Dennis M. Patten

Intra-industry environmental disclosures in response to the Alaskan oil spill: A note on legitimacy theory

According to the legitimacy theory arguments of Preston & Post (Private Management and Public Policy, Prentice-Hall, 1975), social disclosures can be viewed as a method of responding to the changing perceptions of a corporations relevant publics. Based on this theory, this paper examines the effect of the Exxon Valdez oil spill on the annual report environmental disclosures of petroleum firms other than Exxon. A significant increase in such disclosures is found. Furthermore, the amount of change is shown to be related to firm size and ownership in the Alyeska Pipeline Service Company. The results therefore support the legitimacy theory arguments.

Exposure, legitimacy, and social disclosure

Abstract This study examines whether the voluntary social disclosures included by corporations in their annual reports are related to either public pressure or firm profitability. It is argued that social disclosures are used as a means of addressing the exposure firms face with regard to the social environment, and as such should be related more closely with public-pressure variables than profitability measures. A regression analysis on the level of disclosure for 128 firms in 1985 indicates that size and industry classification are significant explanatory variables whereas a number of profitability variables are not.

The relation between environmental performance and environmental disclosure: a research note

Abstract Previous studies of the relation between environmental performance and environmental disclosure have consistently documented a lack of significance. This study examines the relation between 1990 annual report environmental disclosures for a sample of 131 US companies and their environmental performance as based on toxics release data from 1988 (made available in 1990). In contrast to the previous examinations, results indicate that, controlling for firm size and industry classification (two factors previously shown to be related to the extent of environmental disclosure), there is a significant negative relation between performance and disclosure for the sample firms. However, the disclosure level of firms from non-environmentally sensitive industries is more affected by toxic release levels than is the disclosure of firms from environmentally sensitive industries.

Environmental disclosures, regulatory costs, and changes in firm value

Abstract Union Carbides chemical leak in Bhopal, India during December 1984 resulted in approximately 4,000 deaths and 200,000 injuries. This study examines the market reaction of chemical firms other than Union Carbide to this catastrophe. Evidence indicates that a significant negative intra-industry reaction occurred. However, firms with more extensive environmental disclosures in their financial report prior to the chemical leak experienced a less negative reaction than firms with less extensive disclosures. This result suggests that investors interpreted such disclosures as a positive sign of the firm managing its exposure to future regulatory costs.

Securing organizational legitimacy

This paper explores the role that environmental disclosures might play in producing a legitimating effect on investors within the context of the chemical industry. By way of an experimental decision case it examines effects of negative, and the offsetting effects of positive, environmental disclosures surrounding chemical firms’ liabilities for toxic waste site liabilities. The paper outlines the theoretical bases for the process of organizational legitimation, and sets the decision experiment in a detailed historical analysis of the toxic waste problems of the 1970s that led to the enactment of legislation requiring clean up and imposing significant liabilities on chemical firms. The results from the decision experiment, which indicate that under some circumstances positive disclosures can restore or repair an organization’s legitimacy, are discussed in the context of the earlier theoretical and historical analysis.

LEGITIMACY AND THE INTERNET: AN EXAMINATION OF CORPORATE WEB PAGE ENVIRONMENTAL DISCLOSURES

Internet usage has exploded over the past decade and the medium is now being suggested as a potentially powerful tool for disclosing environmental information and increasing corporate accountability. This study, grounded in legitimacy theory, argues that such a view may be overly optimistic. Results of an analysis of both annual report and corporate web page environmental disclosures for a sample of 62 U.S. firms do indicate that corporate web pages appear to be adding at least some additional, non-redundant environmental information beyond what is provided in the annual reports. However, the relative lack of negative environmental disclosure on the web pages, in conjunction with the finding that differences in the level of positive/neutral environmental disclosure are associated with legitimacy variables suggests that the focus of Internet disclosure may be more on corporate attempts at legitimation than on moving toward greater corporate accountability.

Evidence on the pernicious effect of financial report environmental disclosure

Abstract Unlike previous US environmental regulations, the Toxics Release Inventory (TRI), passed into law in 1986, focused on using information as a tool for reducing pollution. As noted by Konar and Cohen [Journal of Environmental Economics and Management 32 (1997) 109], if investors cared enough about the pollution performance information required under the enactment to punish bad performers, firms would have a market-based incentive to reduce toxic emissions. However, legitimacy theorists suggest that corporations may use largely voluntary financial report environmental disclosures to offset or mitigate the negative aspects of other information or actions. Accordingly, these disclosures could reduce the market effect of the TRI program. This study examines the market reaction to the unexpected proposal by President George Bush in June of 1989 for revisions in the Clean Air Act to identify whether TRI information and 10-K report environmental disclosures had an impact. Based on a sample of 112 firms, we find that companies with worse pollution performance (higher levels of size-adjusted toxic releases into the air) suffered more negative market reactions than companies with better performance. However, companies with less extensive environmental disclosures in their 10-K reports suffered more negative market reactions than companies with more extensive disclosure. These results suggest that, while the TRI information may be inducing market effects that could in turn work as a quasi-regulatory device, financial report environmental disclosure reduces its impact. If concern about the environment is important, therefore, it appears that environmental disclosure under a largely voluntary regime is inadequate.

Corporate disclosure of environmental capital expenditures: A test of alternative theories

Purpose - The purpose of this paper is to examine three potential explanations for the corporate choice to disclose environmental capital spending amounts. Design/methodology/approach - Using archival data from a sample of Findings - First, the authors find that, for the overwhelming majority of observations, the disclosed amounts are not quantitatively material. This suggests that non-disclosure is likely due to immateriality. Next, their findings show that disclosing firms do not exhibit improved subsequent environmental performance relative to non-disclosing companies. Further, controlling for firm size and industry class, they find the choice to disclose is associated with worse environmental performance. Research limitations/implications - The sample includes only relatively larger firms from certain industries and this limits the generalizability of the findings. Smaller firms and those from excluded industries may have other reasons to choose to disclose environmental information. Further, the authors rely on TRI data to assess pollution performance, but TRI is self-reported and its reliability is only as good as the inputs. Finally, although environmental capital spending is potentially relevant information, this investigation does not examine other types of environmental information disclosure. Practical implications - This paper provides corroborating evidence that companies use the disclosure of environmental capital spending as a strategic tool to address their exposures to political and regulatory concerns. Hence, interpreting disclosed environmental information would appear to require careful understanding of the underlying motivations. Originality/value - This paper extends the environmental accounting and reporting literature by contributing to the unresolved question of what drives differences in the corporate disclosure of environmental information. The authors add to this body of research by investigating the disclosure of one specific piece of environmental information, the amount of capital expenditures incurred for pollution abatement and control.

The market reaction to social responsibility disclosures: The case of the Sullivan principles signings☆

Abstract Few studies to date have tested for investor use of social responsibility information disclosures. This paper examines the stock trading volume and price return reaction to the 1977 disclosures that certain United States companies doing business in South Africa had agreed to the Sullivan Principles. Results indicate that non-signing firms experienced significantly higher unexpected trading volume than signing firms around the announcement date. As such, the findings represent further evidence of investor use of social responsibility information.

Corporate responses to political costs: an examination of the relation between environmental disclosure and earnings management

Abstract This study examines the relation between the level of pre-event environmental disclosure and the extent of earnings management in response to regulatory threat. This issue is examined within the context of the earnings management response by intra-industry firms following the December, 1984 chemical leak at Union Carbide’s Bhopal, India plant. The analysis finds that a sample of 40 US chemical firms exhibited significant negative discretionary accruals for 1984. Furthermore, companies with higher levels of pre-event environmental disclosures in their 10-K reports tended to take less negative discretionary accruals. These results are consistent with the argument that corporate management believes environmental disclosure is an effective tool for reducing exposure to potential regulatory costs and that decisions to manipulate earnings are tied to a larger corporate strategy for dealing with political pressures.