1 Introduction

“The most fundamental criticism of CSR is that what executives spend on it is other people’s—i.e., shareholders’—money. They may mean well, and it may give them satisfaction to write a cheque for hurricane victims or disadvantaged youth, but that is not what they were hired to do. Their job is to make money for shareholders. It is irresponsible for them to sacrifice profits in the (sometimes vain) pursuit of goodness.” Footnote 1

Anecdotal evidence such as the quote above suggests that at least some investors and parts of the business press are critical when it comes to strong sustainability engagements on the part of chief executive officers (CEOs). Prior research has shown that CEOs indeed have a significant imprint on a company’s decisions regarding sustainability performance (Cronqvist and Yu 2017; Jiraporn and Chintrakarn 2013). These individual decisions are based on distinct and unobservable motives (Aguilera et al. 2007). Specifically, CEOs’ social values seem to determine their instrumental, relational, and moral motives (Boone et al. 2020). However, the way in which CEOs’ social values and motives translate into company-level sustainability is somewhat difficult to assess for outsiders such as investors, as it is hard to determine whether these decisions are driven by self- or other-serving values (Boone et al. 2020).

In this paper, we address the question of whether investors perceive CEOs’ sustainability reporting style as a signal, and if they assess company risk as a function of sustainability performance that is moderated by sustainability reporting. This approach is motivated by prior research that suggests that the relationship between sustainability performance and financial performance is not linear. Positive, negative, and non-significant relationships have been documented to date in various contexts (Fujii et al. 2013; McWilliams and Siegel 2000; Trumpp and Guenther 2017; Schreck 2011). Accordingly, the impact of sustainability performance on future financial performance and company risk can be difficult for capital market participants to assess. Therefore, sustainability reporting is essential for companies to reduce information asymmetries on their sustainability activities (Clarkson et al. 2013; Dhaliwal et al. 2011; El Ghoul et al. 2011). Stakeholders may also incorporate other additional publicly available information in their assessment of the true motives underlying a firm’s engagement in sustainability (Ogunfowora et al. 2018).

CEOs’ engagement in sustainability activities is driven by a mix of instrumental and relational motives. These motives aim at maximizing their own utility function through compensation, job stability, and reputation, as well as moral motives that are purely altruistic beyond genuine self-fulfillment (Aguilera et al. 2007). Since CEOs are guided by their social values and preferences in their decision making regarding sustainability activities (Boone et al. 2020), we hypothesize that their social values and preferences also influence a company’s sustainability reporting. This channel is essential to disseminate information about sustainability performance to the external environment (Clarkson et al. 2013).Footnote 2 Therefore, it is difficult for capital market participants to evaluate the motives behind sustainability engagement and the implications for their investment in the companies. CEOs might offer some potentially significant insights that affect outsiders’ perception of sustainability engagement motives (Ogunfowora et al. 2018). Based on signaling and attribution theory, we postulate that CEOs’ sustainability reporting style is a public signal available to investors.Footnote 3 Investors then consider this signal in building their assessment of company risk, which in turn is a function of sustainability performance. Therefore, we argue that a deviation from average CEO reporting behavior (relative to a company’s baseline level of reporting on sustainability) could be recognized and interpreted by investors as an ambiguous signal. It is thus ex-ante unclear whether investors perceive it as a positive or negative signal when evaluating a company’s future risk. Since true sustainability performance is partly unobservable to investors and disclosure is the primary source of readily assessable information, we conjecture that they base their perceptions more on CEOs’ specific reporting style than on CEOs’ specific sustainability performance style. Overall, (1) we build on the established link between sustainability performance and implied cost of equity (e.g., El Ghoul et al. 2011). Since investors base their perception on available information, we argue that in this relationship, sustainability reporting is essential to reduce information asymmetries and thus moderates the said relationship (2). Based on this illustration we hypothesize that CEO-fixed effects (high/low) moderate the relationship (3). As a result, we expect a three-way moderation between sustainability performance (1), sustainability reporting (2), and CEOs’ style of sustainability reporting (3).

To test our hypotheses, we first construct a measure for sustainability reporting. Michelon et al. (2015) argue that sustainability reporting quality is a multidimensional construct consisting of quantitative as well as content-based dimensions. Hence, we measure the quality of sustainability reporting on an aggregated level with a self-constructed score comprising five equally weighted different sustainability reporting items from the Asset4 database. These items have been identified as being relevant to investors by prior research (e.g., Plumlee et al. 2015; Reimsbach et al. 2018).

For our empirical test, we employ a two-step research design. First, to estimate whether CEOs significantly contribute to the quality and scope of a company’s sustainability reporting, we follow the mover dummy approach outlined in Bertrand and Schoar (2003). We calculate CEO-fixed effects on a sample comprising US companies for all CEOs who became CEO in one of the sample companies within the sample period, left a sample company as CEO, or switched sample companies as CEO in any year during the observation period 2001 to 2019. With this approach, we measure time-invariant fixed effects for each CEO, arguing that a CEO’s values and preferences that influence sustainability reporting style are rather stable over time as the orientation of a CEO towards sustainability is most likely a result of their personality and social values (Kang 2017; Boone et al. 2020). In a second step, to empirically answer whether the specific reporting style attributable to CEOs conveys a signal to investors, we employ the estimated CEO-fixed effects from the first step. By applying a three-way interaction term, we test whether there is a moderating relationship between sustainability performance, sustainability reporting, and CEO-fixed effects as our variables of interest with implied (ex-ante) cost of equity (investors’ perception of company risk) as the dependent variable.

In the first step of our analysis, we provide novel evidence that CEO-fixed effects significantly explain sustainability reporting at the firm level, which supports our first hypothesis. In the second step, we find that CEOs with a high (low) fixed effect on sustainability reporting are associated with an increase (decrease) in the cost of equity related to a marginal increase in sustainability performance, moderated by sustainability reporting. This supports our Hypotheses 2a/2b, underlining the view that capital market participants use CEOs’ fixed-effects on sustainability reporting as an indicator of the motives and CEOs’ social values underlying the corporate engagement in sustainability. Our findings indicate that high CEO-fixed effects (i.e., driving sustainability reporting) are interpreted as self-serving action. Similarly, low CEO-fixed effects (i.e., lowering sustainability reporting) instead are taken as true motives related to shareholder value maximization through corporate sustainability engagement as a business case. Consequently, investors value sustainability activities perceived to be mainly driven by instrumental motives as long as they are assessed to add value for shareholders and do not provide CEOs with the possibility to pursue their own ambitions detached from business objectives.

The contribution of our study is twofold. First, our findings add to the literature on the impact of executives on company-level disclosures. Prior studies indicate that executives have an impact on mandatory rather backward-looking financial disclosures (Levy et al. 2018), as well as voluntary financial disclosures (Bamber et al. 2010; Brochet et al. 2011; Yang 2012; Davis et al. 2015). While voluntary financial disclosures (i.e., conference calls) tend to be short-term in their focus, sustainability reporting is primarily long-term oriented (Dhaliwal et al. 2011). Given that managers follow different time horizons (Brochet et al. 2015), we provide evidence that managers also influence not only voluntary short-term but also long-term disclosure channels. Thus, we provide new evidence, as we show in particular, that their specific style does indeed significantly explain the choice of quality and quantity of voluntary company-level long-term nonfinancial disclosures. By identifying CEOs as drivers of sustainability disclosure, we also add to previous studies that analyze company-specific factors driving sustainability reporting (among many others, Brammer and Pavelin 2006; Clarkson et al. 2008; Cormier and Magnan 2003; Dhaliwal et al. 2011, 2014).

Secondly, we contribute to signaling theory literature (e.g., Connelly et al. 2011) and the literature investigating the relationship between sustainability performance and perceived company risk (El Ghoul et al. 2011). While there are many signals to the market in the sustainability context, such as sustainability and ethics programs, corporate disclosures, trustmarks, or sustainability performance (Zerbini 2017), stakeholders still struggle to evaluate the motives behind such signals as sustainability performance (Ogunfowora et al. 2018). Specifically, by examining the moderating role of CEOs’ company-specific sustainability reporting style on the relationship between sustainability performance and shareholders’ perceived risk as a particular stakeholder group, we contribute to the literature that considers CEOs signal senders vis-à-vis stakeholders in the sustainability context, which has only been backed up by some experimental evidence to date (Ogunfowora et al. 2018). We suggest that investors incorporate publicly available information about CEOs’ impact on company level sustainability reporting into their evaluation of sustainability activities when they assess company risk. We hence add to the literature on the relationship between sustainability performance and risk perception (e.g., El Ghoul et al. 2011) by providing insights into two specific moderators of this relationship, namely sustainability reporting and CEOs’ imprint on sustainability disclosure. In particular, we demonstrate how the interaction of sustainability performance and reporting on the next-period’s cost of equity is moderated by how CEOs shape the sustainability reporting style of the company they currently serve.

Our findings show companies how important the CEO role is for implementing a sustainability strategy, which includes the reporting thereon. Our study may also be of use for CEOs in that it demonstrates that they indeed have an influence on company-level sustainability reporting. If they are aware of this influence, they may also be aware that investors could incorporate these differences as signals in their assessments.

The remainder of this paper is structured as follows: Section 2 reviews the relevant literature and develops our research hypotheses. Section 3 describes our methodology, and Sect. 4 reports our results. Robustness tests are conducted in Sect. 5. Section 6 concludes the paper.

2 Literature review and hypotheses development

2.1 Sustainability performance and cost of equity

A company’s commitment to sustainability may mitigate crisis risks (Coombs and Holladay 2015), increase customer confidence, boost a company’s competitive advantage (Du et al. 2011), and improve organizational processes (Eccles et al. 2014). These benefits contribute to the relationship between sustainability performance and market returns, which has been studied extensively in the context of sustainability performance (e.g., Flammer 2015). Previous research on companies’ commitment to sustainability and how it is evaluated by the market has found divergent results and reported either a positive, negative, or no significant relationship depending on the sample, research design, and setting (Friede et al. 2015; McWilliams and Siegel 2000). These findings also support the notion that the market perception of sustainability performance is moderated by other factors such as the relationship with customers (Schreck 2011).

Corporate sustainability engagement may generate competitive advantages, which in turn translate to lower financing costs (Chava 2014; El Ghoul et al. 2011; Ge and Liu 2015; Goss and Roberts 2011). A beneficial impact, especially on the cost of equity, may take place via two possible channels (El Ghoul et al. 2011). First, enhanced sustainability performance reduces the perceived company risk as it increases the stability of future cash flows. More specifically, in negative incidents, stakeholders sanction the affected companies. Such sanctions range from boycotts to challenging business rights and harm reputation and revenues (Godfrey 2005). As a result, the extent to which a company is penalized varies depending on how stakeholders perceive the company’s intentions (Godfrey 2005). Activities in sustainability build moral capital that protects a company’s reputation and operations when such negative events occur as stakeholders acknowledge such moral capital (Godfrey 2005; Godfrey et al. 2009; Peloza 2006). Consequently, commitment to sustainability creates risk management benefits (i.e., a buffer function in case of adverse events) that are recognized by the capital market (Kim et al. 2021). Similarly, poor sustainability performance and irresponsible behavior regarding sustainability topics result in increased perceived risk by investors and, consequently, increased cost of capital (Chava 2014). The second channel is the reduction of information asymmetries through engagement in sustainability, leading to reductions in agency issues (El Ghoul et al. 2011; Lopatta et al. 2016). Additionally, managers who adopt international frameworks (e.g., the UN Guiding Principles on Business and Human Rights), are more likely to follow ethical and moral standards and need less monitoring (Lopatta et al. 2016), which in turn reduces information asymmetries and cost of equity (Jensen and Meckling 1976).

Dhaliwal et al. (2011) indicate that companies with a strong sustainability performance also have superior reporting on that performance. Hence, disclosure on sustainability performance is essential to convey information to the capital market to increase transparency and reduce information asymmetries (Clarkson et al. 2013). Also, companies with strong sustainability performance have stronger incentives to disclose information on their performance (Richardson and Welker 2001). Both sustainability performance and reporting lower information asymmetries, which increase overall company value and allow companies to receive debt and equity capital at more favorable conditions (Dhaliwal et al. 2011; Ioannou and Serafeim 2017; Michaels and Grüning 2017). In the context of sustainability reporting, the underlying reporting quality of sustainability performance is closely linked to the value relevance of this particular information for investors (Du and Yu 2021). Given the evidence on the relationship between sustainability performance and the documented effects of reporting thereon, it can be reasonably assumed that these interact with each other in a moderating relationship when it comes to investors’ risk perceptions in the capital market, similar to the relationship between sustainability performance and (accounting-based and market-based) financial performance (Schreck 2011).

2.2 Managerial values, preferences, and sustainability reporting

According to Aguilera et al. (2007), managers engage in sustainability activities due to instrumental, relational, and moral motives, which they incorporate into their decision-making process in descending order and by different weighting (i.e., each manager has their own mix of motives with different relevant importance for each motive). While instrumental motives, according to agency theory (Jensen and Meckling 1976), are mostly self-serving and based on maximizing shareholder wealth and related managerial compensation (McWilliams and Siegel 2001), relational motives are based on stakeholder theory and pressure from stakeholders (Clarkson 1995; Freeman 2010). Additionally, managers also have personal and moral incentives to increase company-level sustainability performance as they strive for a meaningful existence, as explained by stewardship theory (Davis et al. 1997).

Moreover, CEOs are known to adopt different management decisions (Bertrand and Schoar 2003; Fee et al. 2013) and to deal with complex situations differently (Hambrick 2007; Hambrick and Mason 1984). These styles vary according to various talent characteristics such as general ability and communication, interpersonal, and execution skills (Bolton et al. 2013; Kaplan et al. 2012). However, these differences in style arise not only due to talent characteristics; they are also the result of inborn predispositions as well as past professional and personal (early) life experiences (Benmelech and Frydman 2015; Bernile et al. 2017; Davidson et al. 2015; Dittmar and Duchin 2016; Malmendier et al. 2011; Schoar and Zuo 2017). Moreover, managerial decisions are based on cognitive biases and personal values (Cyert and March 1963). Most differences in style can be explained by genetically and culturally transmitted preferences and values (Cesarini et al. 2009; Gören 2017). For instance, Grønhøj and Thøgersen (2009) found that social interactions within families influence individuals’ environmental values, concerns, and behaviors, while Alford et al. (2005) found that genetic influences on a person’s behavior shape their political reactions. Hereby, the genetic influences are roughly twice as influential as environmental ones.

Managers may have certain personal and moral motives to correct existing imbalances, especially when it comes to corporate engagement in sustainability and social issues (Logsdon and Wood 2002). Depending on their values, they have multiple unobservable motives to increase sustainability performance that are related to broader interests rather than self-fulfillment (Davis et al. 1997). According to Boone et al. (2020), social values determined by different information-processing affinities help CEOs navigate in their complex decision environments, especially when it comes to engagement in sustainability. They distinguish between other-serving values resulting in intrinsically motivated actions, and self-serving values which result in extrinsically motivated actions such as a personal gain from corporate engagement in sustainability. Consequently, their specific characteristics and values have a significant impact on their overall action on sustainability at the corporate level (Hambrick and Finkelstein 1987; Kang 2017). For instance, Cronqvist and Yu (2017) showed that CEOs who have a daughter shape their company in a more social direction, while Davidson et al. (2019) documented that materialistic CEOs lower firm-level sustainability performance.

Beyond that, CEOs’ motives underlying personal characteristics and values influence corporate transparency and the quality of information disclosed (Bamber et al. 2010; Brochet et al. 2011; Davis et al. 2015). As a result, managers who engage in “off-the-job” behaviors that reflect underlying self-serving values, such as low frugality and legal violations, negatively affect the quality of corporate reporting (Davidson et al. 2015). By analogy, we argue that CEOs influence the reporting based on their underlying motives of sustainability engagement. Thus, to improve their self-image and receive praise, CEOs with self-serving personality traits might use disclosure channels excessively (Marquez-Illescas et al. 2019), in contrast to CEOs without self-serving personality traits who might primarily aim at reducing information asymmetry. On the other hand, CEOs might also have personal incentives to diminish disclosure quality to mask poor sustainability performance, as this might worsen their reputation and career prospects (Cai et al. 2020; Wang et al. 2018). Hence, we expect CEOs’ values and motives concerning sustainability and the reporting thereon to shape how companies publicly disclose information on their sustainability performance. Therefore, we formulate our first hypothesis as follows:

Hypothesis 1

The unobservable values and preferences of a given manager captured with CEO-fixed effects have significant statistical power in explaining company-level sustainability reporting.

2.3 CEOs’ sustainability reporting style and cost of equity

After testing whether managers have an individual imprint on a company’s sustainability reporting through their specific values and preferences, we are interested in whether a CEO’s reporting style alters the relationship between sustainability performance and capital market risk perceptions moderated by the reporting thereon.

According to signaling theory, companies send (positive or negative) signals, thereby revealing private information to the capital market. Shareholders assess a company’s behavior based on incomplete information, caused by uncertainties regarding quality and intention, and update their perceptions based on the additional information they receive (Connelly et al. 2011). Corporate engagement in sustainability is seen as a sign of a company’s quality (Branco and Rodrigues 2006; Zerbini 2017). However, companies have incentives to mimic signals, or even send false signals, that do not reflect a company’s true motives (Connelly et al. 2011). Thus, corporate engagement in sustainability may generate ambiguous signals that could be interpreted by the receiver as either positive or negative (Connelly et al. 2011). As the motives (instrumental, relational, and moral) behind companies’ engagement in sustainability are barely accessible to the market (Ogunfowora et al. 2018), the signals companies send about sustainability are rather ambiguous and often perceived by outsiders as conflicting (Skarmeas and Leonidou 2013). To evaluate a signal sender’s behavior and intention, additional relevant information is required (Kelley and Michela 1980).

Signals provided by CEOs offer potentially meaningful insights and additional information that affect stakeholders’ perception of a company’s sustainability engagement motives (Ogunfowora et al. 2018). We argue that CEOs’ style of sustainability reporting, driven by their personal motives and values, is an additional signal that market participants use to evaluate the relationship between sustainability performance and sustainability reporting in their perceptions of risk. Figure 1 illustrates the moderating relationship of CEOs’ sustainability reporting style on the relationship of sustainability performance and cost of equity moderated by sustainability reporting.

Fig. 1
figure 1

The moderating effect of CEOs’ sustainability reporting style and sustainability reporting on the influence of sustainability performance on cost of equity

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Given this relationship, the unanswered question is how capital market participants evaluate such styles in sustainability reporting. Specifically, we are interested in whether their style is a relevant signal to investors, which we would then expect to moderate the relationship between sustainability performance and sustainability reporting on the cost of equity.

We assume that typical CEOs engage in sustainability due to a mix of instrumental and relational motives and thus provide no meaningful signal with the reporting on these activities. We consider these typical CEOs as the reference group. In addition to these CEOs, CEOs who deviate from this group and base their motives on self- and other-regarding values send a signal to the capital market. Therefore, we distinguish between CEOs who increase the level of reporting, and CEOs who adversely affect the level of sustainability reporting. Since it is difficult to distinguish whether observable actions are motivated by other-serving values to behave altruistically or by self-serving values to enhance the CEOs’ personal self-view (Avolio and Locke 2002; Boone et al. 2020), the signal a CEO transmits to the market by impacting sustainability reporting might be ambiguous. As a result, shareholders may vary in their attribution regarding the true motives of CEOs’ reporting styles.

Observing the signal conveyed by a CEO with driving, company-level sustainability reporting, capital market participants potentially recognize this excessive reporting as stemming from personal motives, far beyond instrumental and relational motives, to maximize shareholder wealth. Alternatively, CEOs may exploit sustainability reporting to distribute information on sustainability performance which enhances their reputation and helps them pursue a personal agenda (Petrenko et al. 2016; Wang et al. 2008). Management research suggests that the relationship of many apparently monotonous positive relationships reach context-specific inflection points after which the relationships often become negative (i.e., follow an inverted U-shape) (Busse et al. 2016; Pierce and Aguinis 2013). This holds particularly true for the relationship between sustainability performance and financial performance (Fujii et al. 2013; Trumpp and Guenther 2017). Specifically, at some point the marginal beneficial impact of an increase in sustainability performance on the performance of the company is significantly below the amount that has to be invested for this purpose (Fujii et al. 2013). Thus, capital market participants may perceive a positive impact of the CEO on sustainability reporting as a signal that the inflection point in this relationship has been reached, or that managerial misconduct is becoming more significant with increased corporate social engagement (Wang et al. 2008). They may then infer that CEOs pursue sustainability activities mainly grounded on instrumental motives. However, in the process they do not act in the interest of shareholder value maximization, as CEOs with self-serving values (i.e., materialism) tend to invest in activities that benefit them personally (Davidson et al. 2019). This, in turn, results in an increase in the cost of equity in response to a marginal increase in sustainability performance at a given level of sustainability reporting. Therefore, we formulate our second Hypothesis 2a as follows:

Hypothesis 2a

If the CEO increases company-level sustainability reporting, there is a positive relationship between sustainability performance and costs of equity, moderated by sustainability reporting.

Similarly, social values and preferences behind a CEO’s decision to reduce company-level sustainability reporting are not observable to capital market participants, who may view such a CEO as investing in sustainability only for truly instrumental and relational motives unaffected by personal agendas (i.e., attribute this as a positive signal). Hence, these investments in sustainability activities based on instrumental motives could be viewed as grounded in a genuine business case (Carroll and Shabana 2010), which means that CEOs in this case are also conducting themselves morally. Hafenbrädl and Waegner (2021) document that signaling sustainability commitment for instrumental reasons and highlighting the sustainability business case is a superior impression management strategy, since this reduces perceptions of hypocritical behavior. Moreover, the capital market may perceive a decrease in sustainability reporting quality induced by a specific CEO as a signal that there is no overinvestment driven by a CEO’s motives for attention (Petrenko et al. 2016; Wang et al. 2008), resulting in a lower perceived risk and accordingly lower cost of equity.

However, one could also argue that other stakeholders (e.g., customers) also perceive only truly instrumental motives for sustainability as negative. This could be penalized by reduced consumer demand (Ellen et al. 2006; Skarmeas and Leonidou 2013), resulting in lower future cash flows attributed by shareholders as a negative signal. Moreover, a decrease in sustainability reporting related to a CEO could be perceived as a signal for self-serving values and motives. Managers driven by self-serving values such as materialism show lower corporate engagement in sustainability (Davidson et al. 2019), which in turn could also affect reporting thereon. Thus, for CEOs who negatively impact company-level sustainability reporting, we formulate our second Hypothesis 2b as follows:

Hypothesis 2b

If the CEO reduces company-level sustainability reporting, there is a negative relationship between sustainability performance and costs of equity, moderated by sustainability reporting.

3 Sample and methodology

3.1 Sample selection

Sustainability reporting data are taken for all available companies from the US from the Asset4 section of DataStream, but excluding companies from the financial or utilities industries (SIC codes 4900–4999 and 6000–6999).Footnote 4 Accounting data are from Compustat North America, return data from CRSP, CEO data from ExecuComp, and analyst and management forecast data are obtained via I/B/E/S. Board characteristics data are taken from Asset4 and BoardEx. We use all company-years from the Asset4 database for which our constructed measure of sustainability reporting is available in a company-year.Footnote 5 Our initial sample size consists of 14181 company-year observations spanning the period 2001 to 2019. Due to missing data, we end up with 7149 company-year observations comprising 987 distinct companies for the CEO-fixed effects estimation model. The sample for the cost of equity and CEO-fixed effects model is reduced to 1510 observations and 264 distinct companies. We present the sample selection procedure in Table 1.Footnote 6

Table 1 Summary of the sample selection procedure
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3.2 Measuring the quality of sustainability reporting

Previous research often considers only standalone sustainability reports (Dhaliwal et al. 2011, 2014) when assessing the impact of sustainability reporting on investors (e.g., by looking at cost of equity). However, recent research findings indicate that more than the sustainability report itself matters to investors; they also look at whether these reports incorporate non-financial and financial disclosures and whether they comply with international guidelines such as the GRI guidelines (see in detail Reimsbach et al. 2018). We therefore use a self-constructed five-item score to measure the overall quality of sustainability reporting based on the reporting elements that previous literature has identified as relevant to investors. These elements capture both the quantity as well as the content of these reports, with Michelon et al. (2015) arguing that the quality of sustainability reports is a multidimensional construct consisting of both quantitative and content-based subdimensions. Table 2 shows the five sustainability reporting elements, of which at least three have to be available,Footnote 7 that constitute our sustainability reporting score (SR) and indicates on which studies we base those elements.Footnote 8

Table 2 Sustainability reporting score
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3.3 CEOs’ style of sustainability reporting

Many existing studies on managerial style effects rely on the method developed by Abowd et al. (1999) (hereafter, the AKM method). However, especially in the case of CEO-firm matched samples, the AKM method is methodologically problematic, as the mover/non-mover ratio is typically quite low. In our sample, the ratio is less than 1%.Footnote 9 A low mover/non-mover ratio might cause a severe limited mobility bias, i.e., a downward bias in the estimated correlations between company and CEO-fixed effects (Abowd et al. 2003; Andrews et al. 2008). This is not surprising, given that being appointed CEO is presumably the pinnacle of a manager’s career, making it likely they will retire after their time as CEO (Cronqvist and Yu 2017). Hence, we refrain from using the AKM method as our main method to estimate the CEO-fixed effects and instead follow the mover dummy approach of Bertrand and Schoar (2003). For each moving (i.e., a future company-changing or departing) CEO, the mover dummy approach estimates a fixed effect after controlling for company-specific time-variant characteristics as well as firm- and time-fixed effects. Given the restricted size of our sample, we modify their methodology and require a CEO turnover event for each company. Therefore, and due to the small number of switching CEOs within the sample, the estimated fixed effects rather capture CEO style conditional on a particular company and might include an underlying company-specific time trend related to sustainability reporting.Footnote 10 Nevertheless, to increase confidence in our results, we also employ the AKM method as a validity analysis and still find a significant influence of the CEO on a firm’s level of sustainability reporting quality and scope (results tabulated in the ESM Appendix 4 Table 1).

To test our first hypothesis and measure the explanatory power of individual CEOs’ style based on social values on a firm’s sustainability reporting quality,Footnote 11 we benchmark the baseline Model (1a) without CEO-fixed effects model against Model (1b), which includes CEO-fixed effects estimated with the mover dummy approach, apply a firm-cluster robust version of the Vuong test (Vuong 1989), and hold the sample constant. The model builds on the logistic model of Dhaliwal et al. (2011):

 

$$SR_{i,t+1} =\alpha + \beta_{1}SP_{i,t} + \beta_{2}SIZE_{i,t} + \beta_{3}LIQUIDITY_{i,t} + \beta_{4}FIN_{i,t} + \beta_{5}ROA_{i,t} + \beta_{6}HHI_{i,t}+\beta_{7}EM_{i,t}+\beta_{8}MFCAST_{i,t}+\beta_{9}LEV_{i,t}+\beta_{10}MTB_{i,t}+\beta_{11}COEC_{i,t}+\beta_{12}GLOBAL_{i,t}+\beta_{13}CEOTEN_{k,t}+\beta_{14}CEOAGE_{i,k,t}+\beta_{15}CFOEXP_{i,k}+\beta_{16}GLOBALCOMPACT_{i,t}+\beta_{17}EXTERNALASSURANCE_{i,t}+\beta_{18}CEO\_POWER_{i,k,t}+\beta_{19}CSO_{i,t}+\beta_{20}CEO\_DCHAIR_{i,k,t}+\beta_{21}BOARD\_CSR\_COMP_{i,t}+\beta_{22}BOARD\_LT\_COMP_{i,t}+\beta_{23}BOARD\_GENDER\_DIV_{i,t}+\beta_{24}BOARD\_INDEPENDENT_{i,t}+\sum_{t=1}^{T-1}{{Year}}_{t}+ \sum_{i=1}^{I-1}FIR{M}_{i}\left(+\sum_{k=1}^{K-1}{{CEO}}_{k}\right)+\varepsilon _{i,t+1,}$$
(1a/b)

where SR measures the quality of sustainability reporting as defined in ESM Appendix 1. We use the next period’s value of sustainability reporting, as reporting behavior presumably reacts at a delay to environmental or firm-specific changes. As we analyze annual firm data, and various sustainability reporting items are disclosed at different timepoints throughout the year, SR is calculated as the average value of the monthly SR for each firm at the end of June of each year.Footnote 12

We discuss our control variables in detail in ESM Appendix 2, and briefly outline them in this section. Our starting point is the control variables introduced by Dhaliwal et al. (2011). For instance, we control for sustainability performance (SP) (Dye 1985). Further, we include company-specific controls identified by prior literature to be associated with voluntary disclosure such as size (SIZE) (Prado-Lorenzo et al. 2009), profitability (ROA) (Dhaliwal et al. 2011), company’s share liquidity (LIQUIDITY) (Clarkson et al. 2008), net issuance of long-term debt and shares in a period (FIN), earnings quality (EM) (Dhaliwal et al. 2011), issuance of management forecasts (MF) (Dhaliwal et al. 2014), leverage (LEV) (Prado-Lorenzo et al. 2009), market-to-book ratio (MTB), cost of equity (COEC) (Dhaliwal et al. 2014),Footnote 13 foreign income (GLOBAL) (Dhaliwal et al. 2011) and market competition (HHI) (Dhaliwal et al. 2011). Additionally, we control for time-variant CEO characteristics such as CEO’s tenure (CEOTEN), age (CEOAGE), and also their prior experience as a CFO (CFOEXP) in the company they currently serve (Bochkay et al. 2019; Matsunaga and Yeung 2008). Further, we add whether a company receives external assurance on its sustainability reporting (EXTERNALSSURANCE) (Steinmeier and Stich 2019), and whether a company has signed the United Nations Global Compact (GLOBALCOMPACT) (Cetindamar 2007).

Further, we control for governance measures regarding the CEO and board composition. Thus, we include a proxy for CEO centricity (CEO_POWER) following Bauer et al. (2021), and CEO duality (CEO_DCHAIR) (Song and Wan 2019). Moreover, we add board characteristics such as the percentage of outside directors monitoring the CEO (BOARD_INDEPENDENT) (Jo and Harjoto 2011), the sustainability expertise and voice of a chief sustainability officer (CSO) (Fu et al. 2020; Gallego-Álvarez and Pucheta-Martínez 2020), and BOARD_GENDER_DIV, the female share on the board (Adams and Ferreira 2009; Melero 2011). Additionally, we control for compensation incentives such as whether compensation is tied to a sustainability target (BOARD_CSR_COMP) (Tsang et al. 2021), and the maximum time horizon in years for the director’s targets to receive full compensation (BOARD_LT_COMP) (Mahoney and Thorne 2005). Lastly, we include time- and firm-fixed effects.Footnote 14 We define all variables in Table 3. Again, for a more detailed discussion of our control variables, please see ESM Appendix 2.

Table 3 Variables description
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3.4 CEO-fixed effects and future cost of equity

In our design choice to test Hypothesis 2a/2b, we build on the research design of El Ghoul et al. (2011). Since sustainability performance and cost of equity may be bilaterally interrelated,Footnote 15 we follow Dhaliwal et al. (2011) and lead the dependent variable by one period, since the motivating effect of the future (anticipated) cost of equity on sustainability performance and reporting should be weaker than the motivating effect of the current cost of equity. We estimate the corresponding Model (2a) as follows:

$$COEC_{i,t+1} =\alpha + \beta_{1}CEOFE_{i,t} + \beta_{2}SR_{i,t} + \beta_{3}SP_{i,t}+ \beta_{4} (CEOFE_{i,t} \times SR_{i,t})+\beta_{5}(SP_{i,t} \times SR_{i,t})+\beta_{6} (CEOFE_{i,t} \times SP_{i,t})+\beta_{7} (CEOFE_{i,t} \times SR_{i,t} \times SP_{i,t})+\beta_{8}BASPREAD_{i,t}+\beta_{9}VOL_{i,t}+\beta_{10}SIZE_{i,t}+\beta_{11}BETA_{i,t}+\beta_{12}LEV_{i,t} + \beta_{13}MTB_{i,t}+\beta_{14}LTGROWTH_{i,t}+\beta_{15}DISP_{i,t}+ \sum_{t=1}^{T-1}Yea{r}_{t}+\sum_{i=1}^{I-1}{{Firm}}_{i}+{\varepsilon }_{i,t+1}.$$
(2)

To verify whether the portion of the level of sustainability reporting attributable to a CEO is perceived by investors as a positive (negative) signal regarding the underlying motives of an increase in sustainability performance, we estimate the relationship of the current period’s sustainability performance and related CEO-fixed effects on the next period’s level of cost of equity (COEC). We interact SP with SR (Dhaliwal et al. 2011), as the relationship between sustainability performance and cost of equity seems to depend on a company’s sustainability reporting.

CEOFE captures the CEO-fixed effects estimated applying Model (1b). To reduce measurement noise and increase the model’s explanatory power, we group the CEO-fixed effects into terciles (quartiles, quintiles as robustness tests with similar results).Footnote 16 Consequently, CEOFE captures the CEO-fixed effects from Model (1b) transformed to their across-sample tercile rank value. This data transformation also allows us to compare the relationship of sustainability performance on cost of equity for companies that employ a CEO with a high CEO-fixed effect on sustainability reporting with firms employing a CEO with a low CEO-fixed effect on sustainability reporting. Here, the bottom (top) tercile group consists of CEOs equipped with a high (low) CEO-fixed effect on sustainability reporting. As we predict CEOs to affect the relationship between sustainability performance and cost of equity, we interact SP with CEOFE.

We assume that CEO-fixed effects on sustainability reporting especially matter to investors when they assess companies’ sustainability reporting. Hence, we anticipate the coefficient of the separate variable CEOFE to be statistically insignificant. However, due to econometric concerns (outlined in detail in Brambor et al. (2006)), we refrain from excluding CEOFE as a separate variable.Footnote 17 For the same reasons, we interact all three sustainability-related variables (CEOFE, SP, and SR), resulting in seven interaction term elements. We expect the association between sustainability performance and cost of equity to be altered by CEOs with a high (low) CEO-fixed effect on sustainability reporting. For CEOs with a low CEO-fixed effect on sustainability reporting, we expect a negative association. Considering only CEOs with a high CEO-fixed effect on sustainability reporting, we foresee a positive relationship.Footnote 18

Besides these sustainability-related variables of interest, we employ further control variables based on El Ghoul et al. (2011) as cost of equity is affected by several company-specific factors such as information asymmetries (BASPREAD) and stock return volatility (VOL) (Gebhardt et al. 2001). We further control for size (SIZE), market-to-book ratio (MTB), and leverage (LEVERAGE) as they influence cost of equity (Fama and French 1992). Following El Ghoul et al. (2011), we use the market-model beta (BETA) to control for whether a firm’s share is more volatile than the market. Moreover, there is evidence that cost of equity is affected by a firm’s expected long-term growth rate (Gebhardt et al. 2001) and analyst dispersion (Dhaliwal et al. 2005; Gebhardt et al. 2001). Hence, we include the long-term growth rate (LTGROWTH) and analyst dispersion (DISP) (El Ghoul et al. 2011) and again include firm- and time-fixed effects. All variables are defined in Table 3.

4 Main results

4.1 Descriptive statistics

Table 4, Panel A displays univariate variable-specific statistics for the variables used in Models (1a) and (1b), and Panel B does the same for Model (2). In our sample for the CEO-fixed effects estimation, the average sustainability reporting score SR equals 0.283. All other variables are in line with previous literature except COEC, where the average value is slightly below the cost of equity found in other studies (Dhaliwal et al. 2011; Hail and Leuz 2006).Footnote 19 Comparing Panels A and B, the samples are largely comparable regarding financial characteristics such as LEV, MTB, and COEC. We also find similar values across both panels for non-financial characteristics sustainability performance SP and sustainability reporting quality SR. Table 5 shows the Pearson correlations.

Table 4 Descriptive statistics of regression variables
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Table 5 Pearson correlation CEO-fixed effects estimation model
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4.2 Measuring CEOs’ sustainability reporting style

We assume CEOs to significantly influence a firm’s sustainability reporting beyond firm-specific and time-fixed effects. To test this, we benchmark Model (1b) with CEO-fixed effects against Model (1a) without CEO-fixed effects. Table 6 reports the results.

Table 6 CEO-fixed effects estimation
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Models (1a) and (1b) provide quite similar results. All significant coefficients have the same direction. As expected, sustainability reporting quality is motivated by good sustainability performance, high visibility, and stronger pressure (firm size). The higher adjusted R-squared of Model (1b) compared to Model (1a) (61.5% vs. 49.3%) shows a considerable explanatory power of CEO-fixed effects. Looking at the individual CEO level, we estimate 681 distinct CEO-fixed effects.

To test for the overall significance of CEO-fixed effects in explaining sustainability disclosures at the firm level, we apply the Vuong test for (un)equal explanatory power between two distinct models following the approach for nested models as outlined in Wooldridge (2011) and use firm-clustered standard errors to receive firm cluster-robust Vuong test statistics. According to the test statistics shown in Panel B, Model (1b) with CEO-fixed effects has higher explanatory power than Model (1a) without CEO-fixed effects. The adjusted R-squared equals 61.5% in the model with CEO-fixed effects compared to 49.3% in the model without. The two-sided Vuong test for a non-zero difference of the two models’ explanatory power is significant at the 1% level. This finding supports our first hypothesis that CEOs’ sustainability reporting style has significant explanatory power in explaining firm-level differences in sustainability reporting.Footnote 20

4.3 CEO-fixed effects and future cost of equity

Next, we test the relationship between the CEO-fixed effects, sustainability performance, and sustainability reporting on the next period’s levels of cost of equity. Because we employ moderating variables and self-constructed score-variables, we focus on interpreting the direction of the relationships rather than their magnitudes (Hartmann and Moers 1999). As we employ interaction terms including two continuous variables, the overall magnitude of the relationship of sustainability performance and the significance level thereof depend on the concrete values of sustainability reporting and the CEO-fixed effect tercile. Whether or not the overall relationship remains significant may depend on these values.Footnote 21 Beyond displaying the classic results table, we hence analyze the interaction relationships graphically to show the exact significance intervals for all variables that constitute the interaction terms. With only the result table, we would not be able to provide significance intervals for marginal relationships of the interaction term elements (e.g., sustainability performance) as the significance of the marginal relationships is a joint function not only of its coefficient estimate and variance, but also of the other coefficients estimates (SP, SP*SR, SP*CEOFE, SP*SR*CEOFE), variances, and covariances thereof (Aiken el al. 1996). In the case of negative covariances between the coefficients’ estimates, insignificant constitutive interaction terms can still result in significance ranges for the interaction term elements (Brambor et al. 2006).Footnote 22

Figure 2 displays the marginal relationship of sustainability performance on the next period’s levels of cost of equity (x-axis) depending on the levels of sustainability reporting (y-axis) and the respective CEO-fixed effect tercile rank. The figure runs from the smallest (0) to the largest (1) possible sustainability reporting score. The dashed (dotted, solid) line presents the relationship between sustainability reporting and cost of equity (“marginal effect”) depending on sustainability reporting levels for companies having a CEO in the bottom (middle, top) fixed-effect tercile. Significances are indicated by means of bold lines above the respective line. Thus, for each tercile, the graphic shows for which levels of sustainability reporting the marginal effect of sustainability performance on the next period’s cost of equity is significant.

Fig. 2
figure 2

Marginal effect of SP on COEC depending on SR and CEO-fixed effects. This figure shows the marginal effect of sustainability performance (SP) on next period’s cost of equity (COEC) depending on CEO-fixed effects (CEOFE) as well as sustainability reporting (SR). The dashed (dotted, full) lines indicate the marginal effect of sustainability performance on next period’s cost of equity depending on sustainability reporting levels for firms with a CEO from the bottom (middle, top) CEO-fixed effect tercile. Values of sustainability reporting levels and CEO-fixed effect terciles for which we find a significant marginal effect of sustainability performance on next period’s cost of equity at the 10% significance level are indicated with a bold line positioned above the respective variables’ value combinations

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With regard to Hypothesis 2a, we discuss the signal CEOs convey which are appointed to the top tercile (i.e., attributed to having a high CEO-fixed effect). In this case, we find a significant positive relationship between a marginal increase in sustainability performance and the next period’s cost of equity for levels of sustainability below a certain level of sustainability reporting (SR < 0.57, solid line in Fig. 2). This supports Hypothesis 2a, which suggests that a positive impact on sustainability reporting by the CEO may be interpreted as a negative signal by the capital market when evaluating the value of a marginal increase in sustainability performance. Thus, the results suggest that the capital market tends to evaluate this investment decision as mainly dominated by instrumental motives beyond shareholder value maximization, so purely self-serving for the CEO and shareholder value decreasing. Alternatively, the market could interpret the CEO-driven increase in sustainability reporting as a negative signal, because the market participants struggle to properly interpret this information, as the overall level of reporting is below a certain required threshold.

This is also in line with a limitation of our analysis, namely that we estimate fixed effects conditional upon a particular company (e.g., CEO (k) for company (a) vs. CEO (l) for company (a)). However, we concede that due to our limitations in methodology, the estimated CEO-fixed effect also transmits a signal to the capital market that might be related to a company-specific time trend with respect to sustainability reporting.Footnote 23

For the CEOs in the bottom tercile (i.e., attributed to have a low CEO-fixed effect), we document a negative relationship between an increase in sustainability performance and the next period’s level of cost of equity for sustainability reporting above a certain level (SR > 0.25, dashed line in Fig. 2). This provides initial evidence for Hypothesis 2b that the market interprets this as a positive signal, suggesting that shareholders perceive investments in sustainability activities based on instrumental motives to maximize shareholder value and thus behaving morally in their interest.

That this relationship is observable once a certain threshold of SR is reached is consistent with market participants who can only estimate and value investments in sustainability if the information on this performance is already reported adequately. For the lower and upper terciles, we find comparatively large significance intervals, while the middle tercile (reference group) shows only a fairly small significance interval for CEOs. We argue that CEOs in the middle tercile do not send a strong signal, as their reporting style does not largely differ from that of the company-level baseline. In the interest of clarity, we also report the average coefficients as a results table in Table 7. The first column shows the results using tercile ranks of the CEO-fixed effects, the second (third) column shows the corresponding results with qualitatively similar results for our variables of interest compared to the first regression, now using quartile (quintile) rank indicator variables instead. The overall model fit is similar in all three specifications.

Table 7 Cost of equity and CEO-fixed effects
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Overall, these results are consistent with our general suggestion that CEOs are guided by their social values and preferences that drive their motives to engage in sustainability. Thus, they have a somewhat visible influence (i.e., CEO-fixed effects) on firm-level sustainability reporting which, then again, capital market participants use to assess a company’s risk as a function of incremental changes in sustainability performance.

5 Further analyses and robustness tests

In this section, we briefly present our additional tests. We discuss these in detail in ESM Appendix 3. We start our additional analyses by first examining how, in particular, certain levels of sustainability reporting moderate the relationship between sustainability performance and next-period cost of equity when CEO fixed effects are high (low). Our results suggest that, especially for CEOs belonging to the top tercile (i.e., CEOs with a high CEO-fixed effect), investors perceive an increase in sustainability performance as a bad signal when the reporting level is below the annual sample median, suggesting that this reporting level is insufficient to adequately convey the information to the capital market. Second, we analyze how, in particular, legally required (legal) and voluntarily implemented (normative) sustainability activities are moderated by CEO-fixed effects (Harjoto and Jo 2015). For this purpose, we split the sustainability performance variable into a normative and a legal sustainability performance measure and re-ran our moderation analysis. Our results suggest that CEO sustainability reporting style is particularly important for investors when evaluating normative sustainability activities. Third, we conduct a series of robustness tests to verify our main findings. In particular, we perform placebo tests in which we create artificial CEO-switches within the sample, restrict the sample to CEO changes from the internal pool, and only consider exogenous CEO turnovers in line with Fee et al. (2013). Additionally, we validate our score by randomly weighting items and comparing our measure of sustainability reporting to the length of hand-collected sustainability reports. Overall, our results support the findings of the main analyses. Kindly refer to ESM Appendix 3 for detailed discussion of all additional analyses and robustness tests and to ESM Appendix 4 for the corresponding result tables and figures.

6 Conclusion

This paper sheds light on the interplay between sustainability performance, sustainability reporting, and CEO-fixed effects on sustainability reporting and how they are jointly associated with cost of equity. We are particularly interested in how investors incorporate individual CEO-fixed effects on sustainability reporting as additional information as they assess company risk affected by sustainability performance. Our findings suggest that CEO-fixed effects have significant statistical power to explain the quality of sustainability reporting. Further, we use CEO-fixed effects of sustainability reporting to enhance our understanding of the relationship between sustainability performance and cost of equity and to disentangle sustainability reporting levels, which are primarily related to company-level characteristics, from those more closely tied to CEOs.

Our empirical findings indicate that investors recognize the specific style of a CEO as signaling the underlying motives behind corporate engagement in sustainability in their evaluation of future perspectives and risks. In this context, an increase (decrease) in the baseline company-level sustainability reporting results in increasing (decreasing) cost of equity in response to a marginal increase in sustainability performance depending on the levels of reporting a firm undergoes. Our results suggest that investors are more likely to perceive sustainability engagement related to increased reporting on it as a negative signal. Hereby, CEO’s underlying self-serving values might amplify this reaction as investors could view excessive reporting as mainly serving a CEO’s agenda (e.g., through extensive media coverage) at shareholders’ expense. Beyond that, investors are more likely to perceive corporate sustainability engagement in the context of tight reporting as pure shareholder value maximization and sustainability engagement as a business case. Subsuming shareholders appreciate sustainability activities perceived as grounded on instrumental motives as long as they are attributed to be shareholder-value increasing (i.e., as long as a CEO's goals aligns with the goals of shareholders).

We contribute to two research strings. First, we show that CEO-fixed effects help to explain a company’s quality and scope of sustainability reporting. In doing so, we add to the literature on manager-specific influences on company-level voluntary disclosure. The evidence so far is limited to voluntary financial reporting (Davis et al. 2015). We add to this stream of literature by considering the influence of CEOs on non-financial, rather long-term disclosures. We also add to the body of literature on factors influencing company-level sustainability reporting quality beyond company and industry level determinants (Brammer and Pavelin 2006; Clarkson et al. 2008, 2011; Dhaliwal et al. 2014).

Our second contribution builds on the first. With CEO-fixed effects considered a signal to outsiders (Ogunfowora et al. 2018), we add to the literature on signaling and attribution theory (Connelly et al. 2011). Specifically, we show that investors incorporate CEO-fixed effects on sustainability reporting in their perception of company risk when evaluating company-level sustainability performance, depending on the level of reporting thereon. Our paper thus enhances the understanding of the link between perceived risk and sustainability performance. Lastly, our continuous sustainability reporting score may also be helpful to practitioners and researchers engaging in future explorations of sustainability reporting beyond the sustainability report itself. Its wide availability and ready-to-use character make it appropriate not only as a variable of research interest, but also as an easy-to-implement control variable in empirical models.

Our study provides some insights into the signals that CEOs send to capital markets through their underlying personal style and value system. However, there are some limitations inherent to this study, particularly due to the limited sample size and the availability of within-sample switches that restrict the estimation of CEO-fixed effects. Specifically, we cannot observe unconditional CEO-fixed effects, as the estimated fixed effect is only relative to a company’s reporting level imprinted by its previous CEO. Hence, we acknowledge that the CEO-fixed effects obtained through our methodology are rather differences between company-level reporting style (imprinted by the prior management style) and the actual CEO-specific reporting style. In addition, we are not fully able to isolate time-invariant CEO characteristics, as additional time-varying but unobservable CEO characteristics could also be included in the estimated CEO-fixed effects. Further, CEO-fixed effects may capture some company-specific and selection effects. Lastly, we want to stress that the estimated CEO-fixed effects could also capture a signal to the capital market that is more related to a company-specific time trend with respect to sustainability reporting. Yet, we find significant results when we only consider exogenous CEO turnovers according to Fee et al. (2013). Therefore, it might be unlikely that unobservable factors (e.g., due to selection) drive our results. That said, we believe our findings are nonetheless meaningful as we are particularly interested in the way the signal of publicly observable CEO reporting styles depending on the level of reporting are processed by investors (who are likely to rely on methodology and data similar to those on which this study is based).