Abstract
This study examines the relationship between corporate non-financial disclosure ratings, the Italian Legislative Decrees 231/2001 and 254/2016, and three outcomes of Italian listed firms: performance, risk and agency cost. Based on stakeholder–agency theory, this study conceptualizes the role of firms’ non-financial disclosures in reducing asymmetric information and agency costs between managers and broad stakeholders. Utilizing the Standard Ethics Rating (SER) as a measure of firms’ non-financial disclosure rating, this study finds that SER ratings are positively related to firm value and are negatively related to firms’ risk and agency costs. This study also provides evidence that the adoption of Italian Legislative Decrees 231/2001 and 254/2016, along with external verifications from the SER of firms’ non-financial disclosure, has a positive impact on firm outcomes. Corporate managers and investors should recognize the value added from regulations that foster non-financial disclosures and ratings issued by an independent rating agency (e.g., Standard Ethics) as they both enhance firm performance and reduce risk and agency costs.
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Notes
Available at https://tcdata360.worldbank.org/indicators/h2e15b0d6.
We find that the ordinal value of SER (ETHICRATE variable) is positively correlated with the likelihood of a firm having a GRI rating (0.36) and Bloomberg ESG disclosure score (0.32). We also find that our multivariate regression results using GRI rating are similar with those using the SER ordinal rating (see Table 6 and Sect. 5).
See http://standardethicsrating.eu/images/Documents/1._Sustainability_Rating_definitions_Guide_2018_1.pdf for detail ordinal rating from the SER.
We also check the robustness of our results using the Global Reporting Initiative (GRI) rating instead of the SER ordinal rating (see Sect. 5).
We also collected the Bloomberg environmental, social and corporate governance (ESG) scores for firms in our sample. However, Bloomberg only started collecting ESG scores in 2005 (Grewal et al. 2017). As a consequence, we cannot conduct the same analyses as Tables 3, 4, 5, especially the interaction term between Decree 231/2001 and the firm ESG scores. We checked the correlation coefficient between Bloomberg ESG and SER ordinal rating from 2005 to 2018 and we find that they are positively (0.32) and significantly correlated.
All untabulated robustness tests results are available upon request.
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Acknowledgements
The authors thank the two anonymous reviewers and the Editor, Wolfgang Kürsten, for their suggestions. The authors acknowledge and thank Massimiliano Pizzardi of the PricewaterhouseCoopers and Filippo Cecchi of the Standard Ethics Agency for providing part of the data used in this study. Harjoto acknowledges the financial support and release time from the 2019–2021 Denney Academic Chair Endowment at Pepperdine Graziadio Business School for this specific research project.
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Appendix: variable definitions
Appendix: variable definitions
Variable | Definition | Source |
---|---|---|
Dependent variables | ||
TSR(t) | One year stock returns including cash dividends | Bloomberg |
EVA(t) | Economic value added reported in Bloomberg divided by total assets | |
TOBINQ(t) | [Total assets—book value of shareholder’s equity + market value of shareholder’s equity] divided by total assets | Bloomberg |
VOLAT(t) | One-year historical volatility of daily stock returns from Bloomberg | Bloomberg |
STDROA(t) | One-year standard deviation of quarterly return on assets | Bloomberg |
BETA(t) | Beta of a stock calculated from daily stock returns during 1 year | Bloomberg |
SGA(t) | Selling and general administrative expense divided by net sales | Bloomberg |
FCF(t) | Free cash flow reported in Bloomberg divided by total assets | Bloomberg |
CASH(t) | Cash and Marketable securities divided by total assets | Bloomberg |
Independent variables | ||
ETHICSRATE(t − 1) | One-year lag of ordinal value of ethical rating by the Standard Ethics (SER) from EEE = 9, EEE− = 8, EE + = 7, EE = 6…F = 1 or no rating = 0 | Standard ethics at www.standardethics.eu |
POST231 | Dummy = 1 if year after the Decree 231 of 2001 and prior to 2016 | |
POST231 × ETHICSRATE(t − 1) | Interaction between POST231 dummy variable and one-year lag of ordinal value of ethical rating by Standard Ethics (SER) | |
POST254 | Dummy = 1 if year after the Decree 254 of 2016 | |
POST254 × ETHICSRATE(t − 1) | Interaction between POST254 dummy variable and one-year lag of ordinal value of ethical rating by Standard Ethics (SER) | |
Control variables | ||
SIZE(t − 1) | Natural log of 1-year lag of total assets | Bloomberg, Datastream and Calepino dell’ azionista |
ROA(t − 1) | One-year lag of operating profit divided by total assets | Bloomberg, Datastream and Calepino dell’ azionista |
FIRMAGE(t − 1) | Natural log of one-year lag of firm age since the firm was established | Firms’ websites and Calepino dell’ azionista |
DEBT(t − 1) | One-year lag of total debt divided by total assets | Bloomberg, Datastream and Calepino dell’ azionista |
PCTINSIDER(t − 1) | One-year lag of percentage of firm’s ownership by the insiders (managers and directors) | Factset |
PCTBLOCK(t − 1) | One-year lag of percentage firm’s ownership by the largest blockholder | Factset |
Industry | Industry Sector dummy variables based on the Global Industry Classification Standard (GICS) | Global Industry Classification Standard (GICS) and Borsa Italiana |
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Rossi, F., Harjoto, M.A. Corporate non-financial disclosure, firm value, risk, and agency costs: evidence from Italian listed companies. Rev Manag Sci 14, 1149–1181 (2020). https://doi.org/10.1007/s11846-019-00358-z
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DOI: https://doi.org/10.1007/s11846-019-00358-z