Environmental disclosure, firm performance, and firm characteristics: an analysis of S&P 100 firms.

Author:Wu, Jia

    Environment and sustainability have become an important topic in today's global economy. The recent Copenhagen Summit, in which world leaders convened together to discuss these issues, highlighted the extreme importance of environmental protection and sustainable development. Managers are expected to not only maximize firm values but also, in the meantime, to lower greenhouse emissions, reduce carbon footprint, increase the use of alternative renewable energy, and minimize environmental pollution. Even though environmental issues have become a hot topic, the requirements for environmental disclosure are quite limited for firms listed in US. The US Government Accountability Office (GAO) issued a report in 2004 which point out that Securities and Exchange Commission (SEC) should coordinate with Environmental Protection Agency (EPA) to tighten environmental disclosure requirements and enforcement for publicly-traded firms in Us. In Feb 2010 SEC issued guidance on climate change disclosure requirements. The guidance clarifies the existing SEC rules which require publicly-held companies to disclose material climate-related information. However, this guidance does not add any new legal requirements for climate-related disclosure. Instead, it just emphasizes the provisions of existing reporting rules that publicly-held companies must assess whether climate-related risks or opportunities both positive and negative - have a material impact requiring disclosure. In the absence of stringent requirements, many SEC-reporting firms make environmental disclosures on a voluntary basis.

    Because of the large variation in each firm's environmental disclosure content and format, there is a lack of consistent approach on the environmental disclosure measurement in prior research studies. The first objective of this study is to develop a method to measure how much environmental disclosure is made in the firms' financial reports. Due to the limited mandatory disclosure requirement and large variation in voluntary disclosure, it is difficult to grasp a full picture of a listed firm's complete environmental disclosure efforts. Prior studies use different measures to proxy for a firm's environmental disclosure effort, including Counsel on Economics Priorities' (CEP) environmental performance rating, toxic item emission and pending environmental lawsuits (Knoar and Cohen 2001), toxic waste recycled to toxic waste generated (Al-Tuwaijri et al. 2004) We assess the environmental disclosure by examining the frequency of environment-related keywords in the S&P 100 firms' 10k reports. We expect this approach can provide this study with a fair and truthful measure on a firm's environmental disclosure.

    The second objective of this study is to examine the effects of environmental disclosure on firm performance. On one hand, more disclosure could suggest that the firm has more serious environmental problems that need to be disclosed. On the other hand, with the increased public awareness of environmental issues, more environmental disclosure is likely to improve a firm's reputation, increase the firm's share values and, eventually, lead to better firm performance. The third objective of this research is to investigate the impact of firm performance and firm characteristics on the extent of environmental disclosure. Environmental disclosure comes with a cost. It requires both financial and human resources to make fair and truthful disclosures. Also, the benefits associated with environmental disclosures vary across firms. When making environmental disclosure decisions, the management need to compare costs with benefits. Firms with improved performance or large in size are likely to make more environmental disclosures because of their ample financial and human resources. Also, these firms can possibly reap more benefits from making the environmental disclosures. Growth firms and firms with high leverage may make more environmental disclosures thanks to the significant benefits which can be recouped after the environmental disclosure. These firms are in urgent need to improve their public image in order to secure more capital from the market. However, in the meantime, large, growth, and highly-leveraged firms may have better compliance of environmental laws and regulations. They may have less environmental issues to report.

    Prior research studies have reported mixed results on the relationship between social disclosure and economic performance (Bowman and Haire, 1975; Abbott and Monsen, 1979; Freedman and Jaggi, 1982; Klassen and McLaughlin, 1996; Al-Tuwaijri et al, 2004). The results of our study indicate that environmental disclosure has a significant negative effect on firm performance. We have a few different explanations for this result. This interesting finding suggests that more environmental disclosure is not necessary good for the company. Negative environmental disclosure can have negative impact on the firm's performance and valuation. Compared with positive environmental practice, firms are more likely to make mandatory negative disclosures which they must report any material environmental incident or violations. We also find firm performance and leverage have significant negative impact on environmental disclosure. This suggests that firms with good performance and low leverage may have less reportable environmental issues. These firms may be usually reluctant to make positive environmental disclosure due to the high reporting cost and low benefits. On the other hand, troubling firms with poor performance and high leverage are more likely to encounter environmental problems and violations. Thus, these firms are more likely to make required disclosures on these issues mandated by SEC.

    This study contributes to our understanding of environmental disclosure of listed US firms and its relationship with firm performance and characteristics. The results suggest that the environmental disclosure level is still relatively low among US firms, probably due to the lack of mandatory requirements. Firms which make many environmental disclosures are more likely to be environmental law violators and have relatively poor performance. It also indicates that firms with good performance and high leverage usually do not make more positive voluntary disclosures probably because of insufficient incentives. These results have implications for the company management, stakeholders and legislature. Management team needs to put additional efforts to make positive environmental disclosures to the public. The stakeholders need to give value to the management's environmental disclosure in financial reports. Additionally, the legislature should enact and enforce more stringent environmental disclosure requirements and provide incentives for firms to make true and fair environmental disclosures.

    The rest of the paper proceeds as follows: Section II gives the background and reviews the relevant literature on the relationship between environmental disclosure and firm performance and firm characteristics. It also presents the research hypotheses. Section III describes the sample selection process, provides the descriptive analyses, derives the research models for empirical analysis, and discusses the testing results. Section IV presents the sensitivity analysis and its results. Section V concludes the study and discusses future research directions.


    In the United States there are extensive environmental legislatures governing environmental protection and remediation. The environmental protection laws include the following (1) Resource Conservation and Recovery Act of 1976, (2) The Clean Air Act, (3) The Clean Water Act, and (4) The Toxic Substance...

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