Investor Preferences and Responses to Disclosure: Evidence from Carbon Net-Zero Pledges

I study how investors with heterogeneous preferences respond differently to disclosures using carbon net-zero pledges as a setting. While most extant accounting literature examines the overall market responses to disclosures, recent theoretical work suggests that investors with heterogeneous preferences may respond differently to disclosures. I empirically identify three types of mutual funds with different stated and revealed preferences for firms' environmental performances (green-impact, green-label, and non-green funds), and test how they respond to net-zero pledges. Despite an insignificant market return response to net-zero pledges, I find that the subset of investors with preferences for environmental performance responds positively to these pledges. I further find that while some green funds seem to carefully examine the credibility of net-zero pledges and respond accordingly, other green funds seem to be primarily focused on the "net-zero" label and simply reward companies making these pledges. The results suggest that care is warranted when using overall market response as a proxy for a disclosure's informativeness when investors have heterogeneous preferences. My findings further imply that investors who primarily care about the existence but not the substance of companies' environmental commitments may encourage companies' greenwashing through empty environmental commitments.