Sustainability restatements, firm risk and controversial industries: Analysing the signals based on revision type

This study analyses the relationship between sustainability reporting and firm risk by investigating the correlation between sustainability restatements and stock return volatility. Regression models, employed on a sample of 1580 sustainability reports by 353 European companies, evidence the risk relevance of restatement issuance. Investors interpret different signals, reacting with diverse feedbacks, based on the type of revision and whether the firm belongs to controversial industries or not. In general, restatements decrease firm risk when their purpose is to update reporting methodologies, while the opposite effect occurs when they amend errors and omissions. For companies operating in controversial industries, both types of sustainability restatement increase firm risk, with a stronger correlation when revisions redress errors or omissions. Given that sustainability reporting is still characterised by frequent standard and methodology updates, that often lead to the issuance of restatements, this study presents insights for companies and investors.