Environmental Performance under Voluntary versus Mandatory Disclosure

Governments are beginning to mandate that firms disclose information about social and environmental impacts in their supply chains (e.g., regarding conflict minerals and greenhouse gas emissions). This paper shows that such a mandate will deter firms from measuring (and thus improving) those impacts, for two reasons. First, as demonstrated by our consumer choice experiments, voluntary disclosure of impacts can boost a firm’s market share. Mandating disclosure reduces a firm’s expected gain in market share from learning and disclosing impacts. Second, investors’ valuation of a firm drops upon disclosure that impacts are high. Therefore, to the extent that a manager is concerned about that valuation, a mandate for disclosure will cause her not to learn about impacts, lest she learn and be forced to disclose that they are high.