Evidence on the pernicious effect of financial report environmental disclosure

Martin Freedman and Dennis M Patten

Accounting Forum, 2004, vol. 28, issue 1, 27-41

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.

Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (53)

Downloads: (external link)
http://hdl.handle.net/10.1016/j.accfor.2004.04.006 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:accfor:v:28:y:2004:i:1:p:27-41

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/racc20

DOI: 10.1016/j.accfor.2004.04.006

Access Statistics for this article

Accounting Forum is currently edited by Carol Tilt

More articles in Accounting Forum from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().