BEHAVIORAL RESEARCH IN ACCOUNTING Vol. 23, No. 1 2011 pp.

109129

American Accounting Association DOI: 10.2308/bria.2011.23.1.109

Retail Investors Perceptions of the Decision-Usefulness of Economic Performance, Governance, and Corporate Social Responsibility Disclosures
Jeffrey Cohen Boston College Lori Holder-Webb Western New England College Leda Nath University of Wisconsin David Wood Boston College
ABSTRACT: Academic literature and the business press have placed increased attention on the corporate disclosure of nonnancial information. This study uses a survey of 750 retail investors to examine perceptions about indicators of economic performance, corporate governance policies and performance, and corporate social responsibility. Survey results indicate that retail investors currently are most concerned with economic performance information, followed by governance, and then corporate social responsibility information. Those respondents who currently hold socially responsible investments use more of all three types of nonnancial information than respondents who currently do not hold socially responsible investments. Further, retail investors clearly prefer to obtain information about corporate social responsibility information from a third-party source and governance information from an audited or regulated document, while they use both sources to garner information about indicators of economic performance. Respondents expressed an interest in increasing their use of nonnancial information in the future. When respondents were asked to indicate the specic types of information they had the greatest interest in using in the future, economic performance indicators such as market share, customer satisfaction, and product innovation information were predominant.
We acknowledge the generous nancial support of the FINRA Investor Education Foundation, the research assistance of Belinda Hoff and B. K. Cohen, and the suggestions made by the editor, Theresa Libby, and two anonymous reviewers. The views expressed in this paper are the views of the authors and not the views of the FINRA Investor Education Foundation.

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Cohen, Holder-Webb, Nath, and Wood Keywords: retail investors; nonnancial information; corporate social responsibility. Data Availability: The survey instrument is available from the researchers upon request.

INTRODUCTION n this study we explore how retail nonprofessional investors in the United States value information not typically captured in traditional nancial statements. While the majority of extant accounting research involves the expectations and preferences of professional investors and analysts, retail investors are a signicant element in U.S. equity markets Frederickson and Miller 2004. These investors hold approximately one-third of all outstanding shares. Bogle 2005 and Elliot et al. 2007 point out that there are over 40 million nonprofessional investors in the stock market. A point of concern is that this investor class may also lack the degree of sophistication that regulators assume is possessed by users of corporate nancial statements.1 The academy and regulatory agencies have called for a reexamination of the value of nonnancial informationinformation that is not directly related to a corporations balance sheet but offers material evidence for investor decision-making Chua 2006; Simnett et al. 2009. Chua 2006 highlights a disparity between the increasing importance of intangible wealth in determining corporate value and a lack of increased access to information about that wealth through the traditional nancial statements. Emphasis on nancial information may omit other salient information about the company Lev and Zarowin 1999, especially for investors interested in the manner in which a rm interacts with society at large Epstein and Freedman 1994.2 Many parties support increasing disclosure of nonnancial information. PricewaterhouseCoopers 2002 nds that most top executives at large multinational rms believe that nonnancial performance measures outweigh nancial performance measures in terms of creating and measuring long-term shareholder value. Nonnancial indicators can offer key insight into future performance, and at the same time serve as a proxy for identifying well-managed companies Coram et al. 2006, 2009. Narayanan et al. 2000 also argue that informed managers may reduce information asymmetries through voluntary disclosurein particular, voluntary disclosure of nonnancial information. Investors are demanding that closer attention be paid to the relationships between their particular investments and larger environmental, social, and governance trends Hawley and Williams 2000. The United Nations Principles of Responsible Investment UN PRI, introduced in April 2006, included signatories from asset owner, asset management, and investment consultancy communities representing over $9 trillion in investment who agreed to incorporate material environmental, social, and governance information into their investment practice UN PRI 2007. The socially responsible investment community argues as well that information about corporations environmental and social performanceunderstood broadly as their relationship with stakeholdersoffers material information about their long-term prospects Simnett et al. 2009; Social Investment Forum SIF 2006; KPMG International 2005.

We recognize that traditional nance and accounting literature has viewed the market as efcient, and therefore the actions of individual investors may not matter Fama 1970; Watts and Zimmerman 1986. However, recent research demonstrates that the market may not be as efcient as once thought Libby et al. 2002. Libby et al. 2002 cast doubt on the existence of natural selection that eliminates irrational traders in dynamic equilibria. Thus, understanding individual retail investors preferences is important for understanding the functioning of the markets. For example, investors may prefer to allocate their resources to companies who use disclosures to assert a commitment protecting the environment or to being good citizens within the communities in which they are located Holder-Webb et al. 2009.

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Despite increased attention on analysis of nonnancial performance measures, little attention has been devoted to how retail investors currently view and value such information. Research has focused on the theoretical case for using nonnancial information in investment decision-making and on demonstrating the case for viewing such information as material Amir and Lev 1996; Ittner and Larcker 1998; Banker et al. 2000. Understanding the preferences and expectations of retail investors will be helpful in providing improved information in the future. This study contributes to the understanding of the current value of nonnancial reporting by analyzing retail investor preferences about preferred format, use, and value of three categories of nonnancial information. We examine the perceptions of retail investors concerning indicators of economic performance, corporate governance policies and performance, and corporate social responsibility CSR, a category covering a range of relationships with corporate stakeholders. We conducted an online survey of 750 retail investors to determine their information and disclosure preferences. Survey results indicate that respondents primarily use economic performance information, followed by governance, and then CSR information. Respondents expressed an interest in increasing their use of nonnancial information in the future. Respondents prefer receiving indicators of economic performance and CSR information from a third party, while they prefer obtaining governance information from an audited or regulated document. LITERATURE REVIEW AND RESEARCH QUESTIONS With the rise of behavioral nance, it has become apparent that the content and format of disclosures inuences retail investment decisions Barber and Odean 2002; Huberman 2001; Thaler 2004. Barberis and Thaler 2002 highlight how the format, salience, and framing of information affect investment judgments and decisions of individuals. They conclude that if nonnancial information is selectively disclosed by companies or if the information is not readily available, retail investors may not be able to access necessary data when evaluating potential investment opportunities.3 Accordingly, corporations and regulators may be interested in the types of information that retail investors use and what these investors perceive to be the most effective manner of disclosing this information. We choose three types of nonnancial information that may be of interest to retail investors to ascertain the informations potential usefulness for investment decisions: indicators of economic performance, governance, and CSR information. Indicators of Economic Performance Indicators of economic performance shed light on a companys current and future standing within an industry, as well as upon its ability to generate future cash ows with current investment and to effectively manage the costs of production and sales Eccles et al. 2001. Ittner and Larker 1998 nd that customer satisfaction measures are indicators of accounting metrics, and investors may be able to make better decisions if provided with customer-related measures.4 Coram et al. 2006 nd that the voluntary disclosure of nonnancial information such as customer satisfaction ratings affects estimates of the trend of future stock prices. Coram et al. 2009 also nd that positive nonnancial information has the greatest inuence on stock price prediction when it has also been voluntarily audited. These studies collectively suggest that indicators of economic performance may be valuable to investors and that companies may disclose this information as a
3

Adams 2004 and Cohen et al. 2009 demonstrate that voluntary corporate disclosures of nonnancial information are generally positive in tone, reecting well upon the company and its management, rather than neutral or negative in tone; thus, this bias may lead retail investors to be skeptical of much of the nonnancial information that is currently disclosed. Ittner et al. 1997 found that nonnancial measures such as market share data are frequently used to evaluate managerial performance. The relevance of this type of information to the employee evaluation process suggests that managers may respond by increasing the disclosure of indicators of economic performance and sustainability metrics.

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signaling device to the investing public. It may also be more difcult to manipulate indicators of economic performance in the short- or near-term than it would be to manipulate nancial statement data. Consequently, increased disclosure of indicators of economic performance may lead to rms paying more attention to long-term performance. Governance Information The Sarbanes-Oxley Act of 2002 SOX dramatically increased corporate governance requirements and disclosures in the United States. It substantially increased access to information about structures and processes in place for increasing the transparency of corporate governance, the mitigation of risks to corporate reputations, and governance mechanisms to prevent fraud and mismanagement. Investors may obtain an advantage by paying attention to governance information: if key board committees such as the audit committee or compensation committees, for example, are too closely aligned with management, then the investors holdings may be at excessive risk. However, traditional measures of board independence may not truly capture the substance of board independence, as they do not capture social networks between board members or other subtle contextual factors that inuence member and voting behavior Westphal and Stern 2006; Carpenter and Westphal 2001. In fact, it may be useful for some rms to have management sitting on a board, as it may improve the efciency of the information ow between management and other board members Cohen et al. 2008. Larcker et al. 2007 nd that it is often difcult to establish causal links between measures of governance quality and the performance of the rm. Accordingly, we are interested in how retail investors are currently using governance information and how its disclosure may be improved. Corporate Social Responsibility Information A third area of nonnancial information that has received much attention from academics and regulators is CSR information Simnett et al. 2009. Chua 2006 highlights the growth in these disclosures by large rms, conrming the ndings of Cormier and Magnan 2003 that large rms have a greater need than small rms to manage risks to their reputations. Current CSR disclosures expand sustainability issues beyond environmental considerations; this trend is particularly pronounced in Europe and in Japan Kolk 2003. Social accounting advocates contend that nancial information alone does not offer stakeholders such as government regulators, affected local communities, or environmental activist groups the information necessary to evaluate a corporations full range of impacts on society. The growth in Socially Responsible Investment SRI in the United States and Europe, along with enhanced reporting movements such as the Global Reporting Initiative GRI, founded in 1998, have brought attention to the ways in which traditional nancial reporting may overlook crucial issues that have a long-term impact on corporate performance. However, there is some question concerning the quality of CSR disclosures. Ball et al. 2000 argue that even if the CSR information is voluntarily audited, the disclosures are used to boost management rather than to increase corporate transparency. This concern is echoed by Adams 2004, who nds that disclosures merely bolster the companys desired image rather than increase accountability to various constituencies. Despite the shortcomings that stem from a high degree of discretion and a low degree of accountability, high-quality CSR disclosure does appear to be associated with performance. For example, Al-Tuwaijri et al. 2004 nd that good disclosure of environmental concerns is associated with good environmental performance, which in turn manifests in improved nancial performance. Collectively, the review of the CSR literature suggests that CSR disclosures are becoming an increasingly important component of nonnancial information and that elements of the investment community are increasingly demanding the disclosure of

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this type of information. Given the increased attention paid to the environment and other CSR information, it is potentially important to evaluate whether retail investors would use this type of information if credibly disclosed. Based on the above review, it is unclear which type of nonnancial information would receive the most attention by retail investors. Accordingly, in this research, we address the following three nondirectional research questions: RQ1: Which types of nonnancial information e.g., governance, indicators of economic performance, and social do investors use and perceive to be important for investment decisions? RQ2: Which specic corporate reporting formats do investors nd most effective for use of nonnancial information for investment decisions? RQ3: What type of nonnancial information would be useful in future investment decisions? METHODOLOGY Investor demand for nonnancial information was assessed via an online survey of retail investors from across the U.S.A. The objectives of these inquiries were threefold: to assess the extent to which retail investors use and value various types of nonnancial information; to determine the format that retail investors prefer for nonnancial information; and nally, to identify any presently unmet needs for nonnancial information. Online Retail Investor Survey The online survey was conducted by GlobeScan, Inc., a professional data-collection rm. All 750 retail investors in the sample were drawn from a panel comprised of members of the U.S. general public and were recruited by email invitation.5 Each respondent was offered compensation of $25 for completing the survey. Each respondent was required to meet the following criteria in order to be eligible to participate in the survey: s/he must have bought or sold an investment product within the past year; s/he must be involved in gathering the information needed to make household investment decisions; and s/he must be a U.S. citizen aged 18 years or older. Survey contents were based on the three categories of nonnancial information described above and displayed below: indicators of economic performance information, governance information, and social information which included also environmental and human rights information. Survey questions were designed to identify which types of information investors currently used, which types of information investors would use if provided, and in what format each type of information should be provided. In addition, the survey included questions on current investment behavior and knowledge plus basic demographic information. Survey Respondent Prole Table 2 displays selected self-reported demographic and investing characteristics for sample respondents. The sample n 750 consisted of 408 males and 342 females. Caucasian respondents represented 84.8 percent and non-Caucasians 15.2 percent. The mean age was between 40
5

All respondents were members of the GlobeScan database and had previously expressed a willingness to be contacted for surveys and other investment research. It is unclear whether people who express an interest in participating in research have structurally different utility functions or preferences about corporate disclosure; to the extent that this may be true, the study results may indicate an interest in disclosures that is higher than that possessed by the general population. However, we see no reason to believe that these subjects would have differential types of demand for disclosure than the general population even though the overall demand levels may be higher.

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TABLE 1 Types of Nonnancial Information Included in the Study

Economic Performance and Sustainability Market Share Quality Rankings Customer Satisfaction Survey Data Employee Satisfaction Data Metrics Turnover Data Innovation Data Other Governance Independence Standards Board Selection Processes Executive Compensation Employee Training/Human Capital Development Change of Control Procedures Audit Processes Ethics Guidelines Management Systems Adoption of Balanced Scorecard/JIT/TQM Other Social Workforce Retention Diversity Information Health and Safety Record/ Industry Metrics Supply Chain Practices Human Rights Information Humanitarian Initiatives Customer Satisfaction or Product Safety Information Community Relations Information Political Giving/Lobbying/ Related Environmental Ratings Environmental Programs Other

and 59 years, and the mean household income was between $80,000 and $119,000. Most respondents 67.5 percent held a college degree or higher. Each respondent had made at least one investment decision in the 12-month period prior to taking the survey. Of these, 54 percent had made between one and ve trades; 21 percent had made between six and ten trades; and 10 percent had made more than 20 trades. Most trades were small; 70 percent were less than $6,000, with 35 percent under $2,000. The primary trading/investment channel for respondents was online/internet trading services 54 percent of respondents, with 21 percent using a nancial advisor to place trades, and 20 percent using a broker. Overall, respondents portfolios were more heavily weighted to stocks 43 percent of asset allocation and mutual funds 35 percent of asset allocation. Most respondents reported being very or extremely involved in gathering information for investment decisions 72 percent and very or extremely involved in nal investment decisions 88 percent. In addition not separately reported, 82 percent of respondents agreed that long-term growth was the main objective of their investment strategy. Similarly, 52 percent disagreed that the main objective was short-term gains. While 66 percent of respondents stated that they do not use Socially Responsible Investment SRI products or services, 79 percent had some part of their portfolio invested in SRI, with 43 percent having more than a quarter of their portfolio allocated to SRI products.6 RESULTS Current Use of Nonnancial Information Research Question 1 asks what types of nonnancial information retail investors are using for their investment decisions. Respondents were asked to rate the different types of indicators of economic performance, governance, and CSR information that they used on a seven-point Likert
6

The results of this survey were reported to the FINRA Investor Education Foundation by Wood and Hoff 2008, submitted as part of the grant specications under which information was gathered for the project.

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TABLE 2 Respondent Demographic Characteristics and Investment Experience

n Gender Male Female Age 1829 years 3039 years 4049 years 5059 years 6069 years 70 years or more Race African American Asian American Hispanic Native American Caucasian Other Education Level Some high school High school graduate Some college or university Two-year technical degree Four-year college degree Graduate degree Household Income $20,000 $20,000$39,999 $40,000$59,999 $60,000$79,999 $80,000$99,999 $100,000$119,999 $120,000$139,999 $140,000$159,000 $160,000 Decline to answer Recent Trading Activity 15 times 610 times 1115 times 1620 times More than 20 times Reported Involvement with Investment Research Slightly involved Somewhat involved Very involved Extremely involved 408 342 96 143 149 151 119 92 31 48 15 9 636 11 1 46 133 64 302 204 15 68 126 155 115 88 48 27 58 50 403 159 70 46 72 79 131 267 273 % 54.4 45.6 12.8 19.1 19.9 20.1 15.9 12.3 4.1 6.4 2.0 1.2 84.8 1.5 0.1 6.1 17.7 8.5 40.3 27.2 2.0 9.1 16.8 20.7 15.3 11.7 6.4 3.6 7.7 6.7 53.7 21.2 9.3 6.1 9.6 10.5 17.5 35.6 36.4 (continued on next page)

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TABLE 2 (continued)
n Reported Involvement with Investment Decision Slightly involved Somewhat involved Very involved Extremely involved 35 54 272 389 % 4.7 7.2 36.3 51.9

scale where 1 not used at all and 7 always used. Table 3 presents the results for each type of information. Table 3 displays frequencies using each information type at a score of 5 or higher on the seven-point scale, and mean values from the Likert scale for each information type. The results shown in Table 3 suggest relatively heavy use of economic performance information, with over 60 percent of respondents indicating use of market share and product innovation information, over 40 percent of respondents using quality and customer satisfaction information, and over 30 percent of respondents using employee satisfaction and turnover information. Within this category, the mean interest scores are the highest for market share 5.03. Customer satisfaction and product innovation also have relatively high interest means, at 4.46 and 4.90, respectively. Governance information appears to be used frequentlyand if not as heavily as economic performance information, then with greater consistency. At least 40 percent of the respondents indicate use of director independence standards, change of control information, audit processes, ethics guidelines, and management control strategy information. Mean interest scores are moderate, ranging from 3.82 to 4.35, suggesting that while investors considered this information, they did not emphasize it heavily in general. Respondents report lower rates of use of CSR information overall, with the most frequently used item being product safety used by 52.7 percent of respondents. For the most part, usage rates are low, in the 30 percent range. While fewer respondents indicate use of this type of information, the mean interest scores are moderate. Since a signicant portion of the nonnancial variables studied fall under the general heading of stakeholder involvement and social responsibility issues, survey respondents were classied according to whether they currently invest in SRI products.7 Table 4 presents the mean interest scores, with associated t-statistics, for each group investors with SRI products versus investors without SRI products. The difference in the current usage of nonnancial informationboth CSR and otherwiseis dramatic between these two groups: the SRI investors evince higher mean use of all data items across the board. Investor demographic characteristics affected the level of use of different forms of information. Partial correlations not reported separately for all currently used forms of information suggest that age, race, education, trade size, and trading frequency have some relationship with the demand for information. Therefore, we provide a multivariate analysis of the demand for the three different classes of information: economic performance, governance, and CSR. Each class consists of a subset of individual indicators market share, product innovation, etc. that subjects rated on a 17 scale to indicate their current use where 1 not used at all and 7 always used.
7

Respondents were asked yes/no if they use socially responsible investing products or services, such as SRI stock and mutual fund screens. Respondents were also asked to estimate the percentage of the value of their portfolios presently invested in SRI products.

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TABLE 3 Recent Use of Nonnancial Information (n 750)

No. Respondents Rating Current Use at 5 or Highera (%) 508 67.8% 321 42.7% 430 57.4% 278 37% 271 36.2% 500 66.7% 302 40.3% 281 37.5% 388 51.7% 304 40.5% 359 47.9% 344 45.9% 363 48.4% 290 38.7% 194 25.9% 247 32.9% 295 39.3% 220 29.3% 226 30.1% 395 52.7% Mean (S.D.) 5.03 1.74 3.86 2.00 4.46 1.96 3.70 1.98 3.66 1.98 4.90 1.86 3.82 1.99 3.73 1.95 4.35 1.98 3.80 2.02 4.13 2.01 4.00 2.08 4.15 1.96 3.70 2.01 3.19 1.95 3.50 1.97 3.73 2.01 3.38 1.98 3.39 1.93 4.32 2.00 (continued on next page)

Measure Economic Performance Market share Quality awards or certication Customer satisfaction data Employee satisfaction data Staff turnover and retention Product innovation Governance Director independence standards Board selection processes Executive compensation Change of control procedures Audit processes Ethics guidelines Innovative management strategies Corporate Social Responsibility Employee benets and retention Employee diversity Employee training Health and safety records Human rights information Humanitarian initiatives Product safety

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TABLE 3 (continued)
No. Respondents Rating Current Use at 5 or Highera (%) 235 31.3% 271 36.1%

Measure Political giving/lobbying Environmental ratings/programs

Mean (S.D.) 3.44 1.97 3.65 1.95

Based on responses to a Likert-type scale where 1 not used at all, and 7 always used.

Dependent variables for each class were computed by summing the current use rankings for all individual indicators within that class refer to Table 1 for a breakdown of which indicators are in which class. Thus, the dependent variables represent an aggregate measure of each respondents current information usage for the given class. These aggregate measures were regressed on a vector of demographic variables and investing behavior. Results are presented in Table 5. The results in Table 5 suggest that younger investors possess greater demand for information than older ones do, for all classes of information. Household income is also a determinant for all classes of information, with wealthier households using more information. Interestingly, education is signicant, but negative, indicating that respondents with less formal education tend to use more nonnancial information than those with more formal education.8 The respondents reported involvement in investment research is positively associated with demand for all classes of information, but their reported involvement in the investment decision is not. Finally, the average size of the respondents stock trades is positively associated with demand for information of all types. Thus, it appears that demographics need to be considered when evaluating the use of nonnancial information for investment judgments and decisions. As stated previously, RQ1 explores the current use of nonnancial information. Overall, it appears that economic performance is the most widely used class of information and that retail investors who currently hold SRI products use all types of nonnancial information more that retail investors who currently do not hold SRI products. It may be that investors who are more predisposed to hold these types of products will search for this type of information or, alternatively, exposure to this type of information opens the door for investing in these types of products. Finally, the demographic data suggest that younger individuals are using this information more extensively, which perhaps is an indicator that nonnancial information will be more widely used in the future. Format Preferences for Nonnancial Information Research Question 2 asks whether retail investors have preferences for how they get their information for investment decisions. The survey requested respondents to indicate their most favored information source for the three classes of disclosures examined in this study. The survey provided six avenues for disclosure: the companys own website unaudited; companys annual
8

This may be an artifact either of information overload with respect to the professional jobs generally held by more highly educated individuals, more efcient information search and discrimination practices in the more highly educated groups, or that less-educated respondents may simply nd the nancial information to be too complex and technical.

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TABLE 4 Current Use of Nonnancial Info by SRI and Non-SRI Investorsa

SRI Investor Meanb (S.D.) (n 116) 5.51 1.35 5.16 1.57 5.45 1.57 5.12 1.70 4.97 1.70 5.53 1.44 5.16 1.57 4.98 1.80 5.28 1.60 5.04 1.67 5.30 1.57 5.55 1.48 5.22 1.62 4.98 1.70 4.84 1.87 4.95 1.78 5.05 1.66 5.15 1.52 5.22 1.48 5.43 1.48 4.78 Non-SRI Investor Meanb (S.D.) (n 493) 4.98 1.77 3.57 1.20 4.22 1.97 3.31 1.90 3.36 1.94 4.83 1.91 3.57 2.00 3.47 1.93 4.17 1.99 3.55 2.03 3.94 2.03 3.62 2.06 3.95 1.95 3.40 1.99 2.77 1.78 3.18 1.89 3.36 1.96 2.89 1.83 2.92 1.78 4.00 2.03 3.13

Measure Indicators of Economic Performance Market share Awards or certication for quality Customer satisfaction data Employee satisfaction data Staff turnover/retention Innovative products/production processes Governance Info Director independence standards Board selection processes Executive compensation Change of ownership procedures Audit processes Ethics guidelines Innovative management strategies Social Information Employee benets and retention plans Employee diversity Employee training Health and safety records Human rights information Humanitarian initiatives Product safety Political giving/lobbying

t-value (p) 3.57 0.000 9.31 0.000 7.20 0.000 10.11 0.000 8.96 0.000 4.40 0.000 9.28 0.000 8.08 0.000 6.40 0.000 8.32 0.000 7.90 0.000 11.65 0.000 7.31 0.000 8.74 0.000 10.81 0.000 9.51 0.000 9.55 0.000 13.79 0.000 14.51 0.000 8.66 0.000 9.51

(continued on next page)

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TABLE 4 (continued)
SRI Investor Meanb (S.D.) (n 116) 1.62 5.18 1.42

Measure Environmental ratings and programs

Non-SRI Investor Meanb (S.D.) (n 493) 1.96 3.23 1.90

t-value (p) 0.000 12.38 0.000

Groups are based on responses to the question Do you use socially responsible investment SRI products or services, such as an SRI stock or mutual fund screen? Based on responses to a Likert-type scale where 1 not used at all, and 7 always used.

TABLE 5 OLS Regression of Determinants of Current Demand for Different Types of Nonnancial Information (n 750)
Economic Performance Indep. Var.a Gender Age Income Education Race SRI Investor No_Trades Inv_Resch Inv_Dec Size_Trade F-test Adj. R2 Std. Coef. t-stat 0.017 0.43 0.167 4.44 *** 0.088 2.36 * 0.107 2.91 ** 0.051 1.44 0.003 0.09 0.030 0.76 0.122 2.405* 0.018 0.359 0.136 3.434*** 6.623*** 0.07 Governance Std. Coef. t-stat 0.002 0.06 0.131 3.51 *** 0.082 2.21 * 0.085 2.34 * 0.053 1.50 0.014 0.371 0.042 1.07 0.168 3.33 *** 0.036 0.72 0.167 4.23 *** 7.846*** 0.08 Corporate Social Responsibility Std. Coef. t-stat 0.002 0.06 0.131 3.514*** 0.082 2.21 * 0.085 2.34 * 0.053 1.50 0.014 0.371 0.042 1.07 0.168 3.33 *** 0.036 0.72 0.167 4.23 *** 7.982*** 0.10

*, **, *** Signicant at p 0.05, p 0.01, and p 0.001, respectively.

a

Dependent variables are computed by summing the professed current use scores for each information class for each respondent. Independent variables are a series of categorical and ordinal variables coded accordingly in conformity with the presentation of data in Table 2.

report audited; public media e.g., newspaper, TV; third party other than the media e.g., NGO, rating agency; government; and nancial professionals including investment advisors. Open ended Other responses were also permitted. Results are presented in Table 6. The most popular reporting venues for economic performance indicators are through third parties 32.8 percent and audited lings 30.5 percent. Cohen et al. 2009 argue that these indicators are of immediate and strong value relevance to the long-term viability of the rm; it is possible that the retail investors perceive that auditing lends a higher degree of scrutiny and the third parties a higher degree of disinterest that adds to the reliability of this value-relevant

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TABLE 6 Primary Preference for Reporting Venues (n 750)

Economic Performance and Sustainability Disclosure Venue Corporate Website Audited Filings Media Third Parties Government Financial Professional Other Freq. 49 229 85 246 31 97 13 % 6.5% 30.5% 11.3% 32.8% 4.1% 12.9% 1.7% Governance Freq. 59 325 49 176 35 103 3 % 7.9% 43.3% 6.5% 23.5% 4.7% 13.7% 0.4% Corporate Social Responsibility Freq. 31 118 95 295 17 183 11 % 4.1% 15.7% 12.7% 39.3% 2.3% 24.4% 1.5%

information. The nding highlights a potential disconnect between the supply and demand for this type of information. Cohen et al. 2009 nd a strong preference on the part of the company to disclose this information through corporate websites, yet only 6.5 percent of respondents indicate that the website is a preferred source for economic performance information. The venue most preferred by investors for disclosure of governance information is through audited lings 43.3 percent of respondents, followed by third-party sources 23.5 percent of respondents. This element reects an alignment between the supply and demand sides, in that Holder-Webb et al. 2008 demonstrate that companies tend to provide governance disclosures almost entirely through mandatory lings such as Proxy Statements, 10-Ks, etc. On the other hand, third parties are the ultimately preferred source for CSR information 39.3 percent of respondents, followed by nancial professionals and advisors 24.4 percent of respondents. As with the economic performance information, this reects a disconnection between supply and demand. Holder-Webb et al. 2009 show that companies disclose CSR information primarily through corporate websites, a venue preferred by fewer than 5 percent of the survey respondents. Overall, it appears that information from corporate websites may be discounted for being too self-serving. Investors who place their trades through a nancial advisor show a strong preference for receiving information through that venue, compared to investors who do not place their trades primarily through a nancial advisor. For economic performance information, 38.1 percent of the nancial advisor group rated Financial Professional the most preferred source of information, versus 20.7 percent for all other investors. The nancial advisor group had a markedly lower demand for this information from Audited Filings 10.6 percent versus 17.1 percent, from the Media 8.1 percent versus 13.9 percent, and from Third Parties 36.2 percent versus 40.2 percent. For governance information, 24.4 percent of the nancial advisor group rated Financial Professional the most preferred source of information, versus 10.8 percent for all other investors. The nancial advisor group had a markedly lower demand for this information from Audited Filings 40.0 percent versus 44.2 percent, from the Media 3.8 percent versus 7.3 percent, and from Third Parties 20.6 percent versus 24.2 percent. For CSR information, 25.6 percent of the nancial advisor group rated Financial Professional most highly, versus 9.5 percent of all other investors. The nancial advisor group had a markedly lower demand for this information from Corporate Websites 3.1 percent versus 7.5 percent, from the Media 8.1 percent versus 12.2 percent,

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from Third Parties 31.9 percent versus 33.1 percent, and from the Government 0.6 percent versus 5.1 percent. All other differences in preferred venues were minor difference of less than 3.5 percent. As stated previously, RQ2 asks whether retail investors have preferences for how they get their information for investment decisions. It appears that retail investors clearly prefer third-party data e.g., NGO, rating agency as the format for CSR information, while they prefer audited sources for the governance information. Both third-party data and audited sources are viewed as important for the economic performance indicators. Interestingly, when this is compared to prior studies that examine the actual disclosure practices for these types of information, it appears that only for governance information is there a match between what retail investors want and the manner in which companies disclose that type of information. Future Use of Nonnancial Information by Survey Respondents Research Question 3 asks what types of information respondents would like to use in future investment decision-making. Respondents were presented with the same array of information types as for Research Question 1, and asked to indicate their interest in using more of the information type to make investment decisions by rating their interest on a seven-point Likert scale anchored on 1 not at all interested and 7 extremely interested. Table 7 presents the results of a univariate analysis of the responses. In general, respondents indicate an intention to consume more of this information in the future. The results of a paired-samples t-test not reported separately for mean intent values as reported in Table 7 and mean use values as reported in Table 4 indicate statistically signicant increases in interest for all information types at p .001. In the interests of further exploring the demand shift between current and future use, we run a regression similar to that run for Research Question 1. The dependent variables, as before, are summations of each respondents ratings of their interest in future use of the information types, summed within information classes. Dependent variables thus represent an aggregate interest for each investor in the future use of the three information classes: economic performance, governance, and corporate social responsibility. Dependent variables were regressed upon the same vector of independent variables used in the previous analysis. Results are shown in Table 8. The only signicant differential determinants of future use of economic performance indicators are the respondents age and reported involvement in investment research, and the average size of the respondents trades. As before, younger investors express greater intent to use more information in the future than do older ones. With respect to governance information, women express a greater interest in future use than do men, younger investors a greater interest than older ones, wealthier investors a greater interest than less-wealthy ones, andas with the economic performance informationthose more involved with research and with larger trades than those who are less involved or with smaller trades. The analysis of the determinants of future use of CSR information suggest that women are more interested than men, younger investors more interested than older ones, wealthier investors more interested than less-wealthy ones, SRI investors more interested than those who do not currently hold any SRI products, and those making larger trades more interested than those making smaller ones.9 Finally, respondents were asked to indicate the types of information they had the greatest interest in using in the future. They were presented with the same list of information types used in the analysis so far, and asked to select the ve information types that they were most interested in using in the future. Results of this analysis are presented in Table 9.
9

When investors placing their trades through a nancial advisor are excluded from the analysis, Income drops below conventional signicance levels and Inv_Resch is no longer signicant for any model.

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TABLE 7 Future Use of Nonnancial Information

No. Respondents Rating Current Use at 5 or Higher (%) 564 75.2% 403 53.7% 519 69.2% 392 52.3% 384 51.2% 552 73.6% 362 48.3% 360 48.0% 467 62.3% 343 45.7% 455 60.7% 436 58.1% 436 58.1% 344 45.9% 277 36.9% 340 45.3% 390 52.0% 302 40.3% 289 38.5% 486 64.8% 329

Measure Economic Performance Market share Quality awards or certication Customer satisfaction data Employee satisfaction data Staff turnover and retention Product innovation Governance Director independence standards Board selection processes Executive compensation Change of control procedures Audit processes Ethics guidelines Innovative management strategies Corporate Social Responsibility Employee benets and retention Employee diversity Employee training Health and safety records Human rights information Humanitarian initiatives Product safety Political giving/lobbying

Mean (S.D.)a 5.41 1.61 4.43 1.93 5.10 1.74 4.41 1.88 4.38 1.84 5.27 1.71 4.31 1.94 4.26 1.93 4.87 1.88 4.30 1.87 4.76 1.85 4.65 1.97 4.64 1.87 4.21 1.92 3.73 2.02 4.15 1.88 4.44 1.88 3.92 2.03 3.87 1.99 4.95 1.79 4.06

(continued on next page)

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TABLE 7 (continued)
No. Respondents Rating Current Use at 5 or Higher (%) 43.9% 365 48.7%

Measure Environmental ratings/programs

Mean (S.D.)a 2.03 4.25 1.98

Based on seven-point Likert response scale to question of whether the respondent intends to use the type of information in the future, where 1 not at all interested, and 7 extremely interested.

TABLE 8 OLS Regression of Determinants of Future Demand for Different Types of Nonnancial Information (n 750)
Economic Performance Indep. Var.a Gender Age Income Education Race SRI Investor No_Trades Inv_Resch Inv_Dec Size_Trade F-test Adj. R2 Std. Coef. t-stat Governance Std. Coef. t-stat 0.085 2.18* 0.086 2.29* 0.081 2.15* 0.014 0.37 0.055 1.56 0.043 1.14 0.021 0.54 0.156 3.05** 0.024 0.48 0.146 3.67*** 6.315*** 0.08 Corporate Social Responsibility Std. Coef. t-stat 0.112 2.90 ** 0.224 6.00 *** 0.073 1.97 * 0.009 0.26 0.035 0.99 0.073 1.96 * 0.007 0.17 0.095 1.86 0.010 0.207 0.107 2.70 ** 7.713*** 0.08

0.047 1.20 0.114 3.00** 0.074 1.94 0.001 0.03 0.049 1.36 0.042 1.11 0.018 0.46 0.107 2.07* 0.025 0.48 0.115 2.86** 4.41*** 0.06

*, **, *** Signicant at p 0.05, p 0.01, and p 0.001, respectively.

a

Dependent variables are computed by summing the professed future interest scores for each information class for each respondent.

The limitation on the number of information types that may be selected in this survey forces a prioritization. While all information types were reported to be used currently by at least 25 percent of the sample, the results in Table 9 indicate a clear preference for market share data, with nearly 63 percent of the sample placing this item in their top ve picks. Customer satisfaction data and product innovation are also very popular items, chosen by 48 percent and 46 percent of the respondents, respectively. As with the supply-demand mismatch observed with respect to the disclosure venues above, there also appears to be a mismatch between the supply of economic performance indicators and the demand for them.

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TABLE 9 Respondents Ranked Information Types (n 750)

Measure Economic Performance Market share Quality awards or certication Customer satisfaction data Employee satisfaction data Staff turnover and retention Product innovation Governance Director independence standards Board selection processes Executive compensation Change of control procedures Audit processes Ethics guidelines Innovative management strategies Corporate Social Responsibility Employee benets and retention Employee diversity Employee training Health and safety records Human rights information Humanitarian initiatives Product safety Political giving/lobbying No. Respondents Listing in Top Five Choices (%) 470 62.8% 136 18.1% 357 47.6% 140 18.7% 113 15.1% 343 45.7% 90 12.0% 98 13.1% 212 28.3% 90 12.0% 194 25.9% 177 23.6% 200 26.7% 101 13.5% 43 5.7% 68 9.1% 116 15.5% 59 7.9% 52 6.9% 230 30.7% 110 Mean (S.D.)a 0.63 0.48 0.18 0.39 0.48 0.50 0.19 0.39 0.15 0.36 0.46 0.50 0.12 0.033 0.13 0.34 0.28 0.45 0.12 0.33 0.26 0.44 0.24 0.43 0.27 0.44 0.13 0.034 0.06 0.23 0.09 0.29 0.15 0.36 0.08 0.27 0.07 0.25 0.31 0.46 0.15 (continued on next page)

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TABLE 9 (continued)
No. Respondents Listing in Top Five Choices (%) 14.7% 104 13.9%

Measure Environmental ratings/programs

Mean (S.D.)a 0.35 0.14 0.35

Means are based on a dichotomous variable where 1 chosen by respondent, and 0 not chosen by respondent. Each respondent could choose up to ve information types.

Our results indicate fairly high demand for customer satisfaction information, while the results of Cohen et al. 2009 suggest that levels of these disclosures provided by their sample rms are generally low. On the other hand, Cohen et al.s 2009 results suggests that the corporate suppliers of information appear to have anticipated with some accuracy the investor interest in market share and product innovation. With respect to the governance class, the objects of primary interest with more than 25 percent of the respondents prioritizing them are executive compensation, audit processes, ethics guidelines, and management strategies. Comparing these ndings to Holder-Webb et al.s 2008 survey of the supply of these disclosures yields the information that these items also appear generally to have been anticipated by the corporations. The one exception is management strategies, which 27 percent of respondents placed in their top ve picks, while Holder-Webb et al. 2008 indicate that this information was disclosed by only 0.6 percent of their sample. The only CSR item identied by more than 25 percent of the respondents as a priority pick is product safety, with 31 percent of the respondents selecting this item in their top ve. Comparison with Holder-Webb et al. 2009 suggests that this item may also be under-disclosed, as only 15 percent of their sample rms chose to report on it. One potential explanation for the relative lack of CSR information is that CSR information tends to be disclosed in a companys website and the information tends to be favorable in nature Holder-Webb et al. 2009. Perhaps if CSR information were audited, investors might demand the CSR information to a greater extent in the future Simnett et al. 2009. As stated previously, RQ3 asks what types of information respondents would like to use in future investment decision-making. For all types of information, respondents expected to employ greater use of this information than they currently have. This suggests that the demand for this information may prod companies to disclose more of this type of information and to make these disclosures in a format that investors can use. When respondents were asked to indicate the types of information of which they had the greatest interest in using in the future, it appears that such economic performance indicators as market share, customer satisfaction, and product innovation information were the ones retail investors most wanted to use in the future. Perhaps these retail investors can see this type of information having the strongest connection to their investment performance. CONCLUSIONS In this study, we examine retail investors demand for nonnancial information. We use an online survey to explore the preferences of 750 nonprofessional investors in terms of their current use and future interest in use of three classes of nonnancial information: economic performance indicators, governance, and corporate social responsibility information. We then conduct multi-

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variate analyses to examine demographic and investment experience characteristics upon the demand for these types of information. Finally, we examine respondents preferences with respect to the information source for these classes of information. We nd that respondents express relatively high levels of current use of each class of nonnancial information, with even higher interest in the future use of all classes. In general, these investors prefer their information to be provided through audited lings or from third parties, possibly reecting a concern with the integrity and reliability of the nonnancial disclosures. We also, in conjunction with prior research, nd that there are numerous mismatches between the corporate supply of this information and the retail investor demand for it. The results should be of interest to corporations, who presumably release nonnancial information in an effort to inuence market participant decision-making. They should also be of interest to investors, regulators, and researchers. Corporations should be aware of the current mismatch between their supply of information and investor demand, while investors may need to be educated about the volume and types of nonnancial information that are presently available. The perceived importance of economic performance indicators may reect the belief that this information will help investors predict the companys future positioning with respect to industry peers. With the passage of the Sarbanes-Oxley Act U.S. House of Representatives 2002, information on governance has become more voluminous and, in some areas, more transparent. Its use by investors may reect concern over the potential for errors and irregularities in corporate nancial reports, or malfeasance by corporate managers. In contrast, perhaps over time there will be more of a demand for social corporate information as the investing public becomes more aware of the impact of these activities upon the sustainability both of the economy and of the entire rm. The nding that information that is disclosed on a companys website is given little value suggests that regulators may look to suggest that more objective third parties be in charge of disclosing or at least giving assurance on the nonnancial information. Researchers may gain insight from this study in designing studies that will gain even greater insight into the impact of nonnancial information. For example, a future study can determine whether the inclusion of specic types of nonnancial information may improve the accuracy of investment decisions. Auditing appears to be of use in lending credibility to the disclosure of nonnancial information, in the view of most respondents. At a minimum, including a clear description of the methodology used to develop nonnancial performance measures may also be likely to increase the credibility of the summary for these investors. As in all studies, there are limitations that represent opportunities for future studies. Respondents were asked about hypothetical situations and there was no cost involved in their answers. A future study could employ an experimental markets context that would get at judgments and choices where there was an economic benet and cost to their decisions. Further, respondents were not told that there would be a cost borne by the company in producing and disseminating this type of information. Perhaps if a companys expenses were to increase signicantly as a result of providing this information, retail investors might not want this information produced and disseminated. Respondents were retail investors and may have lacked sufcient nancial sophistication to make full use of the nancial information. Surveys of sophisticated investors, including nancial analysts, may yield different results Lang and Lundholm 1993. A future study could examine the preferences of sophisticated investors who work in the nancial markets area to determine, for example, what factors may affect nancial analysts use of sustainability, governance, and CSR information. Finally, our results could be a function of what nonnancial information is currently available. Perhaps through more exposure and use we will see greater reliance on nonnancial data. A future study could explore whether providing feedback and/or training to investors and analysts may enhance the perceived usefulness of the information.

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