British Accounting Review (1999) 31, 439457

Article No. bare.1999.0108, available online at http://www.idealibrary.com on

NARRATIVE CORPORATE SOCIAL DISCLOSURES:

HOW MUCH OF A DIFFERENCE DO THEY MAKE
TO INVESTMENT DECISION-MAKING?
MARKUS J. MILNE and CHRISTIAN C.C. CHAN
University of Otago, New Zealand
This paper reports the results of a study on the usefulness of typical social disclosures
from corporate annual reports for investment decision-making. Rather than seek to
solely survey respondents about their stated behaviour, the present study also seeks
to examine if narrative social disclosures in the annual report actually impact on the
behaviour of how investors allocate their investment funds. The experiment provides
a basis for assessing the magnitude of any decision impacts. The results indicate
that from a sample of sophisticated users (accountants and investment analysts)
social disclosures from annual reports do not elicit any more than a 15% switch in
investment funds. Furthermore, the switch in funds is not always in favour of the
company providing the information. Consistent with these behavioural reactions the
survey evidence also reveals moderate attitudes to the decision usefulness of narrative
social disclosures for investment decision making.
1999 Academic Press

INTRODUCTION
Since the early surveys of Ernst & Ernst (1978), the voluntary social
disclosure practices of firms have become widely documented (see, for
example, Guthrie & Parker, 1990; Gray, Kouhy & Lavers, 1995; Deegan
& Gordon, 1996; Hackston & Milne, 1996). Many of these studies show
that most of the social information disclosed in annual reports relates to
employees, the environment and the community. The disclosures, which
Correspondence should be addressed to M. J. Milne, Department of Accountancy, University of Otago,
PO Box 56, Dunedin, New Zealand. Fax: 64-3-4798450; e-mail: mmilne@commerce.otago.ac.nz
The authors would like to thank David Owen, Alan Macgregor, Kate Brown, Ken Moores and Ralph
Adler for comments on earlier drafts. In addition, the authors express their appreciation to participants
at seminars at Massey and Otago Universities. All errors remain the responsibility of the authors.
Previously a BCom (Hons) student, Department of Accountancy, University of Otago. This paper
was developed from Christians dissertation.
Received 23 November 1998; revised June 1999; accepted July 1999.
08908389/99/040439+19 $30.00/0

1999 Academic Press

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MARKUS J. MILNE AND CHRISTIAN C.C. CHAN

are typically qualitative, often appear in the Chairmans statement or some

other commentary section of the annual report.
Why firms make such disclosures in their annual reports has also been
the subject of much research effort (for a review of several studies, see
Epstein & Freedman, 1994; Gray et al., 1995). To date, however, there
is little universal agreement on the rationale(s) underlying such disclosure
practices. In fact, several lines of argument have emerged to explain the
disclosure practices, including agency theory, legitimacy theory, stakeholder
theory, political economy theory and user utility theory. Some of these
theories may be overlapping rather than competing (Gray, et al., 1995).
Without wishing to diminish the validity of other arguments, this study
focuses on the line of argument that the disclosures are made because they
are useful to decision-makers, and to a lesser extent because they are good
for the firm producing them.
The dominant strand of the decision-usefulness argument is that
traditional user groups (investors) find social disclosure information useful
for their investment decision making and firms are fulfilling these decision
needs. The most common method of assessing the validity of this argument
has been surveys of investor needs and stock market reaction studies.
Surveys provide an indication of the demand for social information, but
they are at best a weak test of the use value of the information. One of the
more careful surveys, for example, recently asked respondents to consider
whether a different decision would be made where the [social] information
is known, compared to where the [social] information is unknown (Deegan
& Rankin, 1997, p. 572, n. 13). While Dierkes & Antal (1985) suggest that
asking users about their perceptions is a useful starting point in assessing
social information usefulness, they point out, The ultimate test for the
usefulness of social reporting information is its impact on decision-making
(p. 30, emphasis added).
Stock market reaction studies measure actual decision-making behaviour,
but the problem with these studies is the degree to which the behavioural
changes can be confidently associated with the social disclosure information
(Booth, Moores & McNamara, 1987). An alternative to the stock market
reaction study is to use a decision experiment to capture the changes in
investor behaviour. Several early experimental studies (Elias, 1972; Acland,
1976; Schwan, 1976; Hendricks, 1976; Belkaoui, 1980) were conducted
on social disclosure information. With the exception of Belkaoui (1980),
however, and no doubt reflecting the public interest in employee matters in
the 1970s, these studies focused solely on human resource issues. Many of
these experimental studies were also limited to using contrived financially
quantified social information that appeared in an amended financial section
of the annual report. The exception is Acland (1976), who also included
some narrative information, although this information was also contrived.
Consequently, little is actually known about the investment decision impact
of narrative social disclosures that firms typically provide in their annual

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441

reports. In fact, in a broader sense, little is known about any decision impact
from such information.
By following Dierkes and Antals (1985) model of social responsibility
information usefulness, and by using an experimental design, this study
provides a stronger test of the decision usefulness argument. The study also
provides a basis for quantifing the magnitude of any investment decision
impact from narrative social disclosures.
PRIOR LITERATURE
The extent to which previous market reaction, experimental and survey
studies can be used to develop prior expectations for the overall impact of
narrative social disclosures on investment decision making is far from clear
cut. Not only do the different research methods elicit different results,
but so too do the same methods across different studies. The social
information signals used to test market reactions vary enormously and
there appears to be no consistent pattern of results associated with such
variability. Belkaoui (1976), for example, obtained positive reactions to
financially quantified pollution control expenditures obtained from annual
report disclosures (also see Shane & Spicer, 1983). Mahapatra (1984),
however, using financially quantified pollution expenditures supplied by the
US Environmental Protection Agency, found a negative market reaction
associated with such disclosures. Yet Freedman and Jaggi (1986) could
find no incremental reaction to financially quantified pollution disclosures
over and above that for descriptive pollution disclosures. Anderson and
Frankle (1980) obtained positive market reactions. Their information
signal, however, was a mixture of financially quantified, but predominately
qualitative, social information from annual reports.
The survey evidence is also mixed, although there are perhaps some
clearer reasons for the variability in the results. When investors have specific
ethical investment motives, their perceptions of the usefulness of corporate
social disclosure appear to be strong. Buzby & Falk (1978), Rockness &
Williams (1988) and Harte, Lewis & Owen (1991) all found evidence
from social investors that suggest some social items of disclosure were
important, and in some cases at least equally important, as financial items
of disclosure. With regard to making investment decisions more generally,
however, the survey evidence is less consistent about the importance of
social information. Again, there appear to be reasons for this. Several
early surveys (e.g. Benjamin & Stanga, 1977; Firth, 1978; Buzby & Falk,
1979) could find moderate or no importance given to social responsibility
information in their respondents investment decision-making processes.
On the other hand, more recent surveys (e.g. Epstein, 1992; Goodwin,
Goodwin & Konieczny, 1996; Deegan & Rankin, 1997) suggest that social,
and particularly environmental, information is important to investors more
generally.

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MARKUS J. MILNE AND CHRISTIAN C.C. CHAN

The type of survey participant also appears to have a strong bearing

on their probable response. The studies carried out by Epstein (1992),
Goodwin et al. (1996) and Deegan & Rankin (1997), for example,
showed strong demands from non-institutional investors for social and
environmental information. Benjamin & Stanga (1977), Teoh and Shui
(1990) and Deegan & Rankin (1997), however, found that bankers and
investment analysts seem to be the most likely to state that social or
environmental information has little or no importance for them.
In contrast to those latter survey findings, investment analysts, bankers
and accountants have, for the most part, been found to react significantly
to social and environmental information in experimental studies. Reflecting
the public interest in employee and labour issues during the 1970s, several
experimental studies examined the impact of human resource information
on investment and lending decisions. By requiring participants to perform
a hypothetical investment decision task based on two sets of financial
statements, one with social information included and one without, Acland
(1976), Schwan (1976) and Hendricks (1976) all concluded that human
resource information either in or supplementing the financial statements
affects investment decision-making behaviour. Only the earlier study of
Elias (1972), that used human resource values generated from historic cost
information, failed to elicit a positive response from investment analysts.
Hendricks (1976) found, for example, a positive reaction to additional
human asset information. In his experiment, investors (finance student
surrogates for investment analysts) on average switched 26% of the
portfolio funds to the company with the better human asset investment
practices. Likewise, Schwan (1976) found bankers made significantly
different decisions when provided with human resource information in
the notes to the accounts. Positive information tended to create positive
reactions. Investment analysts were also affected positively in their choice
of investment when provided with narrative interpretations of non-financial
behavioural indicators in Aclands (1976) study.
Belkaouis (1980) later experiment, which used additional pollution
abatement cost information, appeared to produce little or no effect on his
student subjects. The bank loan officers and accountants produced greater
reactions, however.1 The loan officers, under both capital gains and income
investment strategies, on average switched more funds to the company that
was making greater investments in pollution abatement equipment at the
expense of higher income. Under a capital gains investment strategy, similar
reactions were observed for the accountants. Under an income strategy,
however, the accountants switched funds away from the heavy investor in
pollution abatement equipment in favour of the company making greater
short-term income. From his findings Belkaoui (1980) therefore concluded
that not only does the pollution abatement cost information impact on
investment decision making, it also appears to impact differently depending

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443

on the professional background of the investor and the investment strategy

being pursued by the investor.
Thus, the guidance to be taken from these previous studies in formulating
prior expectations for the experimental use of narrative social disclosures
is equivocal at best. Overall, there is no consistency in the market reaction
studies (Ullman, 1985), and for some it is doubtful whether these studies
provide strong support for the proposition that social information is useful
for making investment decisions anyway (Booth et al., 1987). On the other
hand, while experimental studies suggest that social disclosures will have
an impact on investment decision making, these results relate largely to
human resource issues and the results may be a function of the time
period in which the studies were conducted. Only Belkaouis experiment
looks beyond human resource issues, but this focuses on the decision
impact of modified financial statements. Furthermore, much of the survey
evidence, especially that of financially trained investor groups, suggests that
social disclosures have no effect. Are the differences in these empirical
findings the result of real inconsistencies in the attitudes and behaviour of
investors to corporate social information? Or are they the result of other
differences?
The possibility that peoples perceptions and attitudes might not correlate
with decision-making behaviour is something that has long been recognized
in the psychology literature. Schuman & Johnson (1976), for example,
caution the sole use of attitudinal measures on the assumption that attitudes
cause, reflect, or at least correlate substantially, with behaviour. They
recount several studies in the field of social psychology (LaPiere, 1934;
Saenger & Gilbert, 1950; Kutner, Wilkins & Yarrow, 1952) that dispute
this assumption by yielding not simply small relations between attitude and
behaviour, but none at all.
Perhaps aware of the potential for conflict between attitudes and
behaviour, Dierkes & Antal (1985) present a stepwise process for measuring
the usefulness of corporate social disclosure. They suggest investigating:
1) How important is the concept of corporate social responsibility to users?
2) How much corporate social disclosure satisfies users information needs
when making decisions?
3) Is corporate social disclosure considered usable; is the information
perceived to be reliable and is it presented in such a way that it can be
used?
4) Does corporate social disclosure actually change decision-making
behaviour?
Dierkes & Antals stepwise approach separates the measure of usefulness
into attitudinal and behavioural measures and remains open to the possibility
that these may differ significantly. As a basis for assessing the usefulness of
corporate social disclosures for investment decision making, then, this study
closely follows Dierkes and Antals framework.

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Apart from investors saying and doing different things, one other possible
explanation for the observed differences in the survey and behavioural
studies concerns differences taken in the social information signals that
are provided to respondents. Most of the experimental studies focused on
social information that was quantified and disclosed within the financial
statements or footnotes thereto. Yet, as noted above, most of the social
information that firms typically disclose is qualitative and appears outside
the financial statements in the annual report. Investor surveys, on the
other hand, rarely ask respondents for their perceptions of the usefulness
of financially quantified social information. Consequently, respondents to
surveys may well have the more typical qualitative information in mind when
responding. Apart from providing a measure of the behavioural impact of
narrative social disclosures, this study may therefore also help provide
explanations for the differences between the prior survey and experimental
evidence.
In addition to unclear empirical evidence, economic theory is also
unclear about the expected investment reactions to social information.
While common sense would dictate that firms acting rationally would not
voluntarily disclose social information if they believed it would do them
harm (Verrecchia, 1983; Craswell & Taylor, 1992), they may not always
get it right. Furthermore, as has been long argued by Friedman (1970),
firms engaged in social responsibility activities are potentially doing so at the
expense of increased profits. As such, one would expect rational investors
to react negatively because of expected reductions in profitability with no
corresponding reduction in risk (Holman, New & Singer, 1985). In contrast,
however, lies the argument that investors will reward socially responsible
firms in terms of higher investments. By engaging in corporate social
responsibility, investors can be confident that the firm will not be subjected
to government sanctions in the future as a result of violations regarding the
environment and other social involvement matters (Holman et al., 1985).
Consequently, whether narrative social disclosures communicate corporate
excesses and waste of shareholder funds, reduced corporate risk, or neither
of these is an empirical question. Furthermore, given some of the findings
in social psychology, it is an empirical question best answered by reference
to investors behavioural reactions at least as well as by reference to what
they might say.
From this review of empirical findings and economic argument, it is
not possible to clearly specify with any degree of confidence the expected
behavioural reactions to narrative corporate social disclosures. In a very
real sense, no clear hypothesized reactions emerge, and the study should
be seen largely as an exploratory investigation into behavioural reactions
to narrative social information. In spite of no clear decision expectation,
however, the review does indicate the potential for the type of respondent
and their investment strategy to influence the decision outcomes.

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445

METHOD
As noted in the introduction, the literature has typically, and certainly more
recently, followed capital market research and investor surveys in addressing
the question of whether corporate social disclosure is useful for investment
decision making. In addition to using a survey method, this study revives
the experimental decision task.
All three approaches have limitations, but the experimental method
does have some advantages over the other two. Not least is the fact that
the method has not been used before to assess the worth of corporate
narrative social disclosures to investors.2 Unlike surveys that capture
attitudes, decision experiments measure behaviour. Also, a greater degree
of confidence can be placed on the observed behavioural changes being
the result of the social information than with capital market studies. The
limitation with decision experiments, of course, is that while they do
measure changes in behaviour, they do so under controlled and hypothetical
conditions. The extent to which such behaviour would be repeated in real
decision situations is always open for debate. The level of confidence that
can be placed in the experimental results often depends on how well the
experimental conditions model reality.
As part of this study, a short survey was mailed to similar sets
of respondents as the decision experiment. Five 5-point ordinal-scaled
questions were developed from the dimensions suggested by Dierkes &
Antal (1985) for measuring the perceived usefulness of corporate social
disclosure.3 In addition, survey respondents were also asked, if social
responsibility information had no influence whatsoever on their investment
decisions, to explain why. For the sake of brevity, however, the results from
the survey, which are largely confirmed by the decision experiment, are
reported in an appendix to this paper.
The investment decision task used in this study was modelled after
such earlier studies as Elias (1972), Acland (1976), Hendricks (1976),
Schwan (1976) and Belkaoui (1980). This study improves on these previous
studies by incorporating a variety of social responsibility information and
not just human resource or pollution control information alone. This
should provide a better representation of corporate social disclosure as
contained in annual reports in the 1990s. The shifting demands of public
interest now go beyond matters of employment practices and include the
environment, local communities and consumers. Arguably, more realism is
also introduced in this study because it examines the impact of narrative
corporate social disclosure. The experiments of Elias (1972), Schwan
(1976), Hendricks (1976) and Belkaoui (1980) contained financially
quantified social disclosures or notes to the main accounts. Furthermore,
while Aclands (1976) experiment does contain some narrative statements,
these are included to help interpret the non-financial behavioural human
resource indicators he used, and are not representative of typical narrative

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MARKUS J. MILNE AND CHRISTIAN C.C. CHAN

social disclosures found in annual reports. Numerous studies show that by

far the most common method of disclosing social information in annual
reports is narrative discussion (Teoh & Thong, 1984; Guthrie, Gul, Andrew
& Teoh, 1986; Hackston & Milne, 1996). Financially quantified social
disclosures are relatively rare.
In the experiment, participants were asked to compare two firms,
Company A and Company B, and then allocate $50,000 as equity
investment between the two firms under two investment strategies. In
an attempt to increase the realism and motivate the respondents to take
the task seriously, the participants were asked to assume you really have
$50,000 of your own money that you would like to invest. We acknowledge
that in doing this, however, the conditioned personal investment decision
may differ from one generated in the role of professional investment advisor.
The two investment strategies (i.e., invest for speculative profit and invest
for long term share ownership) were explained to the participants to
ensure uniformity of interpretation. Two information packets were used
as follows:
The Control Packet, including the financial statements of both companies
A and B (labelled Alpha Inc. and Sigma Inc. respectively) prepared
according to conventional accounting procedures, (i.e., ignoring any
corporate social disclosure).
The Social Packet, including the same financial statements as the control
packet. In addition, for Company A (labelled Delta Inc.), the financial
statements were preceded by a page of neutral (i.e., non-corporate social
disclosure) non-financial narrative statements. For Company B (labelled
Omega Inc.), the financial statements were preceded by a page of nonfinancial narrative corporate social disclosure statements.4
Participants were then randomly assigned one and only one of the
above information packets for analysis. In addition to indicating their
investment decision, participants were also asked to provide details of
their age, qualifications and years of work experience. This provided an
ex-post check on the respondents competence in undertaking the decision
task.
Companies A and B were two real companies from the same industry, and
the financial statements were actual statements, although they were several
years old. Every care was taken to conceal the identity of the two companies
and the industry they belonged to. Together, the balance sheets, profit and
loss accounts and cash flow statements provided a three-year history of the
firms financial results. Some aggregating of line items was carried out to
reduce the effort needed to analyse the financial statements. Key financial
ratios5 and actual share prices for two years were also provided to aid the
analysis.

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447

For the social packet, it was necessary to match the amount of information
provided on companies A and B. This was to ensure participants were
responding to the social information and not just to the amount of
information provided for Company B. Both the neutral and the corporate
social disclosure statements were excerpts from the actual annual reports. In
fact, the extracts were taken from the annual reports of two companies used
in a previous social disclosures study (Hackston & Milne, 1996). In that
study, Company A made zero social disclosures, while Company B made
48 social disclosures, about twice the average of disclosing companies. To
conceal any description of names or places, and also for sentence structure
and flow, the narrative statements were slightly modified. The page of
corporate social disclosure included information pertaining to the impact
of the company on the environment, customer relations, human resources,
employee safety and health, product quality and community involvement.
The pages of corporate social disclosure and neutral statements were
headed Chairmans review of Omega and Chairmans review of Delta,
respectively.
Sample selection
The participants selected for this study represented two different professional groups, namely investment analysts and accountants. Accountants
and investment analysts may not be strictly investors per se, but for this
study an investor is not so much a current shareholder but an individual
who possesses the necessary skills to evaluate investments.6
The choice of participants for the study obviously involves some tradeoffs. Studies by Lee & Tweedie (1975, 1976), for example, show that
sophisticated investors (individuals who possess a significant degree
of experience in accounting and financial matters) are more likely to
understand financial reporting practices and the accounting information
contained in the annual report than unsophisticated investors. Although
not a prerequisite for this study, such professionals would also very likely be
investors on behalf of their companies or clients anyway. Financially trained
investors, then, are more likely to boost the validity of the experiment, but
nevertheless it should be remembered that the choice of such participants
might well limit the extent to which the results could be generalized to other
investor groups.
Participants for the study were randomly selected from the membership
list provided by the local Institute of Chartered Accountants Yearbook
and directly through the New Zealand Society of Investment Analysts.7
Participants from each of the two professional groupings were then randomly
assigned to either receive the control information packet or the social
information packet. The information packets were then mailed to the
participants, along with appropriate decision response sheets to be returned
by mail.

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MARKUS J. MILNE AND CHRISTIAN C.C. CHAN

DATA ANALYSIS AND RESULTS

Response rates and demographic details
Table 1 provides a summary of the response rates and the demographic
background details for each of the experimental respondent groups.8
A total of 60 information packets were mailed to each of the above
groups. Sixteen were returned from the accountants sample and 3 from
the investment analysts sample because the addressees were absent and
unable to respond. The lower response rates for the social information
packet are not entirely unexpected given their extra length and more
time-consuming nature. Personally addressing the samples drawn from the
Society of Investment Analysts was not possible, and this may explain the
slightly lower response rates for them.
Early/late response tests were used as a measure of non-response bias
(Oppenheim, 1966, p. 36). It is acknowledged that such tests are weak,
but in this instance it was the only test available. WilcoxonMannWhitney
tests revealed no significant differences at the 5% level.
The participants indicated that they had the relevant expertise and
experience to participate in this study, and, hence, greater confidence
can be placed in their responses. The study respondents typically fell
within the 3135 and 4150 age groups, with more than two thirds having
undertaken at least 56 accounting and finance related tertiary level courses.
Most participants possessed six or more years of experience in evaluating
financial statements. No significant differences could be detected in the age,
education or experience levels on the basis of professional group, or on the
TABLE 1
Response rates and demographic details
Accountants

Investment analysts

Total

Sent & received

Usable responses
Response rate
Median age
Median experience
Median education
Social Group

53
15
28%
3135 years
610 years
56 courses

59
14
24%
3640 years
610 years
56 courses

112
29
26%

Sent & received

Usable responses
Response rate
Median age
Median experience
Median education

51
11
22%
3640 years
35 years
78 courses

58
10
18%
4050 years
1120 years
910 courses

109
21
19%

Control Group

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NARRATIVE CORPORATE DISCLOSURES

TABLE 2
Descriptive statistics for investment decision task
Investment
strategy

Group

Company

Long term

Control
N D29
Social
N D21
Control
N D29
Social
N D21

Alpha
Sigma
Delta
Omega
Alpha
Sigma
Delta
Omega

Short term

Mean
(in dollars)
3405172
1594828
3250000
1750000
3025862
1974138
3154762
1845238

(SD)
(in dollars)
1411708
1411708
1592953
1592953
1606828
1606828
1582080
1582080

K-S stats
115
115
072
072
089
089
075
075

The
The

minimum and maximum for all the categories were $0 and $50,000, respectively.
SD is the same for companies in each experimental group because the distribution for Company
A is $50,000 minus the distribution of Company B.
All the distributions approximate normality.

TABLE 3
Average percentages invested
Group

Additional
information

Company

Profession

Long-term
strategy

Short-term
strategy

Control

None

Alpha

Accountant
Inv anlyst
Accountant
Inv anlyst
Accountant
Inv anlyst
Accountant
Inv anlyst

69%
67%
31%
33%
57%
74%
43%
26%

52%
70%
48%
30%
66%
60%
34%
40%

Sigma
Social

Neutral

Delta

Social disclosure

Omega

basis of treatment group. Consequently, any decision differences can be

more confidently attributed to information rather than the backgrounds of
the decision-makers.9
The Investment decision task
The descriptive statistics for the investment decision task are presented
in Tables 2 and 3. Table 2 presents the results for the professions
combined, while Table 3 reports them separately for each profession. In all
cases, Company A (Alpha/Delta) attracts almost twice the overall average
amount of investment funds as Company B (Sigma/Omega) (Table 2).
Of more importance, however, is whether the overall average amount
invested in Company A or Company B significantly changes as a result of

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MARKUS J. MILNE AND CHRISTIAN C.C. CHAN

investors receiving different information sets. The average amount invested

in Company B (Sigma/Omega) increases ($15,948!$17,500) under the
long-term investment strategy as a result of the social disclosure information.
Under the short-term investment strategy, the average amount invested in
Company B (Sigma/Omega) declines ($19,741!$18,452) as a result of
the social disclosure information.
Table 3 provides another perspective on the overall findings. The
percentages are obtained by averaging the total amount invested in each
company by each professional group under each investment strategy. The
results indicate that under a long-term strategy, accountants tend to reward
the firm that provides corporate social disclosure in the annual report by
allocating, on average, 12% (31%43%) of their investment funds away
from an identical firm without corporate social disclosure in their annual
report. In contrast, investment analysts tend to allocate on average 7%
(33%26%) of their funds away from the firm that provides corporate social
disclosure in the annual report. Under a short-term strategy, however, the
accountants tend to penalize firms which provide corporate social disclosure
in the annual report by allocating away an average of 14% (48%34%) of
their funds from such a firm. Investment analysts tend to reward such a firm
by allocating an average of 10% (30%40%) in favour of it. Interestingly,
however, the largest differences occur within the control group that is subject
to only conventional financial information. The accountants switch 17% of
funds from Alpha as a result of changing from a long-term strategy to a
short-term strategy.
To more formally test the changes in the amounts invested in companies
A and B under different information sets, different professional groups
and different investment strategies, two-tailed independent t-tests for the
equality of the mean amount invested were performed. Paired t-tests were
used for differences in investment strategy within professional groups. Tests
for differences in the mean amounts invested by the different professional
groups revealed no significant differences for any of the information set
or investment strategy combinations. For brevity, the test results are
not reported. The different patterns in the professions shown in Table
3 are, therefore, not statistically different. Given the distribution of decision
responses provided in this study, the professions would need to differ in
their average investments by at least 20% of the portfolio funds or $10,000
before the differences become statistically significant.10
In addition to testing for significance in the magnitude of the investments
being made, binomial tests were also performed in order to examine the
significance of any changes in the proportion of participants changing their
preferences to either company as a result of the social information. This
was achieved by dividing investors at the $25,000 level (e.g., an investor
who allocated $X>$25,000 to Company A preferred Company A over
Company B). None of these tests produced statistically significant results.

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451

In summary, then, while the narrative social disclosures have clearly

produced some differences in the way accountants and investment analysts
have reacted in terms of their investment decision making, the magnitude
of the decision impact is not statistically significant. Furthermore, the
social information did not cause too many participants to change their
preferences for a particular company. The accountants group was most
influenced by the social information. The most positive result to occur from
the social information was a switch of $6,00000 or 12% of the portfolio
under a long-term investment strategy in favour of the company providing
the information. Under a short-term strategy, however, where the greatest
decision impact occurred, accountants switched on average $7,00000 or
14% away from the company providing social information. Overall, the
results from this study suggest corporate narrative social disclosures do not
make much of a difference to investors decision making.
DISCUSSION
The main purpose of this study was to investigate the magnitude of the
decision impact on investors from the typical narrative corporate social
disclosures made in annual reports. A secondary purpose was to try and
reconcile the differences between the results of earlier surveys with those
of earlier decision experiments. Overall, the decision impact is small with
no more than a 15% switch in investment funds being detected. The
biggest switch, in fact, was away from the company providing the social
information. In terms of the magnitude of the decision impact, the results
from the decision experiment in this study are more consistent with earlier
survey responses (Benjamin & Stanga, 1977; Buzby & Falk, 1979; Teoh &
Shiu, 1990; Tilt, 1994), than they are with the earlier decision experiments.
The influence of narrative social disclosures for investment decision making
in a general sense is at best only moderate. For the most part, the respondents
in this study consistently behave as they say they do.
The experimental results from this study, however, are not entirely
inconsistent with those of the other decision experiments. The accountants,
for example, in both this and Belkaouis study avoid the firm reporting
social information under a short-term investment strategy, but prefer to
invest in it under a long-term strategy. In both studies, investment strategy
is clearly influential, and it is the magnitude of the decision impact that
differs between the studies, not the way the accountants have reacted to
the social information. Further experimental studies would reveal whether
such investment strategy reactions to social information for accountants
consistently exist.
The main difference between this and the earlier experimental studies is
the way in which the social information was presented to the decisionmakers. Written responses to the investor survey, and the results for

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MARKUS J. MILNE AND CHRISTIAN C.C. CHAN

which appear in the appendix to this study, suggest the information

differences may explain the relative strength of the decision impacts.
Furthermore, the explanations also seem consistent with the economic
arguments discussed earlier in this paper. It is not social information per se
that is unimportant, but rather the kind of analysis it either does or does
not facilitate. Not surprisingly, most of the accountants and investment
analysts were interested in the financial performance of the firm rather
than its social performance. According to most of the written responses,
narrative social information fails to communicate sufficiently precise and
direct impacts on the firms risk and return relationships and is therefore
largely ignored. Although the respondents did not say so, it would appear
from the earlier experiments that financially quantified amendments to the
financial statements meet these analytical needs. The written responses
seem to indicate that only when corporate social disclosure pertains to
company activities that have a significant impact on future cash flow (i.e.,
returns) because they are mandated by law and have high political visibility
(i.e., high risk), will they be perceived as useful. Information pertaining to
company activities that are less likely to be detected or done voluntarily, for
example minority employment or charitable donations (i.e., low risk), are
not perceived to have a significant impact on future cash flow and, hence,
are not regarded as useful.
Note carefully, however, that the findings in this study do not suggest
that narrative corporate social disclosure could not be of use to investors
for their investment decision making. On the face of it, there seems no
apparent reason why textual disclosures of social performance could not be
made more relevant in terms of their impacts on future cash flow for the
types of investor in this study. The point is that most firms do not do this.
The vast majority of annual report social disclosures tend to be narrative,
self-congratulatorysome would say PR puffand, based on the results
of this study, are not considered useful for investment decision making by
investors drawn from the accounting and investment professions.
CONCLUSION
From the decision experiment used in this study, the overall findings suggest
investor surrogates drawn from the accounting and finance professions
largely ignore narrative social disclosures for their investment decision
making. At best, the decision experiment elicited a 15% switch in investment
funds. These findings are at odds with previous decision experiments,
but consistent with many previous surveys of investor demands for social
information. Within the confines of the experiment, this study has confirmed
that accountants and investment analysts behave largely as they say they
will. Although it is difficult to be sure, it is also probably the case that when
previously asked for their perceptions to social disclosures, respondents

NARRATIVE CORPORATE DISCLOSURES

453

bring to mind the typical narrative information presented in the Chairmans

statements.
The discrepancies between this and the prior decision experiments are
explained by the narrative social information not being sufficient to satisfy
the analytical requirements of the investor types used in this study. Not
surprisingly, the investor types chosen for this study seem most concerned
with risk and return and, in their view, narrative social disclosures were
insufficient to help assess impacts on these characteristics of the investment
decision-making process. It would appear, however, that when social
information is quantified (monetarily) and directly incorporated into the
financial statements, it does provide a basis to assess risk and return, and
will elicit decision reactions.
Whether stronger decision reactions to narrative social disclosures would
have come from other investor types and not just those investing for
social and ethical motives, is unclear. Several previous surveys of noninstitutional investors suggest their demands for social information are
greater than the accountants and investment analysts used in this study,
and consequently a greater decision reaction might be expected. Follow-up
decision experiments on other investor types would, therefore, provide a
means not only to quantify the magnitude of any decision impact, but,
again, to assess the correspondence between potential behaviour and stated
attitudes.
Finally, there is no reason why decision experiments should be limited to
the assessment of investment impacts. Extensions to the decision experiment
used in this study may also come from alternative manipulations to
the social information and alternative decision contexts. Not only could
the experiments be used to assess the usefulness of existing social and
environmental information, they could also be used to assess the potential
of yet-to-be-produced information. In line with Dierkes and Antals (1985)
framework, such experimental results may then provide a stronger basis on
which to argue for increased corporate social disclosures.
NOTES
1. Given that Belkaouis (1980) results are reported as the means of arcsine transformations,
it is difficult to report the effect sizes on the portfolio either in terms of proportions or
absolute amounts.
2. Acland (1976), in assessing the investment decision impact of human resource information, includes non-financial behavioural indicators and some narrative statements.
These statements, however, were interpretive and not typical of the social disclosures
corporations make in annual reports.
3. When answering these questions, the possibility that survey respondents may not have
had in mind the kind of narrative social information we supplied to the experimental
subjects was pointed out by one of the anonymous referees. In hindsight, this weakness
could be improved in all such surveys by supplying the narrative information along with
the survey questions.

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MARKUS J. MILNE AND CHRISTIAN C.C. CHAN

4. A page of corporate social disclosure statements was deemed appropriate because the
average amount of corporate social disclosure provided by New Zealand companies
in the annual report is 23 sentences, which roughly constitutes a page (Hackston &
Milne, 1996). Although the page of corporate social disclosure is justified in terms of
the amount, the concentration of statements in just one page is recognized as nonrepresentative of the average annual report. Consequently, the results might have been
different if the corporate social disclosure statements had been dispersed across a few
pages, resulting in a less intense dosage of the treatment. Full copies of the experimental
investment decision task are available from the authors upon request. Please e-mail:
mmilne@commerce.otago.ac.nz.
5. The choice of key financial ratios was based on Gibsons (1987) study that ranked
60 ratios in terms of their relative importance to Chartered Financial Analysts. Each
of the 8 ratios selected was among the top four in their classification (i.e., measuring
profitability, liquidity or debt) ranked in terms of relative importance.
6. Bank managers and corporate loan officers would also possess the kind of experience
and expertise relevant to this study. Attempts to secure their participation failed due to
an inability to identify a database of suitable candidates.
7. Due to the Privacy Act, the Society of Investment Analysts insisted on performing their
own selection procedure, which we were assured would be random. Nevertheless, as
researchers, we could not attest that this was, in fact, properly carried out.
8. Response rates for the perceptions the survey referred to in the appendix were as follows:
Accountants
Sent & received
Usable responses
Response rate
Median age
Median experience
Median education

39
27
69%
3640 years
610 years
78 courses

Investment analysts
40
19
47%
3135 years
610 years
910 courses

Total
79
46
58%

9. As noted by one of the referees, however, these tests do not capture the content or
nature of the courses taken and experience gained. It is possible, for example, that the
accountants received greater exposure to social reporting issues through their education
and training, and this may possibly explain different decision reactions between the two
groups.
10. It is the large variance of individual responses in each group that makes it difficult to
obtain statistical significance, and this raises the issue of whether a related sample or
repeated measures design would not have been better than the independent samples
design used in this study. While the repeated measures design controls for individual
variation, it would have undoubtedly contaminated the responses by sensitizing
respondents when asking them to complete the decision task twice. Such a request
would also have undoubtedly further eroded the response rate.

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 Significant

at the 5% level.

1) How important is social responsibility

information to you when deciding how to
allocate your investment funds?
2) How often does social responsibility
information disclosed in company annual
reports influence your decision on how to
allocate your investment funds?
3) How reliable do you perceive social
responsibility information disclosed in
company annual reports to be?
4) Is social responsibility information
disclosed in company annual reports
presented in such a way that it is easy to
understand?
5) How much does social responsibility
information disclosed in company annual
reports satisfy your information needs
when deciding how to allocate your
investment funds?

Survey questions
1
3
7
1
0
0
1
1
2
1
2
4
1
1
2

Very important
Number
Percentage
Always
Number
Percentage
Very reliable
Number
Percentage
Very easy
Number
Percentage
Very much
Number
Percentage

2
3
6

2
11
24
2
14
31

2
13
29
2
3
6

3
21
46

3
25
54
3
18
40

3
13
29
3
16
35

4
18
40

4
7
15
4
11
25

4
11
24
4
18
39

Frequencies

5
3
6

5
2
5
5
0
0

5
5
11
5
9
20

Not at all

Not understandable
at all

Not reliable at all

Never

Not at all important

DESCRIPTIVE STATISTICS FOR SURVEY RESPONDENTS

APPENDIX

Median

162

145

193

146

119

K-S Stats
NARRATIVE CORPORATE DISCLOSURES

457