A study of the relationships among environmental performance, environmental disclosure, and financial performance

Abstract

Purpose The purpose of this paper is to study the relationships among environmental performance (EP), environmental disclosure (ED), and financial performance (FP) (three corporate constructs) using data from Newsweek’s green rankings. Design/methodology/approach Previous studies document mixed results about the relations among the three constructs. A firm’s overall management strategy may affect the three constructs simultaneously; therefore, the interrelationships among EP, ED, and FP were jointly examined. A simultaneous equations approach was used to test the hypothesis. Findings The three-stage least square (3SLS) estimation results show a negative relationship between EP and FP and a positive relationship between EP and ED, suggesting that financially successful firms are less likely good environmental performers but green firms are more likely to disclose their EP. Research limitations/implications Since the sample firms examined in this study are US large-size companies, the results found in this paper may not apply to small- and/or medium-size firms or to companies in other countries. Practical implications Three corporate constructs are jointly correlated with each one. A firm’s overall strategic plan on environmental engagement is likely reflected in how it engages in each of the constructs that affect costs and benefits. Sustainable efforts, in short term, may put firms at risk. Companies may need to take a long-term perspective when cutting costs is curtailed. Originality/value The research contributes to the ED and EP literature by using a 3SLS simultaneous equation method and analyzing a more recent and comprehensive multi-industry data. By controlling industry effect, the research investigates the interrelationships among three corporate constructs and finds interesting results. An interpretation and discussion are provided.

The relationship between environmental performance and environmental disclosure: A meta‐analysis

“…Some researchers take only the presence of CER into account, for example, whether firms participate in the GRI reporting scheme or respond to the Carbon Disclosure Project (CDP) (e.g., Dawkins & Fraas, 2011a, 2011bLu & Taylor, 2018). A few others consider the completeness of disclosure, for example, the proportion of reported items in a reporting standard (e.g., Deswanto & Siregar, 2018;Hassan & Romilly, 2018).…”

Factors Affecting Environmental Disclosure in Companies Listed on the Tokyo Stock Exchange

“…For example, first, research which examines the effect of profitability on environmental disclosure. Deswanto & Siregar (2018), Lu & Taylor (2018) proved that the level of profitability does not affect environmental disclosure, whereas Chandok & Singh (2017) and Yanto & Muzzammil (2016) found that profitability has a negative effect on environmental disclosure. On the other hand, research conducted by Ismail et al (2018) found that profitability has a positive effect on environmental disclosure.…”

“…Legitimacy theory assumes that companies operate according to the norms and expectations of the surrounding community so that their existence is legally accepted (Lu & Taylor, 2018). Elkington (1997) also revealed the triple bottom line concept which focuses on economic prosperity, environmental quality, and social justice which is often called 3P namely profit, planet, and people.…”

The Effect of Earnings Management, Managerial Ownership, and Firm Size on Environmental Disclosure with Environmental Performance as Moderating

“…Ismail et al(2018) defined environmental performance as an environmental certification that shows interest and willingness of a company to improve environmental quality. The selection of environmental performance as a moderating variable because according to Lu & Taylor (2018) companies that have good environmental performance will send a signal to the public to get praise and not harm stakeholders. Companies that have good environmental performance will be a driving force to be disclosed to the public that the companies have good environmental policy.…”

“…Legitimacy theory explains that in order to achieve legitimacy, companies need to work according to the norms and expectations of the community where they stand. A good environmental performance will be a positive signal to the community and prove that their activities do not harm the stakeholders (Lu & Taylor, 2018). Earnings management will have a negative impact on the company's image.…”