself may embrace well-crafted guidance: Sharing relevant information can shorten the learning curve for managers and facilitate more informed investor decisions. In capital markets where knowledge often translates into better capital allocation, standards that coordinate a more relevant dialogue are a powerful tool for driving shared progress, Serafeim says.
Image created by Ariana Cohen-Halberstam with asset from AdobeStock/Artinun.
