Does corporate governance enhance the appreciation of mandatory environmental disclosure by financial markets?
- 1.1k Downloads
This paper investigates if mandated disclosure about environmental risks and obligations enhances the information set available to analysts and how a firm’s governance affects such a relation. Government policies mandating such disclosure are potentially a tool to force firms to change their environmental practices, especially if financial markets pick up on the released information and exert pressures upon corporate management for further actions. We focus on 172 non-financial firms subject to mandated environmental disclosure. Results show that mandated disclosure enhances financial analysts’ information set, as proxied by their forecast consensus and overall uncertainty. Analysts seem able to assess if there are inconsistencies between a firm`s disclosure and its environmental impact. Moreover, mandated environmental disclosure substitutes for weak corporate governance in enhancing analysts’ information set. In other words, mandated environmental disclosure does not relate to analysts’ information set in the presence of good governance but does for firms with weak governance. Hence, mandatory disclosure may act as an environmental governance mechanism, either complementing or substituting for a firm’s own governance.
KeywordsAnalyst forecasts Corporate governance Environmental disclosure Information environment
We acknowledge financial support from Autorité des marchés financiers (Québec), Chair in Financial and Organizational Information and the Stephen A. Jarislowsky Chair in Corporate Governance. All usual caveats apply.
- Baghat, S., Bolton, B., & Romano, R. (2008). The promise and peril of corporate governance indices. Columbia Law Review, 108(8), 1803–1882.Google Scholar
- Barron, O. E., Kim, O., Lim, S., & Stevens, D. E. (1998). Using analysts’ forecasts to measure properties of analysts’ information environment. The Accounting Review, 73(4), 421–433.Google Scholar
- Berthelot, S., Cormier, D., & Magnan, M. (2003a). Environmental disclosure research: review and synthesis. Journal of Accounting Literature, 22, 1–44.Google Scholar
- Blacconiere, W. G., & Northcut, W. D. (1997). Environmental information and market reactions to environmental legislation. Journal of Accounting, Auditing and Finance, 12(2), 149–178.Google Scholar
- Botosan, C. (1997). Disclosure level and the cost of equity capital. The Accounting Review, 72(3), 323–349.Google Scholar
- Coffee Jr, J. C. (2007). Law and the market: The impact of enforcement. University of Pennsylvania Law Review, 156(2), 229–311.Google Scholar
- Cormier, D., Ledoux, M. J., & Magnan, M. (2011). The informational contribution of social and environmental disclosures for investors. Management Decision, 49(8), 1276–1304.Google Scholar
- Daily, C. M., Dalton, D. R., & Cannella, A. A. (2003). Corporate governance: Decades of dialogue and data. Academy of Management Review, 28(3), 371–382.Google Scholar
- Ferrell, A. (2004). The case for mandatory disclosure in securities regulation around the world. Harvard Law and Economics Discussion Paper, 492.Google Scholar
- Freedman, M., & Stagliano, A. J. (1995). Disclosure of environmental cleanup costs: The impact of the superfund act. Advances in Public Interest Accounting, 6, 163–176.Google Scholar
- Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2009). Multivariate data analysis (7th ed.). Upper Saddle River: Prentice Hall.Google Scholar
- Healy, P. M. & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1/3), 405–440.Google Scholar
- Li, Y., & McConomy, B. J. (1999). An empirical examination of factors affecting the timing of environmental accounting standard adoption and the impact on corporate valuation. Journal of Accounting, Auditing & Finance, 14(3), 279–313.Google Scholar
- Nunnaly, J. (1978). Psychometric theory (2nd ed.). New York: McGraw Hill.Google Scholar
- Ontario Securities Commission. (2004). National Instrument (NI 51-102).Continuous disclosure obligations. Google Scholar
- Ontario Securities Commission. (2009). OSC corporate sustainability reporting initiative.Google Scholar
- Roe, M. J. (2002). Political determinants of corporate governance—political context, corporate impact. Oxford, UK: Oxford University Press.Google Scholar
- Scott, T. W. (1994). Incentives and disincentives for financial disclosure: Voluntary disclosure of defined benefit pension plan information by Canadian firms. The Accounting Review, 69(1), 26–43.Google Scholar
- Zeckhauser, R. J., & Pound, J. (1990). Are large shareholders effective monitors? An investigation of share ownership and corporate performance. In Asymmetric information, corporate finance, and investment (pp. 149–180). Chicago, USA: University of Chicago Press.Google Scholar