The Voluntary Disclosure Theory Accounting Essay

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Generally, this research focused on how environmental performance may affect discretionary environmental disclosure. Since there were various discussion and conclusion about their connection 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.

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.

Literature Review

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.

Hypothesis Development

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.

Research Design

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.

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 the disclosures by firms in the environmental report

Firms that obtained independent verification from third party for 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.

Environmental spending.

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.

Environmental profile.

The environmental profile consisted of the existing and forth-coming environmental regulations.

Environmental initiatives.

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.

Econometric Model:

Model and variable descriptions

Researchers employed the following econometric model to test the hypotheses:

VED = β₀ + β₁ EP + β₂ J-F coefficient + β₃ FIN + β₄ TOBIN Q + β₅ VOLAT + β₆ ROA + β₇ LEV +

β₈ SIZE + β₉ NEW + β₁₀ CAPIN + ε

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)

β - 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.

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.

Sample selection

There were altogether five polluting industries in this research that reported toxic release data to the US Environmental Protection Agency such as 27 firms of Pulp and Paper, 63 firms of the Chemical, 18 firms of Oil and Gas, 42 firms of Metals and Mining and 41 firms of Utilities industry.

There were 63.78 of the sample decided to present discretionary disclosures regarding environment in year of 2003. 55 of 122 firms had present independent reports and of those firms had stand alone environmental reports, while the rest of the firms which being silent had discretionary disclosures without independent environmental reports.

Table 1 in the article indicated the ratio of firms presenting environmental reports and the difference in average disclosure scores across good and poor environment protection firms. By applying percentage recycled as a measurement of environmental performance, the difference of average scores between good and poor environmental protection firms has shown in table 1(A1-A4).

According to H1a, good environmental protection performers should achieve higher disclosure scores. Based on A1, category of the Governance structure and Management systems, the average score for good performers is 2.08 and poor performer is 1.27. Based on A2, the category of credibility, the average score for good and poor performers is 2.88 and 1.95. Therefore, good EP firms were more preferable to present that they applying Global Reporting Initiative guidelines.

Based on A3, the category of Environment Performance Indicator was hardly presented by poor environment performers. Therefore, the common score of Good performers was 10.19 which were higher than the common score for poor performers, 6.00. It was hard for investor or stakeholder to investigate or create the partial disclosure equilibrium while some firms were more transparent in their report whereas some were totally silent by given differences in production processes across firms within a given industry. Based on A4, the category of disclosure related to environmental spending, the common score for good and poor performers was 0.84 and 0.45. Good performer firms disclosed significantly more often amounts spent on fines than the poor firms.

According to economics theories prediction, good environmental protection firms will be more cooperative with the dollar amount spent on fines which is constant with better environmental performance across the firms in the industry because this amount will be lower than the corresponding amount for poor performer firms.

In order to certify whether the disclosing the amount spent on fines was an indication of a firm's environment commitment, The Investor Responsibility and Research Center had developed and examined the dollar amount spent on fines and the number of environmental violations in year of 2000 for the 100 of sample firms which consists of 56 and 44 of good and poor environmental protection firms in the Corporate Environmental Profile Database.

In unstipulated results, researcher found that the 56 of good performer firms had an average of 1.13 violations per firm and 0.17 cents of fines per thousand of dollars of sales. However, the 44 poor firms had an average of 2.63 violations per firm and 0.42 cents of fines per thousand dollars of sales. Therefore, it was constant with H1a; good EP performers had significantly greater soft discretionary disclosures for environmental initiative relative to poor EP performers.

Based on the analysis of Table2 in the article which related with the environmental disclosure scores by industry, it was indicated that industries with a high (low) pollution are more (less) tendency to provide discretionary environmental disclosures to firm stakeholders. Such indication was inconstant with H1a which conditions disclosure may predict it environmental performance level relative to industry peers. Therefore, Table 2 did confirm that distinction across sectors in both environmental disclosure and pollution tendency suggesting the need for performing environmental protection.


In this research, there was an assumption of voluntary environmental disclosure theory such as corporate stand-alone environmental reports. Second, in cooperating with an environmental reporting authority, researcher had expanded analysis index to investigate the stage of environmental disclosure and social duty reports in the firm. This research had a positive connection between environmental performance and the stage of discretionary disclosures in environmental and social reports.

The research findings were relied on two environmental performance measurements such as actual toxic emission and waste management data which were not affected when assess the relative environment performance within each industry in order to control for industry differences in pollution propensity.

Finally, this research also recommends crucial guidelines for future research by present groundwork support that socio-political theories are strong in estimation. Besides, corporate whose environmental legality is threatened and being claims to be committed to the environment. This action is predicted by legitimacy theory but cannot be well explained by economics disclosure theory. Therefore, future environmental disclosure research should step forward concentrate the enquiry beyond the stage of disclosure.