Corporate non-financial disclosure, firm value, risk, and agency costs: evidence from Italian listed companies

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

  1. 1.

    Available at https://tcdata360.worldbank.org/indicators/h2e15b0d6.

  2. 2.

    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).

  3. 3.

    See http://standardethicsrating.eu/images/Documents/1._Sustainability_Rating_definitions_Guide_2018_1.pdf for detail ordinal rating from the SER.

  4. 4.

    We also check the robustness of our results using the Global Reporting Initiative (GRI) rating instead of the SER ordinal rating (see Sect. 5).

  5. 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.

  6. 6.

    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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Keywords

  • Non-financial disclosures
  • Standard ethics rating
  • Firm performance
  • Risk
  • Agency costs

JEL Classification

  • G23
  • G32
  • G34
  • M14