The Extent Of Environmental Disclosure In Annual Reports Accounting Essay


3.1 Introduction

The study extends the previous research as what has been mentioned in chapter one of this dissertation and therefore uses the same measurement of environmental reporting. The purpose of this study is to investigate environmental reporting in annual report. Rather than that, this study also identify the factor that can be influence company decision to disclose environmental reporting in annual report.

Sample Selection and Data Collection

The population of this study is all public companies listed of the main board of Bursa Malaysia as of 31 December 2009. However, all financial firm are excluded from the sample, as these sector are restricted by certain rules from regulatory bodies such as Bank Negara Malaysia and Ministry of Finance. According to Roscoe (1975), sample sizes larger than 30 and less than 500 are appropriate for most research. Thus, The final sample consist of 100 companies randomly selected were considered appropriate. The annual report is regarded as the main form of company communication (Zeghal & Ahmed, 1990; Unerman, 1999) and it is also widely available (Buhr, 1998; Unerman, 1999). Hence, this study considers the information disclosed in annual reports. All the annual reports of the companies that have full data were downloaded from Bursa Malaysia and company website.

Research Design

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The preliminary test was conducted by referred to Kulim (Malaysia) Berhad as a benchmark. There are several reasons led to the decision to use Kulim (Malaysia) Berhad in this pre-testing. Based on the ACCA MaSRA 2010 Winner, Kulim (Malaysia) Berhad are clearly links sustainability strategy to business objectives, specific operating environment and stakeholders. Besides, the transparently list targets and commitments in term of people, planet and profit and the current outcome. In addition, this company clearly lists its biodiversity targets and status of projects, and elaborates on its conservation partnerships and its wildlife defense programmes, which include sending its security head for wildlife protection training in Thailand. This company also have a strong internal audit function which assesses environmental risks according to the ISO 14000.

Method used for this dissertation is content analysis as many researcher have done previously ( Yusoff et al ,2005; Ten, 2004; Wilmhurst &Frost, 1999; Smith et al, 2007; Ten, 2009). Beattie and Thomson (2007) highlight and illustrate the problem arising from the content analysis stems from the concept boundary problem and coding reliability, volume of disclosures, type of disclosures and the unit of analysis and unit of measurement. Milne and Adler (1999) added that content analysis needs to demonstrate the reliability of data collected using those instruments to permit replicable and valid inferences to be drawn from data derived from content analysis. However annual report is an important document and high credibility used by a number of stakeholder ( Rizk et al 2,008 ; Yusoff and Lehman, 2009). Corporate annual reports were thoroughly read because environmental has been presented in many different ways and in various sections of the reports.

As mentioned in the chapter 1, the objective of this study is to analyze the environmental disclosure among Malaysian Public Listed Company in annual report and examine the factors that may influence a company to provide environmental disclosure. Specifically, this study examine whether high financial performance influences environmental disclosure, environmental sensitive companies influence the environmental disclosure , ISO 14000 accredited companies influences environmental discloasure as well as leverage influences the environmental disclosure.

3.2 Measures of Dependent Variables

Cooper and Schindler (2008) cited that dependent variable or criterion variable is the variable measured, predicted or otherwise monitored by the researcher and expected to be affected by a manipulation of the independent variable.

The dependent variables in this study is environmental reporting. To analyze the extent of disclosure, 24 identified disclosure items in the score sheet were utilized to capture these items from the companies corporate report. This disclosure item are adopted from Yusoff and Lehman (2004) . Consistent with the study done by Cho (2009) , this researcher using environmental disclosure matrics to improve the quality, credibility and relevance of sustainability reporting. A content analysis using dichotomous measure was chosen to measure the dependent variable. Each item will be coded as 1 if the item was disclosed in the corporate report and 0 score will be assigned for non-disclosure of an item. According to Beck , Campbell and Shrives ( 2010) , by adopting a matrix approach to environmental disclosure, multiple information characteristics can be taken into account when analyzing disclosure.

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Since there are 24 total items developed in the score sheet, the companies possible range score of environmental disclosure will be from 0 to 24. After finishing the data collection process, total disclosure by each companies for the year will be calculated as follows :

a = ∑ b * 100


a = disclosure score by each company (0 ≤ a ≥ 24)

b = individual items disclosed by each GLC under each category

Measurement of Independence Variable

Based on Figure X , there are four independent variables in this study, which are industry type, financial performance, ISO 14000 company and leverage . According to Cooper and Schindler (2008), an independent variable is the variable manipulated by the researcher, thereby causing an effect or change on the dependent variable. In other words, change in independent variable will cause change in dependent variable, whether in the same direction or the other way round.

To accomplish the research objectives, this study will examine whether the types of industry, the performance, ISO 14000 companies and also the leverage will cause an effect on the total environmental among Malaysian Public listed company.

Financial Performance

An accounting- based variable was used in this study as a proxy of financial performance. Accounting performance used is return on assets (ROA) as this is the most popular accounting performance indicator and was frequently used in other studies. ( Stanwick &Stanwick , 1998; Leary , 2003 ). The primary purpose of investing in assets is to generate sales, which in turn leads to profits. The return on assets ratio measures the profitability per dollar of investment in the firm. Rather than that Return on equity also one of the accounting performance that looks at the company's profits from the standpoint of the company's owner's. its measures the profitability per dollar of investment in the firm by the owners. The ratio is derive from the following measure :

Return on Assets= ( Earnings Before interest and Tax / Total assets )* 100

Return on Equity = ( Earnings Before interest and tax / Total equity )* 100

Environmental Sensitive company

The extent of environmental disclosure in annual reports may differ from industry to industry. Its due to a number of reason. According to Pahuja (2009) the reason is firstly the fear that the disclosure of information could possibly aid the company's competitors varies among industries and thereby, may lead to industry difference in the extent of disclosure. Secondly, to maintain a healthy relationship between the company and investing community, each company within industry may try to ensure that its annual report is informative. It's a dummy variable. Table x shows list of industries with the codes used in regression equations.




Environmental sensitive company


Non environmental sensitive companies

ISO 14000 Companies

ISO 14000 companies is a dummy variables whereby the company involve will be coded as :




ISO 14000 accredited companies


Non ISO 14000 accredited companies


Leverage are measured by debt to equity ratio. In briefly, total debt by total equity. Long-term creditors will view this number as a measure of how aggressive your firm is. If your business is already levered up with debt, they may be reluctant to offer additional financing. The ratio is derived from the following measure :

Total debt to total assets = ( total debt / total shareholder's equity ) * 100

3.5 Theoretical Framework

Theoretical framework is a conceptual model of how one theorizes or makes logical sense of the relationships among several factors that have been identified as important to the problem (Sekaran, 2003). These several factors are identified as variables that the relationship of one or more variables postulate a relational statement called hypotheses. According to Cooper and Schindler (2008), hypotheses have also been described as statements in which we assign variable to cases. Thus, it is important to highlight the relationship among variables to help this study form a hypothesis for empirical testing.

Industry Type

Industry membership

Financial Performance



ISO 14000


Debt to equity

Environmental disclosure

Independent Variables

Dependent Variables

Figure : The Framework of the study

Hypotheses Testing

In research, a hypothesis serves several important functions such as it guides the direction of the study and provides a framework for organizing the conclusions that result (Cooper & Schindler, 2008). Accordingly, Sekaran (2003) added that the development of hypotheses in the study is done after variables are identified and relationship between variables is established. Hence, it is crucial to understand well the variable chosen before hypotheses can be developed. The following section will discuss some findings on the association between the dependent variable, which is the environmental disclosure with the independent variables, which are type of industries, financial performance, ISO 14000 companies as well as leverage.

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Moreover, a number of previous researches into factors that stimulate the extent and nature of empirical disclosure have been concerned with the impact of corporate characteristics (for example, Aljifri, 2008; Celik et al., 2006; Lynes et al., 2008). Among firm characteristics that are subjected to empirical testing are company size, profitability, sector type, listing status, level of external pressures, leverage and level of foreign investment. This study focuses on four firm characteristics, which are the type of industry, financial performance , ISO 14000 companies and leverage.

Environmental sensitive company

Environmental disclosure practices are affected by some other factors like polluting nature of industry, foreign association of the company, its association of the company, its associations with large business houses or position of the company in the global market. ( Pahuja , 2009) As for that Pahuja (2009) have been explore the environmental disclosure practices by selected large manufacturing companies in India and take into consideration these issue.

There was an increase in the number of studies examining the motivations behind Malaysian environmental disclosures using different theoretical perspectives and Methodologies. (Ten, 2009; Yusoff and Lehman, 2009). Environmental information is a strategic mechanism used towards enhancing good corporate reputation.

Hence, from the above findings, the first hypothesis is as stated below:

H1: There is relationship between environmental disclosure and environmental sensitive company

Financial performance

Environmental initiative incur cost since companies need to finance every activity it undertakes to fulfill the social obligation. For example, to be portrayed as a good citizen, firm gives a donation out of their financial resources to help those in needs. Community programme or even product enhancement towards environmental friendly that the company organized also incurs cost. According to Tsoutsoura (2004), the process of adopting the environmental activities has much need for the firm's management to seek more efficient ways of operating their business. From an economic perspective, a company is expected to engage in such activities if the perceived benefits exceeded the associated cost to finance those activities. Benefits of engaging in this activity must offset the additional cost allocated to finance it.

Many previous researches have conducted research to find out whether a firm's performance really affected company environmental activities efforts. Balabanis et al. (1998) found that there is a link between environmental disclosure and economic performance in the top British companies found that past, concurrent and subsequent economic performance is related to both environmental performance and disclosure. In addition, Turban et al. (1997) found that companies engaged in environmental activities lead to reduced turnover, recruitment and training costs since they have increased ability to attract and retain employees. Thus, these companies have the ability to boost their performance by adopting environmental practices and also generate sustainable long-term performance since they need not incur additional cost of hiring new employees, avoid training cost and so on.

In addition, study by Klassen and McLaughlin (1996) suggests that a company performance is affected by its social performance through both market gains and cost savings. They point out some remarkable points to support that on the market side, customers are more interested towards environmentally and socially oriented companies. This has proved that embracing in CSR activities helps companies to retain and expand their market and attractiveness among interested and loyal investors and customers.

Despite of that, Ullman (1998) argued that mixed results between environmental disclosure and financial performance might be due to the different measures applied. McGuire et al. (1988) argued that financial performance measures are better predictors for environmental activity while Jaggi and Low (2000) opined that return on asset (ROA) and return on equity (ROE) are important.

Based on the above discussion, the second hypothesis is developed as follows:

H2: There is relationship between the environmental disclosure score and firm performance.

ISO 14000 Companies

Sumiani et al. (2007) had been examined the disclosures made by top 50 Malaysian public companies to explore the reporting behaviour of ISO-certified companies. They found that out of 36 disclosing companies, 13 were ISO14001 certified and all the ISO-certified firms provided some form of environmental disclosure in their annual reports. However, Ten (2009) noted that not all ISO 14000 companies showed an environmental disclosure.

Based on the above discussion, the third hypothesis is developed as follows:

H3: There is relationship between the environmental disclosure score and ISO 14000 companies.


According to agency theory higher monitoring costs would be incurred by firms that are highly leveraged. To reduce these costs, firms are expected to disclose more information. Leverage is the ratio of debt that is refer to the non current liabilities and asset that is refer to average total asset. ( Razeed , 2009 ; Ten, 2004) . The more the companies rely on debt financing, the more company will provide an environmental disclosure to be seen as a company is being seen as a company with lower risk.

Pahuja (2009) stated that the companies with higher debt-equity ratio are expected to disclosed more environmental information than the companies with lower debt -equity ratio. In his study, ratio of total debt to equity was used as it has a significant impact on the ability of an organization to obtain additional funds. It gives some idea about the protection given to lenders if the organization become insolvent.

Based on the above discussion, the fourth hypothesis is developed as follows:

H4: There is relationship between the environmental disclosure score and leverage.

3.7 Regression Model

For empirically testing the impact of selected variables on the environmental disclosure practices of the companies, multiple regression analysis was done . In the absence of contrary information, linear relationship was presumed among the variables in each of the equations. As mentioned before, environmental reporting practices are influence not only by quantitative variables ( like financial performance or leverage), but also by variables that are essentially qualitative in nature or nominal scale in nature ( such as environmental sensitive company or ISO 14000 companies ) . One way to " quantify " is by constructing an artificial variable that takes on values of '1' or '0' ; '1' indicates the presence of that attribute and '0' indicating the absence of that attribute ( Pahuja , 2009) .

To incorporated qualitative or nominal scale variables in the regression equation (such as environmental sensitive company or ISO 14000 companies ) , dummy variables have been used.

To examine influence of the selected variables on environmental disclosure practices of the companies following dependent and independent variable were identified and incorporate in the regression equation.

Regression model

Env Score = β0 + β1 (EBIT) + β2 (EPS) +β3 ( ROA) + β4 ( ROE ) + β5 (NET MARGIN) + β6 ( SECTOR) + β7 ( ISO ) + β8 (LEVERAGE) + ε i

Where :

Env Score = total environment scores of all environmental information

β0 = intercept

β1, β2, ……β8 = change in environmental associate with unit change in respective variables

EBIT = earning before interest and tax

EPS = earning per share

ROA = return on asset

ROE = return on equity

NET MARGIN = net profit margin

SECTOR = dummy variable for type of industry

0 = non environment sensitive 1 = environment sensitive

ISO = dummy variable for ISO 14001 certification

0 = non ISO company 1 = ISO company

LEVERAGE = average debt to asset ratio

ε = error term

Analysis of Data

The data was analyze using content analysis method from the annual report of these company

Multiple regression method was used to analyzed the relationship of the selected variable of firm characteristic on environmental disclosure practices of the sample companies. The estimated regression equations were evaluated on the basis of the signs and the size of the estimated parameters, coefficient of correlation among the individual variables, R2 or adjusted R2. F test and t- test. In the present study, dummy variables were used to incorporate qualitative variables like sector and ISO 14000 companies into the regression equation. SPSS is used to find the extensiveness of the environmental information disclosed by the Malaysian Listed Company in their corporate annual report

3.8.1 Descriptive Analysis

Descriptive analysis are used to explore the data collected (Coakes et al., 2008). This analysis is particular useful in this study to determine and explain the environmental disclosure score by GLCs in their corporate annual reports. The descriptive analysis is also used to examine the frequency distribution of disclosure score and number of companies and measures of central tendency and variability like the mode, median and mean of disclosure score and dispersion, which provide information on maximum, minimum and standard deviation. Furthermore, descriptive analysis is also conducted to explain the environmental disclosure determining by independent variables identified in this study (for example, types of industry, financial performance, ISO 14000 certification and Leverage).

Inferential Analysis

Inferential tests will be performed to infer the relationship between two variables, differences of variables among different sub-group and to examine how the variance in a dependent variable is explained by several independent variables (Sekaran, 2003).

3.8.3 Correlation Analysis

Correlation looks at the relationship between two variables in a linear fashion (Coakes et al., 2008). This analysis will help to identify whether one variable is related to another. Hence, correlation analysis will be performed to examine the existence of the relationship between environmental disclosure scores and corporate characteristics of the companies.

Before performing the correlation analysis, it would be best to carry out test of normality. The normality test is performed to identify the normality of data. Normality test will help to justify which type of test to further be carried out either parametric or non-parametric for inferential statistics. Thus, Kolmogorov- Smirnov statistics is used to determine the normality of data in this study. If the result from the test marked a significance level which is greater than 0.05 (p>0.05), it is assumed that the data is normally distributed. Two types of correlation tests that can be applied are the Pearson and Spearman coefficient. If the data is normally distributed (p>0.05), parametric test (Pearson) is applicable. On the other hand, the non-parametric test (Spearman) is applicable if the data is not normally distributed (p<0.05).

In similar, to test the hypotheses by correlation test, 5% significance level will be determined. Therefore, the stated null hypotheses as described in the previous sections will be rejected if the p-value is lesser than the 0.05 level of significance.

Chapter Summary

The study extends the previous research as what has been mentioned in chapter one of this dissertation and therefore uses the same source for measurement of environmental reporting which using environmental disclosure index whereby the score sheet containing 24 disclosure items is developed in the items disclosed. Data was collected for one years. The justification for selecting one years because . The research design adopted is describes in this chapter. This study employed content analysis to capture data from the corporate report of Public listed Companies in Bursa Malaysia. To determined the realationship between variables, four hypotheses are tested. The results are discussing based on the recurring relationship between variables, hypotheses development and previous researchers. The analysis and results from the analysis that includes both the descriptive and inferential analyses are gathered by performing statisticsal analysis on the data collected.