Geographical Distance and Environmental Information Disclosure: The Perspective of Public Pressure Transmission Efficiency

• DOI: http://doi.org/10.1111/ajfs.12176
• Date: 01 June 2017
• Published date: 01 June 2017

Geographical Distance and Environmental

Information Disclosure: The Perspective of

Public Pressure Transmission Efficiency*

Sheng Yao**

School of Management, China University of Mining and Technology, China

Jie Yang

School of Management, China University of Mining and Technology, China

Received 5 July 2016; Accepted 6 December 2016

Abstract

This paper examines how geographical distance influences managers’ behavior around envi-

ronmental disclosure from the perspective of public pressure transmission efficiency and how

the internal and external factors curb the effect of geographical distance. We study Chinese

manufacturing firms over a 6-year period (2009–2014) following the release of The Measures

for Disclosure of Environmental Information (Trial).Research results show that (i) geographi-

cal distance can significantly weaken the transmission efficiency of public pressure and (ii)

internal and external supervision factors can curb the negative effect of geographical distance

on the transmission efficiency of public pressure.

Keywords Geographical distance; Environmental information disclosure; Public pressure;

External audit; Ownership concentration

JEL Classification: G38, L78, Q58

1. Introduction

Prior studies have found that external public pressure, such as environmental acts

(Darrell and Schwartz, 1997) and media attention (Aerts and Cormier, 2009), have a

great influence on environmental information disclosure, which makes firms’ man-

agers change the level and quality of environmental information disclosure to address

greater and more intense public pressure (Patten, 1992; Neu et al., 1998; Aerts and

Cormier, 2009). However, the existing literature is based on two premises. The first is

*The authors would like to thank Dr. Kee Chung (the Editor) and anonymous referees.

Sheng Yao acknowledges financial support from the National Natural Science Foundation of

China under Grants 71572189 and 71102163. All errors are our own.

**Corresponding author: Sheng Yao, School of Management, China University of Mining

and Technology, No. 1 Daxue RD, Xuzhou, Jiangsu, China. Tel: +86-8399-5370, Fax: +86-

8359-1280, email: yaosheng@cumt.edu.cn.

Asia-Pacific Journal of Financial Studies (2017) 46, 445–462 doi:10.1111/ajfs.12176

©2017 Korean Securities Association 445

that all firms face the same public pressure both in density and intensity. The second

is that managers of all firms show almost the same response to changing public pres-

sure. In light of China’s economic status and institutional background, the two pre-

mises may not work. In China, the government’s environmental policy plays an

overwhelming role in regulating environmental disclosure, compelling firms to adopt

environmental policy as the primary public pressure. When environmental policy is

transmitted from the regulating department to firms and then produces effects, both

the process of transmission and its result will bear an obvious difference. Among the

influencing factors, geographical distance is important because of Chinese firms’ dis-

persed distribution and environmental information characteristics that are difficu lt to

verify. However, few studies explore the influence of geographical distance on the

transmission efficiency of public pressure. Kedia and Rajgopal (2011) study the influ-

ence that geographical distance has on the SEC’s regulative efficiency, and results sug-

gest that regulation is most effective when it is local. Considering the Chinese

transitional economic background, this distance effect is probably significant, espe-

cially with regard to environmental policy efficiency in China.

Prior studies indicate that geographical distance still matters in strategic decisions

made by managers (Smith and Watts, 1992; Coval and Moskowitz, 1999, 2001; Lough-

ran and Schultz, 2005; John et al., 2011), even though modern information technol-

ogy is developed. As it is difficult to verify environmental information and because

regulatory departments have limited human and material resources, managers have

more flexibility in using geographical distance to manipulate environmental disclo-

sures. In particular, when external public pressure increases dramatically, geographical

distance will become an important factor to offset the influence from public pressure.

We therefore select The Measures for Disclosure of Environmental Information (Trial)

(hereafter The Measures), issued in 2008, as an indicator of increasing public pressure

and use its data from 2009–2014

1

to study the influence that geographical distance has

on environmental disclosure and to explore how internal and external supervising fac-

tors curb the distance effect. The results suggest that geographical distance has a nega-

tive association with environmental disclosures. It indicates that geographical distance

weakens the transmission efficiency of The Measures from the central government to

firms.Further research finds that internal large shareholders’ direct supervision or

external high-quality audits curb the negative influence of geographical distance. The

research shows that internal and external supervising mechanisms help to improve the

transmission efficiency of public pressure.

This paper contributes to the existing literature in the following ways. First,

from the perspective of geographical distance, this paper studies the heterogeneity

of managers’ responses to public pressure. In particular, it explores the negative

effect of geographical distance in the transmission of public pressure. These research

results can accurately explain the actualizing mechanism that managers use to

1

The samples do not encompass data from 2008 because we are unable to confirm influence

from 2008, the year in which The Measures were issued.

S. Yao and J. Yang

446 ©2017 Korean Securities Association