Environmental and Social Disclosures and Firm Risk

Abstract

We examine the link between a firm's environmental (E) and social (S) disclosures and measures of its risk including total, systematic, and idiosyncratic risk. While we do not find any link between a firm's E and S disclosures and its systematic risk, we find a negative and significant association between these disclosures and a firm's total and idiosyncratic risk. These are novel findings and are consistent with the predictions of the stakeholder theory and the resource based view of the firm suggesting that firms which make extensive and objective E and S disclosures promote corporate transparency that can help them build a positive reputation and trust with its stakeholders, which in turn can help mitigate the firm's idiosyncratic/operational risk. These findings are important for all corporate stakeholders including managers, employees, and suppliers who have a significant economic interest in the survival and success of the firm.

Corporate environmental performance, environmental management and firm risk

“…As shown in this table, the mean value of stock volatility for our sample is 0.021, with a median volatility of 0.018. In terms of the firm's nonsystematic risk, the average CAMP_IDIO is 0.018, with a median of 0.015 and standard deviation of 0.009, which is in line with reported values in previous studies (e.g., Benlemlih et al, ). The other two measures of idiosyncratic risk used have slightly lower values: the mean (median) for FAMA_IDIO is 0.017 (0.014) and for CARHART_IDIO is 0.017 (0.014).…”

“…For the environmental pillar, a company is assigned 70 KPIs. Although the ASSET4 database was primarily designed for professional purposes, it has been commonly used in academic studies on sustainability‐related topics (e.g., Benlemlih, Shaukat, Qiu, & Trojanowski, ; Haque & Ntim, ; Hartmann & Vachon, ; Moussa, Allam, Elbanna, & Bani‐Mustafa, ; Stellner, Klein, & Zwergel, ).…”

“…To address potential endogeneity bias arising from reverse causality between the multidimensional environmental performance and firm risk, the lagged value of firm risk is used in the models (Cai et al, ; Misani & Pogutz, ). Industry and year fixed effects are included in the regressions to control for any unobserved industry characteristics or macroeconomic shocks that could simultaneously influence CEP and firm risk (Benlemlih et al, ). Furthermore, we centralize the component variables of the interaction terms to reduce potential multicollinearity.…”

“…Although the ASSET4 database was primarily designed for professional purposes, it has been commonly used in academic studies on sustainability-related topics (e.g., Benlemlih, Shaukat, Qiu, & Trojanowski, 2018;Haque & Ntim, 2018;Hartmann & Vachon, 2018;Moussa, Allam, Elbanna, & Bani-Mustafa, 2019;Stellner, Klein, & Zwergel, 2015). Table 1 presents the composition of the sample companies by sector and year.…”

Corporate social responsibility and firm financial risk reduction: On the moderating role of the legal environment

“…This reduction of information asymmetry provides additional evidence in support of the role that CSR can play in reducing stock price volatility. For example, Benlemlih, Shaukat, Qiu, and Trojanowski () confirm this view by showing that firms that disclose additional environmental and social information are associated with low total and idiosyncratic risks.…”