Impact of sustainability reporting and performance on organization legitimacy

Varsha Sehgal, Naval Garg () and Jagvinder Singh
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Varsha Sehgal: Delhi Technological University
Naval Garg: Delhi Technological University
Jagvinder Singh: University of Delhi

International Journal of System Assurance Engineering and Management, 2023, vol. 14, issue 1, No 10, 143-153

Abstract: Abstract There is an on-going academic debate on why firms participate in sustainability initiatives. The two arguments often tossed around are either because it supports profit maximation or because it enhances organization legitimacy. Profit maximization and organization legitimacy are not mutually exclusive as past literature states that sustainability initiatives enable an organization to gain legitimacy which enhances reputation and could translate to higher financial returns. This paper explores if the sustainability reporting type impacts the relationship between sustainability performance and organization legitimacy. We study the impact of sustainability reporting on organization legitimacy through two effects. First is the compliance mechanism based on the normative perspective, where a firm complies with the values and norms prevailing in the industry. Second, we look at the disclosure mechanism where the firm can choose what to make public i.e., it chooses what to disclose to maintain stakeholder interest and legitimacy. We extensively study the sustainability disclosure and sustainability performance of 60 Indian firms listed on NSE and who have published sustainability reports for the year 2021. We study how these firms respond to the compliance and disclosure effects over a period of a year. We analyze the impact of sustainability reporting and performance on firm’s media legitimacy. Analyzing a sample of 60 Indian companies over 2021, we demonstrate that sustainability reporting positively influences the firm legitimacy. This is the compliance mechanism at work. We also find that in case of a comprehensive disclosure sustainability performance has a positive impact on firm legitimacy. However, in case of restricted disclosure, sustainability performance has no impact on firm legitimacy. This is the disclosure mechanism at work. Firms following a comprehensive disclosure provide stakeholders with a true picture while firms following a restricted disclosure leave their stakeholders confused and stakeholders are forced to look at other constructs like age, size, reputation to proxy performance. Companies with have high performance are better off following comprehensive reporting while firms with low sustainability performance are safer, giving restricted disclosures in the interim for a short period of time.

Keywords: Sustainability reporting; Sustainability performance; Legitimacy (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s13198-022-01830-y

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