Generally, this research focused on how environmental performance may affect discretionary environmental disclosure. Since there were various discussion and conclusion about their relationship in the past studies, researchers tried to retest the connection between environmental performance and environmental disclosure. They used comparable predictions from economists' voluntary disclosure theory and socio-political theories as a tool for testing.
According to the economists, under the voluntary disclosure theory, there was a positive connection between environmental performance and the degree of discretionary environmental disclosure. Companies that will voluntarily disclosed on environmental information for their investors and stakeholders were those with good environmental performance.
On the other hand, the socio-political theories predicted a negative connection between the environmental performance and the degree of discretionary environmental disclosures. When the performance was poor, the performers who faced pressures and threatened legitimacy will try to increase the disclosures to change stakeholder perceptions about their real performance.
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In this paper, a content analysis index based on the Global Reporting Initiative (GRI) guidelines was developed to evaluate the degree of discretionary environmental disclosed in environmental and social responsibility reports. This index allowed investors, regulators and environmental stakeholder groups to get to know the firms' true environmental commitment and related environmental exposures.
A research was done by sampling 191 firms from 5 most polluting industries in the US (Pulp and Paper, Chemicals, Oil and Gas, Metals and Mining, and Utilities) to test the competing predictions of voluntary disclosure and socio-political theories. This result agreed with the predictions of the economics disclosure theory, but disagreed with the predictions by the socio-political theories. There was a positive connection between environmental performance and the degree of discretionary disclosures in environmental and social reports.
The literature review mostly discussed on the relation between environmental disclosures and environmental performance. In the study of Ingram and Frazier (1980), it showed no connection between environmental disclosure and environmental performance. The same went to the paper by Freedman and Wasley (1990), in which the result of the research showed none of the disclosure indicated the forms' actual environmental performance.
However, according to the paper by Bewley and Li (2000), Hughes et al. (2001) and Pattern (2002), the results of their research showed a negative connection between environmental performance and environmental disclosures. Pattern (2002), who doubted the reliability of the performance index by Council on Economic Priorities (CEP) and used TRI based data, found that TRI/Sales showed a negative connection between environmental performance and environmental disclosures.
On the other hand, the research by Al-Tuwaijri et al. (2004) showed a positive connection between environment performance and environmental disclosure. These researchers assessed the environmental performance as the percentage of total waste generated that is recycled.
Last but not least, in the study of Wiseman (1982), he did not mention on the connection between the environmental performance and disclosures. According to his paper, he developed an environmental disclosure index which was used to examine the degree of voluntary environmental disclosures made by corporations in their annual reports.
Hypotheses that were developed in the research included:
H1a: Environmental performance and the degree of discretionary environmental disclosures are positively connected, as implied by the economists' voluntary disclosure theories.
H1b: Environmental performance and the degree of discretionary environmental disclosures are negatively connected, as implied by the socio-political theories.
Environmental performance indicators
In conducting this research, 2 different measures were used within each industry as the indicators for environmental performance since the pollution propensity differs significantly.
The first one was the % recycled ranks. It measured by figure out the percentage of total toxic waste that was recycled. This measurement could only be used for firms which were heterogeneous in terms of production processes within the 5 industries mentioned.
The second measure was TRI/Sales ranks, the ratio of TRI to total firm sales. This measurement was used for homogenous firms in the mentioned industries as it could directly compare the environmental performance across firms in the industry.
Environmental disclosure index
The Global Reporting Initiative (GRI) was launched in 1997 to establish a world-wide accepted reporting framework to improve the standard, rigor and usage of sustainability reporting. It was used in this research paper as the researchers found that it was consistent with the researchers' purpose to measure the extent of a firm's disclosure in their sustainability report.
Always on Time
Marked to Standard
The researchers' disclosure index followed closely with the requirements of the GRI guidelines. In the disclosure index, at around 80% of the items were related to "hard" disclosure measures compared to 20% for the "soft" disclosure items.
Hard Disclosure items
Hard disclosure items in the researchers' disclosure index comprised of:
Firm's governance structure and management systems.
The Board of Directors will inform the stakeholders of their commitments in the environmental committee.
Credibility of a firm's disclosures in its environmental report.
Firms that obtained independent verification of their environmental reports will receive higher scores for this item as the reports were convincing.
Environmental performance indicators.
The specific environmental performance indicators disclose included firms' current pollution emissions and their recycling efforts.
Disclosed were made on dollar savings from existing environmental programs, and efforts spent to enhance future environmental performance.
Soft Disclosure items
Soft disclosure items in the researchers' disclosure index comprised of:
Vision and environmental strategy claims.
They were considered to be "soft" as they were not convincing and could be easily imitated.
The environmental profile consisted of the existing and forth-coming environmental regulations.
These initiatives included employee training in environmental management, existence of response plans for environmental accidents, internal environment awards and audit, community involvement through scholarship and donations.
Model and variable descriptions
Researchers employed the following econometric model to test the hypotheses:
VED = Î²â‚€ + Î²â‚ EP + Î²â‚‚ J-F coefficient + Î²â‚ƒ FIN + Î²â‚„ TOBIN Q + Î²â‚… VOLAT + Î²â‚† ROA + Î²â‚‡ LEV +
Î²â‚ˆ SIZE + Î²â‚‰ NEW + Î²â‚â‚€ CAPIN + Îµ
The variables in the regression are defined as follows:
VED - Voluntary environmental disclosures
EP - Environmental performance (TRI/Sales - the larger the measure, the
better the environmental performance; % recycled - the larger the recycling percentages, the better the environment performance)
J-F coefficient - Janis-Fadner coefficient of imbalance
FIN - amount of debt or equity capital raised by the firm
TOBIN Q - (market value of common equity + book value of preferred stock + book
value of long term debt + current liabilities) / book value of total assets
VOLAT - standard deviation of market adjusted monthly stock return
ROA - total return on assets
LEV - leverage ratio, (total debt / total assets)
SIZE - natural logarithm of the total asset value
NEW - assets newness, (Net PPE / gross PPE)
CAPIN - capital intensity, (capital spending / total sales revenue)
Î² - control variables included to avoid a correlated omitted variables threat
Benefits of voluntary disclosure
There were quite a number of voluntary disclosure's benefits. Firstly, voluntary disclosure enabled firms to rise financing in debt and equity markets at a lower cost of capital. This was because public will be more confident on the firm and were willingly to invest in the firm. Besides, through voluntary disclosure, managers could lower the information asymmetry. They will create a balance between information for both the manager and stakeholders.
Furthermore, voluntary disclosure may also influence firms' performance. Firms will try their best to perform well in market because when they were good in performing, they will be willingly disclosed the "good news" to the financial markets. Lastly, voluntary disclosure also benefits firms in term of leverage. As firm's debt increases, agency costs of debts will increase. The demand for information increase will then increase the leverage and followed by the increase in voluntary disclosures.
Cost of voluntary disclosure
However, voluntary disclosure may also be costly for firm. In term of firm's size, most voluntary disclosure studies confine for firm size depend on the assumption of economies of scale regarding the information production costs. Besides, voluntary disclosure also involved proprietary costs. It was the costs that were related to the manager to reveal information to environmental regulators and other environmental activist groups.
Other control variables specific to environmental disclosures
Besides costs and benefits, there were also other control variables specific to environmental disclosures. One of it would be equipment age and annual capital spending. Firms with newer technologies would likely to have a better environmental performance measure. Therefore, they most probably will want to disclose this to the stakeholders to keep the confidence from stakeholders or to attract new investors.
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Other than that, favorable media coverage also influenced environmental disclosures. As the lagged environmental legitimacy existed, there will be tendency for unfavorable press articles. The favorable of press articles was measured by using Janis - Fadner coefficient of imbalance. This coefficient ranged from -1(unfavorable) to +1(favorable), with zero implying neutral perceptions about the firm's environmental legitimacy. This means that, if there is lagged environmental legitimacy, there will be unfavorable press articles and the level for voluntary disclosure will be low.
Empirical association = significant and consistent relation
CEP= a non-profit organization specializing in the analysis of corporate social activities
future environmental performance = invest in new environmental technologies, environmentally related R & D and innovations