- Email: [email protected]
Environmental reporting management: a continental European perspective
Journal of Accounting and Public Policy 22 (2003) 43–62 www.elsevier.com/locate/jaccpubpol
Environmental reporting management: a continental European perspective Denis Cormier
a,1
, Michel Magnan
b,*
a
b
Professor, Ecole des sciences de la gestion, Universit e du Qu ebec a Montr eal, C.P. 8888, succ. Centre-ville, Montr eal, Qu e., Canada H3C 3P8 Professor & The Lawrence Bloomberg Chair in Accountancy, John Molson School of Business, Concordia University, 1455, de Maisonneuve West, Montr eal, Qu e., Canada H3G 1M8
Abstract Extending Cormier and MagnanÕs approach [J. Account. Audit Finance 14 (1999) 429] into a new context, our study investigates the determinants of corporate environmental reporting using a cost/benefits framework within FranceÕs unique legal and regulatory context. Results suggest that, in addition to firm size, proprietary costs, information costs and media visibility determine corporate environmental reporting. Industry-specific reporting patterns are also apparent. Ó 2003 Elsevier Science Inc. All rights reserved.
1. Introduction Over the past decade, through privatizations, foreign stock listings and investments by foreign institutional investors (mostly British and American), French firms have significantly broadened their investorsÕ base, i.e., enhanced both their stock market capitalization and their number of actual or potential stockholders (Cohen and Perez, 1999, pp. 62–63). However, the opening of French capital markets increases the pressure on firms to expand both the quality and the quantity of disclosure about their activities. While French firmsÕ financial reporting is strictly regulated by the state, their non-financial *
Corresponding author. Tel.: +1-514-848-2795; fax: +1-514-848-4518. E-mail addresses: [email protected] (D. Cormier), [email protected] (M. Magnan). 1 Tel.: +1-514-987-3000x8358. 0278-4254/03/$ - see front matter Ó 2003 Elsevier Science Inc. All rights reserved. doi:10.1016/S0278-4254(02)00085-6
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reporting context is less rule-oriented (prescriptive) than in the United States and, thus, more conducive to voluntary disclosure (Saudaragan and Biddle, 1992, p. 112). 2 French firms are reacting to their new institutional context by setting up public affairs or investor communications departments that allow the potential economic benefits from an active disclosure strategy to be better exploited (Attarcßa, 1998, p. 75). While stakeholdersÕ environmental concerns underlie the trend towards more corporate disclosure throughout Europe (Bebbington et al., 2000), such concerns are especially acute in France where a Green political party, with strong ecological views, is part of the government. However, in contrast to our understanding of environmental reporting from common law English-speaking countries (USA, Canada, Britain, Australia), the determinants of corporate environmental reporting in Continental Europe, particularly in France, are still relatively unknown. Relying on the approach adopted in Cormier and Magnan (1999) for a sample of Canadian firms, our paperÕs intent is to ascertain if French firmsÕ informational position, as captured by information costs and by proprietary costs, determine their environmental reporting practices. 3 In addition, we assess if media visibility, i.e., the extent of press coverage of a firmÕs environmental activities, which suggests active monitoring by a firmÕs stakeholders, enhances the potential benefits from an open environmental reporting strategy and leads to more disclosure. Our paper builds upon and extends Cormier and Magnan (1999) in the following ways. First, we apply Cormier and MagnanÕs (1999) economic costs–benefits environmental reporting model to a continental Europe setting, France, with unique regulatory and legal constraints. So far, most environmental or social reporting studies have focused on firms from AngloSaxon countries (e.g., Gray et al., 1995). Second, we revise and expand Cormier and MagnanÕs (1999) costs–benefits environmental reporting model by assessing how a firmÕs proprietary costs and media visibility positions affect its reporting stance. Third, we rework and expand Cormier and MagnanÕs (1999) measure of environmental reporting to make it more comprehensive and reflective of current environmental and disclosure trends. Fourth, our paper provides insights as to the relative contribution of various firm-specific attributes in explaining environmental reporting. Finally, by contrasting our French findings to Cor2
The US and French legal liability systems are quite different. While the United States relies on a common law system, France relies on code law (Saudaragan and Meek, 1997, p. 129). In a code law environment, obligations towards third parties are strictly defined and delimited within the law. This criterion does not strictly apply in the United States (see, among other texts, Roberts et al., 1998, pp. 14–15). 3 Information collection costs by stockholders, or information costs, occur when it is more valueefficient for a widely held firm to directly disclose environmental information than for individual investors to collect it themselves (Lang and Lundholm, 1993, p. 249). Costs resulting from the disclosure of, potentially damaging, proprietary information are deemed proprietary costs (Scott, 1994, p. 28; Lang and Lundholm, 1993, pp. 249–250).
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mier and MagnanÕs (1999) Canadian evidence, we are able to assess if an economic-based environmental reporting model transposes well across different institutional, legal and economic settings. Our results suggest that information costs, proprietary costs as well as media visibility all influence, to some extent, French firmsÕ corporate environmental reporting strategies. The remainder of the paper is organized as follows. Section 2 briefly reviews Cormier and Magnan (1999) and contains an overview of environmental reporting by European firms as well as hypotheses. Section 3 provides a description of the studyÕs methodology. Section 4 presents our empirical findings. Section 5 comments on the findings and their implications. 2. The determination of environmental reporting in continental Europe 2.1. Context and current trends Consistent with trends observed among North American firms (e.g., Gamble et al., 1995, p. 44), European firms increasingly view environmental reporting strategies as a value-added tool. In fact, there is evidence that firms in most European countries are expanding both the quantity and the quality of their environment-based information disclosure (KPMG, 1999) 4. However, the format of such environmental reporting varies widely across firms since its content is not strictly regulated. 5 However, in determining their environmental reporting strategy, French firms must strike a delicate balance between the benefits from an open disclosure policy and the potential costs arising from the socio-economic context in which they operate. For instance, many French industrial firms now voluntarily submit their investment projects for evaluation by ecological groups (Avenier, 1993, p. 84). In addition, even business-tobusiness transactions are governed by ecological considerations, with some firms demanding that their suppliers adhere to strict environmental management guidelines (Louppe and Rocaboy, 1994, p. 36). In fact, environmental management initiatives underlie the success of many French firms (Louppe and Rocaboy, 1994, p. 38). Finally, French environmental laws and regulations are enforced with some severity. Hence, poor environmental management can be 4
Based on a survey of the top 100 firms in each of 10 countries, half of them in the European Union, KPMG (1999, p. 17) finds that environmental reporting increased in all European countries from 1996 to 1998. In contrast to European trends, the proportion of top American firms reporting environmental information fell for the same period. According to KPMG (1999, p. 17), this could reflect American firmsÕ resentment about over-regulation plus fears that giving too much information could contribute to lawsuits. 5 Recently, detailed guidelines on environmental reporting were published (Federation des experts-comptables europeens-Federation of European Professional Accountants, 1999, FEE Discussion Paper Towards a Generally Accepted Framework for Environmental Reporting. Brussels, Belgium).
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costly to a French firm, either directly (fines, penalties, shutdowns) or indirectly (loss of suppliers and/or customers) (Ordre des experts-comptables, 1996a, p. 15; Boiral and Jolly, 1992, p. 88). 6 The impetus for more transparency in environmental management matters began in earnest in 1991 when 32 major firms signed a Sustainable Development Charter that was sponsored by the International Chamber of Commerce and Industry (Ordre des experts-comptables, 1996b, p. 99). Since then, many industry associations (e.g., plastics, chemicals) have taken environmental initiatives, encouraging their member firms to become more transparent with respect to their environmental management (Ordre des experts-comptables, 1996a, p. 21; Perais, 1999, p. 6). Furthermore, in 1998, for the first time, French companies took part in the European Environmental Reporting Award Scheme (Association of Chartered Certified Accountants, 1999). Finally, at the beginning of 1999, approximately 20 French firms had registered their facilities in the European Environmental Management and Audit Scheme (EMAS) (Association of Chartered Certified Accountants, 1998). All these actions point toward French firms becoming acutely aware of their environmental obligations and of the importance of being perceived to be environmentally responsible. The emergence of corporate environmental reporting coincides with French firms increasingly relying on stock and public debt markets to raise capital as they respond to foreign investorsÕ information needs (Cohen and Perez, 1999, p. 64, 72). These changes in the way French firms raise capital have occurred within a short time frame, starting with the privatizations of state-owned firms in the late 1980s (Mertens-Santamaria, 1997, pp. 55–59). Prior evidence within a North American context suggests that, as firms increase their exposure to capital markets and to capital marketsÕ participants, they are likely to change their disclosure position (e.g., Scott, 1994; Healy et al., 1999; Botosan, 1997). 2.2. Environmental reporting management within a costs–benefits framework Corporate environmental reporting can be viewed as an outcome of managementÕs assessment of the economic costs and benefits to be derived from additional disclosure (e.g., Blacconiere and Northcut, 1997, pp. 154–157). In fact, Li et al. (1997, p. 460), Barth et al. (1997, p. 45) and Cormier and Magnan (1999, p. 444) do provide evidence that is consistent with firms adopting a strategic posture that takes into account potential costs and benefits when disclosing (or not disclosing) environmental information. Hence, extending the conceptual framework proposed by Cormier and Magnan (1999), we assert that environmental reporting strategy is determined by 6 On a more general level, the press coverage and the popular movements generated by the Mad cow syndrome, and by transgenic foods illustrate European ecological and health concerns (e.g., Les Echos, December 27, 2000, p. 10).
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(1) Benefits from a reduction in information asymmetry and in overall information gathering costs to be assumed by investors (information costs). (2) Costs resulting from disclosure of proprietary information (proprietary costs). (3) Environmental media visibility (media visibility).
2.2.1. Information costs If a firmÕs managers do not provide credible information, it is expected that investors will assume the worst and will bid down its stock price (Lang and Lundholm, 2000, p. 630). In contrast, by disclosing credible information, a firm allows investors to reduce data collection and analysis costs from alternative information sources (Healy et al., 1999, p. 497; King et al., 1990, pp. 124–126). Hence, consistent with Cormier and Magnan (1999), we propose the following hypothesis: Hypothesis 1. The level of information costs to be incurred by a firmÕs shareholders enhances its environmental reporting.
2.2.2. Proprietary costs Environmental reporting comprises, to a large extent, proprietary information. Environmentally related capital expenditures and operating costs, estimates of site remediation and reclamation costs, budgeted environmental investments, environmental management strategies and environmental liabilities or commitments are examples of environmental reporting that are of a proprietary nature (Li et al., 1997, p. 441). Costs resulting from the disclosure of proprietary environmental information can be of some magnitude, thus causing some concern to managers (Li et al., 1997, p. 460). Nevertheless, by incurring proprietary costs, a firm enhances its reputation among stakeholders as a credible discloser, thus adding to the value of the information being released. Hence, the value-creation potential of a reporting strategy is dependent upon proprietary costs and upon a firmÕs ability to withstand them (Skinner, 1994, pp. 43–44; Verrecchia, 1990, p. 245). For instance, while there is evidence that high quality voluntary disclosure reduces a firmÕs cost of capital (Botosan, 1997, p. 345; Sengupta, 1998, p. 473), there is also evidence that the disclosure of environmental performance measures is value-relevant, with high pollution levels lowering firm valuations (Hughes, 2000, pp. 220–221; Cormier and Magnan, 1997, p. 440). Hence the following hypothesis: Hypothesis 2. A firmÕs ability to incur proprietary costs enhances its environmental reporting.
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2.2.3. Environmental media visibility The benefits from an active environmental reporting strategy are magnified if external stakeholders closely monitor a firm. In such a situation, any information released by the firm is quickly and efficiently distributed into the marketplace at relatively low cost for the firm (Gibbins et al., 1990, p. 132). In addition, managers will be more sensitive about maintaining a firmÕs environmental management reputation if it is highly visible (e.g., Skinner, 1994, p. 40). Hence, the following hypothesis: Hypothesis 3. A firmÕs environmental media visibility enhances its environmental reporting.
3. Method 3.1. Sample Our sample comprises 246 firm-year observations selected in the following manner. First, we identified all non-financial French firms contained in the Datastreame financial information database. Firms that are included in the Datastreame database are typically large, are closely followed by analysts and are expected to be most sensitive to investorsÕ concerns with respect to environmental issues. We obtained sample firmsÕ addresses from the DAFSA (1997) Corporate Directory (an annual publication describing all publicly listed French firms). Second, all these firms were then sent a request for their annual reports and/or environmental reports of the last six years. Out of 57 firms that were contacted, 50 responded to the request for a resulting sample of 246 firmyear observations: 240 annual reports and six environmental reports (not all firms sent reports for the six years). Finally, there are missing data, i.e., lagged stock price for the first year a firm was listed on a stock market in the case of privatization, for five observations resulting in a sample of 241 firm-year observations. Sample firms are active in seven industrial sectors: consumer goods and services, manufacturing; water, energy, chemicals and drugs; distribution; food and beverages; high technology; heavy industry. 3.2. Dependent variable measurement––environmental reporting The following model summarizes the approach to be adopted in the empirical analysis: Environmental reportingit ¼ f ðInformation costs; Proprietary costs; Media visibility; ControlÞit
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A firmÕs environmental voluntary reporting strategy, as reflected in its annual and environmental reports, is coded using a 39-item instrument. Cormier and MagnanÕs (1999) initial 19-item instrument is extensively reworked and modified to better capture the increased complexity and scope of corporate environmental reporting. Items are grouped into six categories: Environmental expenditures and risks, laws and regulations, pollution abatement, sustainable development, land remediation and contamination (including spills) and environmental management (see Appendix A). Two persons reviewed reporting scores while a third person reviewed scoring disagreements. 3.3. Explanatory variables measurement 3.3.1. Information costs InvestorsÕ information needs with respect to a firmÕs environmental management, and their implicit information costs, are proxied by five variables that, with the exception of Foreign Ownership, are derived from Cormier and Magnan (1999, p. 437). In that regard, Bauer and Bertin-Mourot (1996) discuss how French firmsÕs and institutional investorsÕ executives and directors are drawn from a very small pool of graduates from a few elite institutions. However, if a large proportion of a firmÕs shareholders are foreign, it may be difficult for them to obtain information about it from alternative sources. For the firm, it becomes efficient to enhance its environmental reporting since it is a value-added service for these shareholders (KPMG, 2000, p. 6). Hence, consistent with Hypothesis 1, all information cost variables are predicted to exhibit a positive relation with environmental reporting. 3.3.2. Proprietary costs The ability of a firm to incur proprietary costs as a result of its environmental reporting strategy is dependent upon its financial condition. Hence, it appears that only firms that are financially sound may be able to trade off the benefits from additional environmental disclosure with the costs of revealing potentially damaging information with respect to their environmental performance. Consistent with Cormier and Magnan (1999, p. 437), three variables proxy for a firmÕs ability to withstand these potential proprietary costs. Hypothesis 2 predicts that accounting and market returns (leverage) are positively (negatively) associated with environmental reporting. 3.3.3. Environmental media visibility Active monitoring by stakeholders, which reflects societal concerns about a firmÕs activities, is likely to provide a firm with additional benefits from a proactive environmental reporting strategy. A proxy for such monitoring is the intensity of a firmÕs press coverage (media visibility) (e.g., Neu et al., 1998,
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p. 276). Consistent with Hypothesis 3, a positive relation is expected between media exposure and the extent of environmental reporting. 3.3.4. Control variables Consistent with Cormier and Magnan (1999, p. 438), control variables (fixed assets age, firm size and SEC registrant 7) are introduced that are expected to be positively associated with environmental reporting. Explanatory variables and measurement Measurement Information costs Risk Capital markets Volume Widely held ownership Foreign ownership Proprietary costs Accounting return Market return Leverage Media visibility Media visibility Control variables Fixed assets age Firm size SEC
7
Beta (systematic risk) 1 if a firmÕs debt-to-equity ratioÕs year-to-year change is more than 20%, 0 otherwise 8 Annual trading volume (on all exchanges) divided by total shares outstanding 1 if no investor or related investors own more than 20% of a firmÕs votes, 0 otherwise 9 1 if foreign investors own more than 20% of a firmÕs voting shares, 0 otherwise 10 Net earnings divided by lagged assets (in %) Annual stock market return (in %) (Long term financial debt)/(Equity) Number of environmental newsstories reported in ABI/Inform for a particular firm in a given year [Accumulated depreciation]/[Depreciation expense] Ln(Assets) 1 if a firm, or a subsidiary, are registered with the Securities and Exchange Commission, 0 otherwise
SEC regulations mandate some level of environmental disclosure. Results are not sensitive to the use of a different cutoff point, i.e., between 5% and 20%. 9 According to International Accounting Standards (2000, IAS 28, paragraph 4), an ownership stake of 20% defines significant influence over a firmÕs affairs. 10 The 20% ownership cutoff is dictated by data availability in the DAFSA directory. 8
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4. Results 4.1. Descriptive analyses Table 1 reports mean firmsÕ environmental reporting from 1992 to 1997. The reporting score is divided into six categories: environmental expenditures and risks, laws and regulation, pollution abatement, sustainable development, land remediation and contamination, and environmental management. From Table 1 we can see that average environmental reporting for all sample firms increases from 1992 to 1993 (2.5–4.5), is stable around 5.0 from 1993 to 1996 and increases again in 1997 (from 5.1 in 1996 to 8.2 in 1997). Patterns vary across industries. On average, firms in the consumer goods, water–energy–chemicals and drugs and, food and beverages industries report little information about their environmental management. For instance, throughout the 1992–1997 period, environmental reporting averaged 0.8 per year for consumer goods and services firms, 0.8 per year for water–energy– chemicals and drugs firms and 1.7 for foods and beverages firms. In contrast, distribution and heavy industry firms have more than doubled their level of environmental reporting from 1992 to 1997. Finally, high-tech and manufacturing firmsÕ environmental reporting does not exhibit any particular trend, with high-tech firms showing the highest average level of reporting among all industrial sectors. Table 2 shows Pearson cross-correlations between all variables used in the study. As expected, environmental reporting is positively related with risk (0.19), trading volume (0.28), widely held ownership (0.40), media visibility (0.44), fixed assets age (0.12), firm size (0.33) and SEC (0.42). Cross-correlations
Table 1 Sample firmsÕ average environmental reporting scores by year and by industry Consumer goods and services 1992 1993 1994 1995 1996 1997 Average for 1997–1992 N
0.0 0.6 0.4 0.4 0.8 2.0 0.8 28
Light and industrial manufacturing 0.0 1.5 2.7 4.0 5.7 3.0 3.3 15
Water, energy, chemicals and drugs 0.0 0.0 1.3 1.0 0.8 1.3 0.8 23
Distribution
2.5 5.8 10.0 11.7 13.5 13.0 10.7 31
Food and beverages 0.4 1.1 2.9 2.4 1.8 0.8 1.7 51
High technology
10.3 21.0 19.0 13.0 9.1 22.0 16.4 36
Heavy industry
3.8 1.7 2.0 3.5 5.2 7.5 4.0 62
Firms from all industries 2.5 4.5 5.2 5.0 5.1 8.2 5.4 246
52
Variable Reporting Risk Capital markets Trading volume Widely held ownership Foreign owner. Accounting return Market return Leverage Good/bad news Age Firm size SEC Consumer goods Manufacturing Water, energy Distribution Food beverages High-tech Heavy industry
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
2
3
4
5
6
0.19
0.05 0.06
0.28 0.09 0.02
0.40 0.05 )0.07 0.05 )0.05 0.15 )0.05 )0.01 )0.10 0.11 )0.01 0.08 )0.06 )0.09 0.31 0.26
7
8
9
10
11
12
13
14
17
19
20
0.42 )0.20 ).08 0.49 )0.18 )0.06 )0.16 0.22 0.07 )0.27 0.03 0.09 ) .10 )0.03 0.06 0.10 0.02 0.04 )0.13 )0.04 0.13 0.01 )0.01 )0.04
0.25
0.05
0.41
0.30 )0.14
0.08 )0.16 )0.07
0.20
0.10
0.08
0.33
0.34
0.18
0.09 )0.05 )0.02
0.02 )0.11
0.00 )0.13
0.24 )0.27 )0.08
0.01
)0.03 )0.04 0.25 )0.02 )0.01 )0.02 0.04 )0.08 )0.10 )0.04 )0.02 0.09 )0.30 0.04 )0.08 )0.02 )0.04 )0.04 0.12 0.04 0.02 )0.09
18
0.33 0.38 0.15
0.07
0.02
16
0.44 0.12 0.05 0.09 0.04 )0.04
0.16
0.08
15
0.06 )0.01 )0.03 )0.09 0.03
0.19 0.08
0.08
).11 0.13 0.02 )0.15
0.07 0.04 0.01 0.00 0.05 0.06 )0.04 0.02 )0.05 0.14 )0.07 0.02 )0.08 )0.10 )0.03 )0.09 )0.10 0.02 0.21 0.35 )0.10 0.03 0.36 )0.07 )0.07 )0.07 )0.05 0.11 0.03 )0.08 )0.03 0.00 )0.03 )0.11 )0.08 0.28 )0.07 )0.28 )0.13 0.32 0.11 )0.01 )0.09 )0.06 )0.16 )0.01 0.39 )0.10 )0.06 )0.05 0.03 n.r. n.r. n.r. n.r. n.r. n.r. n.r.
n.r. n.r.
n.r. n.r. n.r.
n.r. n.r. n.r. n.r.
n.r. n.r. n.r. n.r. n.r.
Cross-correlations greater than or equal to (smaller than or equal to) 0.08 ()0.08) are significant at 10% (two-tailed). n.r.: non-relevant cross-correlation since industry-specific dummy variables are, by definition, correlated with each other (a firm that is in one sector is automatically not in the other sectors).
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Table 2 Pearson cross-correlations between variables
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53
also corroborate the evidence shown in Table 1 with some industries (water– energy–chemicals and drugs, heavy industry) exhibiting higher levels of environmental reporting and other sectors (consumer goods, distribution, high-tech) showing lower levels of environmental reporting. No cross-correlation among explanatory variables is higher than 0.39. However, some information costs and proprietary costs variable do seem to overlap with control variables such as firm size and SEC. For instance, firm size is significantly correlated with risk (0.38), capital markets (0.15), trading volume (0.41), widely held ownership (0.33), leverage (0.14) and media exposure (0.21). SEC is also associated with trading volume (0.30), widely held ownership (0.34) and media exposure (0.35). In light of these findings, and to ascertain the incremental contribution of each set of variables in explaining environmental reporting, hierarchical regressions are used to introduce explanatory variables in blocks. 4.2. Determinants of environmental reporting 4.2.1. Environmental reporting as a continuous variable––control and experimental models Columns 3 and 4 of Table 3 show results from two distinct pooled crosssectional ordinary least squares (OLS) regressions between environmental reporting and control variables (column 3) or experimental variables (column 4). As a group, control variables (industry, fixed assets age, firm size and SEC) explain 39% of overall variance in environmental reporting. As expected, firm size and SEC are associated with more extensive environmental reporting. The experimental model regression includes only information and proprietary costs variables as well as media visibility. As a group, these experimental variables explain 28.6% of overall variance in environmental reporting. There is evidence that information costs (Hypothesis 1) and media visibility (Hypothesis 3) drive a firmÕs environmental reporting. However, there is only weak evidence in support of Hypothesis 2, with leverage being negatively associated with environmental reporting. 4.2.2. Environmental reporting as a continuous variable––full model Column 5 of Table 3 shows the results from a pooled cross-sectional OLS regression between environmental reporting and its determinants, combining all variables from the control and experimental models. The full model regression explains 43.3% of overall variance ðp 6 0:000, two-tailed), a result that confirms the initial diagnostic that there is significant overlap in explanatory power between experimental (adjusted R-square of 28.6%) and control (adjusted R-square of 39.0%) variables.
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Table 3 Pooled cross-sectional regressions of the relation between environmental reporting and its determinants (n ¼ 241) Explanatory variable
Prediction
Dependent variable: firm-specific environmental reporting Control modela Experimental model Full modela 6.19b (4.31)c;f
Intercept Information costs Risk Capital markets Trading volume Widely held ownership Foreign ownership
þ þ þ þ þ
3.32 1.89 3.15 5.58 2.72
Proprietary costs Accounting return Market return Leverage
þ þ )
0.45 (0.04) 1.36 (1.01) )1.39 ()1.72)e
)0.26 ()0.03) 1.92 (1.43)d )1.40 ()1.86)e
Media visibility Good news/had news
þ
3.88 (5.50)f
2.33 (3.28)f
Control variables Fixed assets age Firm size SEC
þ þ þ
Adjusted R2 F statistic Incremental R2 : Experimental ) Full Incremental R2 : Control ) Full
(2.45)f (1.19) (1.47)d (5.55)f (1.97)f
)0.01 ()0.25) 1.36 (3.76)f 3.00 (1.71)e 39.0% 11.96f
1.83 1.87 3.85 2.55 1.78
(1.29)e (1.29)e (1.67)e (2.29)f (1.36)e
)0.03 ()0.81) 0.61 (1.40)e 1.53 (0.83) 28.6% 11.66f
43.3% 8.98f 17.5%f 6.2%f
a
Industry-specific and year-specific intercepts not reported. Coefficient (t statistic). c T statistic. d p 6 0:10, one-tailed for regression coefficients and two-tailed for regressionsÕ explanatory power. e p 6 0:05, one-tailed for regression coefficients and two-tailed for regressionsÕ explanatory power. f p 6 0:01, one-tailed for regression coefficients and two-tailed for regressionsÕ explanatory power. b
However, F -tests reveal that each set of variables has incremental explanatory power over the other. All variable-specific variance inflation factors 11 are found to be smaller than 10.0, thereby providing no indication of multi-
11 The variance inflation factor (VIF) for Xj is 1=1 RSQj , RSQj being the R-square from the regression of Xj on remaining k 1 predictors. If Xj is highly correlated with the remaining predictors, its VIF is very large.
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collinearity. At 1.89, the Durbin–Watson statistic does not suggest the existence of autocorrelation. Coefficients for all five information costs proxies are in the expected directions. Environmental reporting is positively related to risk (1.83; t ¼ 1:29, p 6 0:10 one-tailed), capital markets (1.87; t ¼ 1:29, p 6 0:10 one-tailed), trading volume (3.85; t ¼ 1:67, p 6 0:05 one-tailed), widely held ownership (2.55; t ¼ 2:29, p 6 0:01 one-tailed) and foreign ownership (1.78; t ¼ 1:36, p 6 0:10 one-tailed). Thus, consistent with Hypothesis 1, in determining their environmental reporting strategy, firms appear to be sensitive to investorsÕ information needs, as proxied by the five information costs variables. Among proprietary costs variables, as expected, an increase in market return (1.92; t ¼ 1:43, p 6 0:10 one-tailed) and a decrease in leverage ()1.40; t ¼ 1:86, p 6 0:05 one-tailed) are associated with additional environmental reporting. However, accounting return is not associated with environmental reporting. These results, which are consistent with Hypothesis 2, suggest that firms in good financial condition engage in more extensive environmental reporting while poorly performing firms minimize the level of environmental information they provide to investors. The coefficient for media visibility (2.33; t ¼ 3:28, p 6 0:01 one-tailed) suggests that, consistent with Hypothesis 3, active media monitoring influences the extent of a firmÕs environmental reporting. In fact, it could be inferred that firms with a more aggressive environmental reporting strategy may also be more active in using the media. Among control variables, only firm size is significantly associated with more environmental reporting (0.61; t ¼ 1:40, p 6 0:10 one-tailed). Except for water, energy, chemicals and drugs firms and for heavy industry firms, all industry membership coefficients are negative at conventional significance levels.
4.3. Sensitivity analyes––measurement of environmental reporting 4.3.1. Firm-specific environmental reporting relative to annual industry median In light of the apparent importance of industry membership in explaining a firmÕs environmental reporting, an additional analysis is performed with firmspecific environmental reporting scores net of year and industry-specific median environmental reporting scores. These results are presented in column 3 of Table 4. As a group as well as individually, control variables such as fixed assets age, firm size and SEC do not add to our understanding of environmental reporting when used concurrently with information costs, proprietary costs and media visibility variables (incremental R-square of 0.1%; p > 0:01; not reported). The regression is statistically significant (adjusted R-square: 11.6%; p 6 0:01 two-tailed). The reduction in adjusted R-square from the regression shown in
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Table 4 Sensitivity analyses of the relation between environmental reporting score and its determinants (n ¼ 241) Variable
Prediction
Logit regressiona Dependent variable: 1 if environmental reporting score >2; 0 if environmental reporting score 6 2
)3.32b
Intercept Information costs Risk Capital markets Trading volume Widely held ownership Foreign ownership
OLS regression Dependent variable: firm-specific environmental reporting less annual industry median
þ þ þ þ
0.59 1.96d 5.05e 2.14e
1.07c 1.46d )0.50 0.78c
þ
0.87
2.48e
þ þ )
)2.56 2.09d )0.93d
3.46 1.27d )0.94e
Media visibility Good news/bad news þ
1.34e
1.44d
Control variables Fixed assets age Firm size SEC
)0.01 0.14 0.44
0.05 0.46d )0.43
Adjusted R2 11.6% F statistic 3.62e
Pseudo R2 47.6%f Chi-square 155.9e
Proprietary costs Accounting return Market return Leverage
þ þ þ
a
Industry-specific and year-specific intercepts not reported. Coefficient. c p 6 0:10, one-tailed for regression coefficients and two-tailed for regressions explanatory power (F statistic). d p 6 0:05, one-tailed for regression coefficients and two-tailed for regressions explanatory power (F statistic). e p 6 0:01, one-tailed for regression coefficients and two-tailed for regressionsÕexplanatory power (F statistic). f Cox and Snell r-square. b
Table 3 is due to the elimination of fixed year and industry effects from the regression and does indicate the relative importance of industry membership in determining environmental reporting. Overall, inferences to be drawn from information costs, proprietary costs, media visibility and control variable coefficients are highly similar to the evidence presented in Table 3 except that risk
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and foreign ownership are no longer statistically significant at conventional levels. Hence, there is still evidence that is consistent with the predictions contained in Hypotheses 1–3. 4.3.2. Firm-specific environmental reporting as a dichotomous variable The analysis presented in Table 3 relies on the assumption that environmental reporting is a continuous variable that is measured with a minimal margin of error. However, there are a fair number of firms without any relevant environmental reporting in any given year and the measurement of environmental reporting does have some interpretative aspects. Therefore, for sensitivity purposes, environmental reporting scores are recoded in a dichotomous fashion with environmental reporting scores greater than 2 being coded 1 and scores less or equal than 2 being coded 0. The cutoff point, 2, is the sampleÕs median level of environmental reporting. These relative environmental reporting scores are then analyzed using a logistic regression (column 4 of Table 4). Results from incremental significance tests corroborate findings reported in Table 3 as both the control set of variables and the experimental set of variables contribute in explaining a firmÕs environmental reporting status. Only the results for the full model logit are now explicitly discussed. As expected, among information cost variables, risk (1.07; p 6 0:10, onetailed), capital markets (1.46; p 6 0:05, one-tailed), Widely held Ownership (0.78; p 6 0:10, one-tailed) and foreign ownership (2.48; p 6 0:01, one-tailed) are associated with more extensive environmental reporting. Overall, these findings provide partial support for Hypothesis 1. Among proprietary costs, results are similar to the ones reported in the OLS regression (Table 3) with environmental reporting being associated positively with market return (1.27; p 6 0:05, one-tailed) and negatively with leverage ()0.94; p 6 0:01, one-tailed). Both findings are consistent with Hypothesis 2. Finally, consistent with Hypothesis 3, media visibility (1.44; p 6 0:05, one-tailed) is associated with more extensive environmental reporting. Among control variables, only firm size (0.46; p 6 0:05, one-tailed) is associated with a high level of environmental reporting. 4.4. Additional sensitivity analyses To assess the resultsÕ robustness to the measure of environmental reporting, additional analyses are also performed. First, one-year lagged environmental reporting is added to the regression model. Such a specification explicitly assumes that environmental reporting follows a random walk, with current yearÕs disclosure being the best predictor of next yearÕs disclosure. Second, the pooled regression is reestimated without outliers (identified using
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Belsh–Kuhley procedure, Hair et al., 1998, p. 218). Results from these regression analyses (not reported) using alternate specifications provide similar results to those reported in Tables 3 and 4. Year-specific regressions are also performed (not reported). However, inferences from such regressions are not entirely reliable considering the small number of degrees of freedom in each annual regression (between 11 and 25). In fact, adjusted R-squares from these regressions are found to be quite volatile. Z statistics (Z1 and Z2 ) are then computed to evaluate if mean t statistics for the period under investigation are statistically different from zero (see Barth and McNichols, 1994, p. 200, for a description of both tests). 12 Results from these Z statistics then allow conclusions to be drawn for the overall period. Overall, results from annual regressions are consistent with the results obtained from the pooled regression reported in Table 3.
5. Conclusion 5.1. Overview of findings By investigating the determination of environmental reporting by French firms, our study extends Cormier and Magnan (1999) approach into a continental Europe context. Our main results suggest that economically derived variables such as information costs (risk, reliance on capital markets, trading volume, ownership) and proprietary costs (leverage, profitability) are significant determinants of a firmÕs environmental reporting strategy (Hypotheses 1,2 respectively). Moreover, corporate environmental reporting does appear to be related to a firmÕs media visibility (Hypothesis 3). Results also suggest that environmental reporting is conditioned by industry membership. That corporate disclosure strategies seem to be determined in a similar way, irrespective of a given countryÕs socio-cultural environment, is an illustration of the strong impact of globalized stock markets on fostering convergence in corporate practices. Further analyses are required to validate this claim but it is a promising avenue for future research. The evidence that large firms tend to report more extensively about their environmental management than small firms would be consistent with them subject to more intense external monitoring. Significant inter-industry differences in environmental reporting are also found.
12
Z statistics P are computed in the following manner (Barth and McNichols, 1994, p. 200): Z1 ¼ 1=N 1=2 ð tj =ðkj =ðkj 2ÞÞ1=2 Þ; Z2 ¼ averageðtÞ=ðstandard deviationðtÞ=ðN 1Þ1=2 .
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5.2. Comparison with Cormier and Magnan (1999) and contribution These findings contribute to the literature in the following ways. First, it appears that French firms provide less extensive voluntary environmental reporting than comparable North American firms (see Cormier and Magnan, 1999, p. 440, for Canada and Walden and Schwartz, 1997, pp. 138–144, for the United States). These findings are observed despite the use of a more comprehensive coding instrument, a context that is less litigation-prone and French societyÕs perceived environmental concerns. Second, in a manner similar to Canadian firms, French firmsÕ disclosure decisions do appear to be based upon an assessment of their information economics position and of their investorsÕ needs. Such a finding contrasts with the traditional view that French firmsÕ disclosure is regulatory-driven, e.g., use of the ‘‘Plan Comptable’’ (or Accounting Plan) for financial reporting (Gray, 1988, p. 12). In fact, French firmsÕ environmental reporting is related to their stock market performance: Cormier and Magnan (1999) do not observe such a relation for their sample of Canadian firms. Third, French firms appear to be quite sensitive to public perceptions, as proxied by their media visibility, when determining their environmental reporting strategy. This finding confirms French firmsÕ growing accountability to external stakeholders. In that regard, no evidence is provided by Cormier and Magnan (1999). Fourth, while firm size is a major determinant of environmental reporting in Cormier and Magnan (1999), its relative importance is much less for French firms. This finding suggests that environmental reporting in France is less institutionalized or subject to ritual than in Canada. Finally, in both countries, industry membership does appear to play an important role in determining a firmÕs environmental reporting strategy. 5.3. Limitations and future research The studyÕs limitations include the narrow scope of its sample, the way environmental reporting is measured and its reliance on a specific, but perhaps limiting, conceptual framework. Future research could consider contrasting environmental reporting predictions from different theoretical frameworks. The determination of environmental reporting in multi-countries samples could be considered also. This would allow richer disclosure models to emerge.
Acknowledgements Financial support from the Fonds FCAR (Quebec) and from the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged.
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Appendix A. Environmental reporting ratings Environmental expenditures and risks: Pollution control equipment and facilities Past and current expenditures Future estimates of expenditures Future estimates of operating costs Financing Environmental debt Risk provision Provision for charge
Land remediation and contamination: Sites Efforts of remediation (present and future) Cost/potential liability (provisions for site remediation)
Spills: Number Nature Efforts to reduce Liabilities (actual and potential)
Laws and regulations: Litigation (present and potential) Fines Orders to conform Corrective actions Incidents Future legislation or regulation requirements
Sustainable development reporting: Conservation of natural resources Recycling Life cycle information
Pollution abatement: Air emission information
Environmental management: Environmental policies or company concern for the environment
Water discharge information Solid waste disposal information Control, installations, facilities or processes described Compliance status of facilities Noise and odours
Environmental management system Environmental auditing Goals and targets Awards Department or office for pollution control ISO 14000 Participation in elaboration of environmental standards Joint projects with other firms on environmental management
Rating scale: 3, item described in monetary or quantitative terms; 2, item described specifically; 1, item discussed in general.
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Avenier, M.J., 1993. La problematique de lÕeco-management. Revue francßaise de gestion 93, 73–85. Barth, M.E., McNichols, M.F., 1994. Estimation and market valuation of environmental liabilities relating to superfund sites. Journal of Accounting Research 32 (Suppl.), 177–209. Barth, M.B., McNichols, M.F., Wilson, G.P., 1997. Factors influencing firmsÕ disclosures about environmental liabilities. Review of Accounting Studies 2 (1), 35–64. Bauer, M., Bertin-Mourot, B., 1996. Vers un modele europeen de dirigeants? ou trois modeles contrastes de production de lÕautorite legitime au sommet des grandes entreprises? Comparaison Allemagne/France/Grande-Bretagne. CNRS. Paris, France. Bebbington, J., Gray, R., Larranniga, C., 2000. Editorial: environmental and social accounting in Europe. The European Accounting Review 9 (1), 3–6. Blacconiere, W.G., Northcut, W.D., 1997. Environmental information and market reactions to environmental legislation. Journal of Accounting, Auditing and Finance 12 (1), 149– 178. Boiral, O., Jolly, D., 1992. Strategie, competitivite et ecologie. Revue francßaise de gestion 89, 80–92. Botosan, C.A., 1997. Disclosure level and the cost of equity capital. The Accounting Review 72 (3), 323–350. Cohen, E., Perez, R., 1999. Vingt dÕans dÕanalyse financiere en France. Comptabilite-contr^ ole-audit 4 (2), 61–76. Cormier, D., Magnan, M., 1999. Corporate environmental disclosure strategies: determinants, costs and benefits. Journal of Accounting, Auditing and Finance 14 (3), 429–451. Cormier, D., Magnan, M., 1997. InvestorsÕ assessment of implicit environmental liabilities: an empirical investigation. Journal of Accounting and Public Policy 16 (2), 215–241. DAFSA, 1997. Annuaire des societes. Paris: Compass. Gamble, G., Hsu, K., Kite, D., Radtke, R., 1995. Environmental disclosures in annual reports and 10Ks: an examination. Accounting Horizons 9 (3), 34–54. Gibbins, M., Richardson, A., Waterhouse, J., 1990. The management of corporate financial disclosures: opportunism, ritualism, policies and processes. Journal of Accounting Research 28 (1), 121–143. Gray, R., Kouhy, R., Lavers, S., 1995. Corporate social and environmental reporting. Accounting, Auditing and Accountability Journal 8 (1), 44–77. Gray, S.J., 1988. Toward a theory of cultural influence on the development of accounting systems internationally. Abacus 24 (3), 1–15. Hair, J.F., Anderson, R.E., Tatham, P.L., Black, W.C., 1998. Multivariate Data Analysis. PrenticeHall, Upper Saddle River, New Jersey. Healy, P., Hutton, A.P., Palepu, K.G., 1999. Stock performance and intermediation changes surrounding sustained increases in disclosure. Contemporary Accounting Research 16 (3), 485– 520. Hughes, K.E., 2000. The value relevance of nonfinancial measures of air pollution in the electric utility industry. The Accounting Review 75 (2), 209–228. International Accounting Standards Committee, 2000. International Accounting Standards. KPMG, 1999. International Survey of Environmental Reporting. September. Amsterdam, Netherlands. KPMG, 2000. Beyond the numbers: how leading organizations are linking values with value to gain competitive advantage. KPMG International. King, R., Pownall, G., Waymire, G., 1990. Expectations adjustments via timely management forecasts: review, synthesis and suggestions for future research. Journal of Accounting Literature 9, 113–144. Lang, M., Lundholm, R., 1993. Cross-sectional determinants of analyst ratings of corporate disclosures. Journal of Accounting Research 31 (2), 246–271. Lang, M., Lundholm, R., 2000. Voluntary disclosure and equity offerings: reducing information asymmetry or hyping the stock. Contemporary Accounting Research 17 (4), 623–662.
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Li, Y., Richardson, G.D., Thornton, D.B., 1997. Corporate disclosure of environmental liability information: theory and evidence. Contemporary Accounting Research 14 (2), 435–474. Louppe, A., Rocaboy, A., 1994. Consumerisme vert et demarche marketing. Revue francßaise de gestion 98, 36–47. tat des Mertens-Santamaria, D., 1997. Entreprises europeennes et mondialisation (1978–1996)––E lieux et strategies. La documentation francßise, Paris, France. Neu, D., Warsame, H., Pedwell, K., 1998. Managing public impressions: environmental disclosures in annual reports. Accounting, Organizations and Society 23 (3), 265–282. Ordre des experts-comptables, 1996a. Les systemes de management environnementaux. ExpertComptable-Media, Paris, France. Ordre des experts-comptables, 1996b. Information financiere et environnement. Expert-Comptable-Media, Paris, France. Perais, E., 1999. Strategie des entreprises francßaises a lÕegard de lÕenvironnement naturel. Centre de recherche en gestion, Universite de Poitiers. May. Roberts, C., Weetman, P., Gordon, P., 1998. International Financial Accounting – A Comparative Approach. Financial Times/Pittman Publishing, London, U.K. Saudaragan, S., Biddle, G., 1992. Financial disclosure levels and foreign stock exchange listings. Journal of International Financial Management and Accounting 4 (2), 106–148. Saudaragan, S., Meek, G., 1997. A review of research on the relationship between international capital markets and financial reporting by multinational firms. Journal of Accounting Literature 16, 127–159. Scott, T., 1994. Incentives and disincentives for financial disclosure: voluntary disclosure of defined benefit pension plan information by Canadian firms. The Accounting Review 69 (1), 26–43. Sengupta, P., 1998. Corporate disclosure quality and the cost of debt. The Accounting Review 73 (4), 459–474. Skinner, D., 1994. Why firms voluntarily disclose bad news. Journal of Accounting Research 32 (Spring), 38–60. Verrecchia, R., 1990. Endogenous proprietary costs through firm interdependence. Journal of Accounting and Economics 12 (1), 245–250. Walden, D., Schwartz, B.N., 1997. Environmental disclosures and public policy pressures. Journal of Accounting and Public Policy 16 (2), 125–154.
Environmental reporting management: a continental European perspective Denis Cormier
a,1
, Michel Magnan
b,*
a
b
Professor, Ecole des sciences de la gestion, Universit e du Qu ebec a Montr eal, C.P. 8888, succ. Centre-ville, Montr eal, Qu e., Canada H3C 3P8 Professor & The Lawrence Bloomberg Chair in Accountancy, John Molson School of Business, Concordia University, 1455, de Maisonneuve West, Montr eal, Qu e., Canada H3G 1M8
Abstract Extending Cormier and MagnanÕs approach [J. Account. Audit Finance 14 (1999) 429] into a new context, our study investigates the determinants of corporate environmental reporting using a cost/benefits framework within FranceÕs unique legal and regulatory context. Results suggest that, in addition to firm size, proprietary costs, information costs and media visibility determine corporate environmental reporting. Industry-specific reporting patterns are also apparent. Ó 2003 Elsevier Science Inc. All rights reserved.
1. Introduction Over the past decade, through privatizations, foreign stock listings and investments by foreign institutional investors (mostly British and American), French firms have significantly broadened their investorsÕ base, i.e., enhanced both their stock market capitalization and their number of actual or potential stockholders (Cohen and Perez, 1999, pp. 62–63). However, the opening of French capital markets increases the pressure on firms to expand both the quality and the quantity of disclosure about their activities. While French firmsÕ financial reporting is strictly regulated by the state, their non-financial *
Corresponding author. Tel.: +1-514-848-2795; fax: +1-514-848-4518. E-mail addresses: [email protected] (D. Cormier), [email protected] (M. Magnan). 1 Tel.: +1-514-987-3000x8358. 0278-4254/03/$ - see front matter Ó 2003 Elsevier Science Inc. All rights reserved. doi:10.1016/S0278-4254(02)00085-6
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reporting context is less rule-oriented (prescriptive) than in the United States and, thus, more conducive to voluntary disclosure (Saudaragan and Biddle, 1992, p. 112). 2 French firms are reacting to their new institutional context by setting up public affairs or investor communications departments that allow the potential economic benefits from an active disclosure strategy to be better exploited (Attarcßa, 1998, p. 75). While stakeholdersÕ environmental concerns underlie the trend towards more corporate disclosure throughout Europe (Bebbington et al., 2000), such concerns are especially acute in France where a Green political party, with strong ecological views, is part of the government. However, in contrast to our understanding of environmental reporting from common law English-speaking countries (USA, Canada, Britain, Australia), the determinants of corporate environmental reporting in Continental Europe, particularly in France, are still relatively unknown. Relying on the approach adopted in Cormier and Magnan (1999) for a sample of Canadian firms, our paperÕs intent is to ascertain if French firmsÕ informational position, as captured by information costs and by proprietary costs, determine their environmental reporting practices. 3 In addition, we assess if media visibility, i.e., the extent of press coverage of a firmÕs environmental activities, which suggests active monitoring by a firmÕs stakeholders, enhances the potential benefits from an open environmental reporting strategy and leads to more disclosure. Our paper builds upon and extends Cormier and Magnan (1999) in the following ways. First, we apply Cormier and MagnanÕs (1999) economic costs–benefits environmental reporting model to a continental Europe setting, France, with unique regulatory and legal constraints. So far, most environmental or social reporting studies have focused on firms from AngloSaxon countries (e.g., Gray et al., 1995). Second, we revise and expand Cormier and MagnanÕs (1999) costs–benefits environmental reporting model by assessing how a firmÕs proprietary costs and media visibility positions affect its reporting stance. Third, we rework and expand Cormier and MagnanÕs (1999) measure of environmental reporting to make it more comprehensive and reflective of current environmental and disclosure trends. Fourth, our paper provides insights as to the relative contribution of various firm-specific attributes in explaining environmental reporting. Finally, by contrasting our French findings to Cor2
The US and French legal liability systems are quite different. While the United States relies on a common law system, France relies on code law (Saudaragan and Meek, 1997, p. 129). In a code law environment, obligations towards third parties are strictly defined and delimited within the law. This criterion does not strictly apply in the United States (see, among other texts, Roberts et al., 1998, pp. 14–15). 3 Information collection costs by stockholders, or information costs, occur when it is more valueefficient for a widely held firm to directly disclose environmental information than for individual investors to collect it themselves (Lang and Lundholm, 1993, p. 249). Costs resulting from the disclosure of, potentially damaging, proprietary information are deemed proprietary costs (Scott, 1994, p. 28; Lang and Lundholm, 1993, pp. 249–250).
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mier and MagnanÕs (1999) Canadian evidence, we are able to assess if an economic-based environmental reporting model transposes well across different institutional, legal and economic settings. Our results suggest that information costs, proprietary costs as well as media visibility all influence, to some extent, French firmsÕ corporate environmental reporting strategies. The remainder of the paper is organized as follows. Section 2 briefly reviews Cormier and Magnan (1999) and contains an overview of environmental reporting by European firms as well as hypotheses. Section 3 provides a description of the studyÕs methodology. Section 4 presents our empirical findings. Section 5 comments on the findings and their implications. 2. The determination of environmental reporting in continental Europe 2.1. Context and current trends Consistent with trends observed among North American firms (e.g., Gamble et al., 1995, p. 44), European firms increasingly view environmental reporting strategies as a value-added tool. In fact, there is evidence that firms in most European countries are expanding both the quantity and the quality of their environment-based information disclosure (KPMG, 1999) 4. However, the format of such environmental reporting varies widely across firms since its content is not strictly regulated. 5 However, in determining their environmental reporting strategy, French firms must strike a delicate balance between the benefits from an open disclosure policy and the potential costs arising from the socio-economic context in which they operate. For instance, many French industrial firms now voluntarily submit their investment projects for evaluation by ecological groups (Avenier, 1993, p. 84). In addition, even business-tobusiness transactions are governed by ecological considerations, with some firms demanding that their suppliers adhere to strict environmental management guidelines (Louppe and Rocaboy, 1994, p. 36). In fact, environmental management initiatives underlie the success of many French firms (Louppe and Rocaboy, 1994, p. 38). Finally, French environmental laws and regulations are enforced with some severity. Hence, poor environmental management can be 4
Based on a survey of the top 100 firms in each of 10 countries, half of them in the European Union, KPMG (1999, p. 17) finds that environmental reporting increased in all European countries from 1996 to 1998. In contrast to European trends, the proportion of top American firms reporting environmental information fell for the same period. According to KPMG (1999, p. 17), this could reflect American firmsÕ resentment about over-regulation plus fears that giving too much information could contribute to lawsuits. 5 Recently, detailed guidelines on environmental reporting were published (Federation des experts-comptables europeens-Federation of European Professional Accountants, 1999, FEE Discussion Paper Towards a Generally Accepted Framework for Environmental Reporting. Brussels, Belgium).
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costly to a French firm, either directly (fines, penalties, shutdowns) or indirectly (loss of suppliers and/or customers) (Ordre des experts-comptables, 1996a, p. 15; Boiral and Jolly, 1992, p. 88). 6 The impetus for more transparency in environmental management matters began in earnest in 1991 when 32 major firms signed a Sustainable Development Charter that was sponsored by the International Chamber of Commerce and Industry (Ordre des experts-comptables, 1996b, p. 99). Since then, many industry associations (e.g., plastics, chemicals) have taken environmental initiatives, encouraging their member firms to become more transparent with respect to their environmental management (Ordre des experts-comptables, 1996a, p. 21; Perais, 1999, p. 6). Furthermore, in 1998, for the first time, French companies took part in the European Environmental Reporting Award Scheme (Association of Chartered Certified Accountants, 1999). Finally, at the beginning of 1999, approximately 20 French firms had registered their facilities in the European Environmental Management and Audit Scheme (EMAS) (Association of Chartered Certified Accountants, 1998). All these actions point toward French firms becoming acutely aware of their environmental obligations and of the importance of being perceived to be environmentally responsible. The emergence of corporate environmental reporting coincides with French firms increasingly relying on stock and public debt markets to raise capital as they respond to foreign investorsÕ information needs (Cohen and Perez, 1999, p. 64, 72). These changes in the way French firms raise capital have occurred within a short time frame, starting with the privatizations of state-owned firms in the late 1980s (Mertens-Santamaria, 1997, pp. 55–59). Prior evidence within a North American context suggests that, as firms increase their exposure to capital markets and to capital marketsÕ participants, they are likely to change their disclosure position (e.g., Scott, 1994; Healy et al., 1999; Botosan, 1997). 2.2. Environmental reporting management within a costs–benefits framework Corporate environmental reporting can be viewed as an outcome of managementÕs assessment of the economic costs and benefits to be derived from additional disclosure (e.g., Blacconiere and Northcut, 1997, pp. 154–157). In fact, Li et al. (1997, p. 460), Barth et al. (1997, p. 45) and Cormier and Magnan (1999, p. 444) do provide evidence that is consistent with firms adopting a strategic posture that takes into account potential costs and benefits when disclosing (or not disclosing) environmental information. Hence, extending the conceptual framework proposed by Cormier and Magnan (1999), we assert that environmental reporting strategy is determined by 6 On a more general level, the press coverage and the popular movements generated by the Mad cow syndrome, and by transgenic foods illustrate European ecological and health concerns (e.g., Les Echos, December 27, 2000, p. 10).
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(1) Benefits from a reduction in information asymmetry and in overall information gathering costs to be assumed by investors (information costs). (2) Costs resulting from disclosure of proprietary information (proprietary costs). (3) Environmental media visibility (media visibility).
2.2.1. Information costs If a firmÕs managers do not provide credible information, it is expected that investors will assume the worst and will bid down its stock price (Lang and Lundholm, 2000, p. 630). In contrast, by disclosing credible information, a firm allows investors to reduce data collection and analysis costs from alternative information sources (Healy et al., 1999, p. 497; King et al., 1990, pp. 124–126). Hence, consistent with Cormier and Magnan (1999), we propose the following hypothesis: Hypothesis 1. The level of information costs to be incurred by a firmÕs shareholders enhances its environmental reporting.
2.2.2. Proprietary costs Environmental reporting comprises, to a large extent, proprietary information. Environmentally related capital expenditures and operating costs, estimates of site remediation and reclamation costs, budgeted environmental investments, environmental management strategies and environmental liabilities or commitments are examples of environmental reporting that are of a proprietary nature (Li et al., 1997, p. 441). Costs resulting from the disclosure of proprietary environmental information can be of some magnitude, thus causing some concern to managers (Li et al., 1997, p. 460). Nevertheless, by incurring proprietary costs, a firm enhances its reputation among stakeholders as a credible discloser, thus adding to the value of the information being released. Hence, the value-creation potential of a reporting strategy is dependent upon proprietary costs and upon a firmÕs ability to withstand them (Skinner, 1994, pp. 43–44; Verrecchia, 1990, p. 245). For instance, while there is evidence that high quality voluntary disclosure reduces a firmÕs cost of capital (Botosan, 1997, p. 345; Sengupta, 1998, p. 473), there is also evidence that the disclosure of environmental performance measures is value-relevant, with high pollution levels lowering firm valuations (Hughes, 2000, pp. 220–221; Cormier and Magnan, 1997, p. 440). Hence the following hypothesis: Hypothesis 2. A firmÕs ability to incur proprietary costs enhances its environmental reporting.
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2.2.3. Environmental media visibility The benefits from an active environmental reporting strategy are magnified if external stakeholders closely monitor a firm. In such a situation, any information released by the firm is quickly and efficiently distributed into the marketplace at relatively low cost for the firm (Gibbins et al., 1990, p. 132). In addition, managers will be more sensitive about maintaining a firmÕs environmental management reputation if it is highly visible (e.g., Skinner, 1994, p. 40). Hence, the following hypothesis: Hypothesis 3. A firmÕs environmental media visibility enhances its environmental reporting.
3. Method 3.1. Sample Our sample comprises 246 firm-year observations selected in the following manner. First, we identified all non-financial French firms contained in the Datastreame financial information database. Firms that are included in the Datastreame database are typically large, are closely followed by analysts and are expected to be most sensitive to investorsÕ concerns with respect to environmental issues. We obtained sample firmsÕ addresses from the DAFSA (1997) Corporate Directory (an annual publication describing all publicly listed French firms). Second, all these firms were then sent a request for their annual reports and/or environmental reports of the last six years. Out of 57 firms that were contacted, 50 responded to the request for a resulting sample of 246 firmyear observations: 240 annual reports and six environmental reports (not all firms sent reports for the six years). Finally, there are missing data, i.e., lagged stock price for the first year a firm was listed on a stock market in the case of privatization, for five observations resulting in a sample of 241 firm-year observations. Sample firms are active in seven industrial sectors: consumer goods and services, manufacturing; water, energy, chemicals and drugs; distribution; food and beverages; high technology; heavy industry. 3.2. Dependent variable measurement––environmental reporting The following model summarizes the approach to be adopted in the empirical analysis: Environmental reportingit ¼ f ðInformation costs; Proprietary costs; Media visibility; ControlÞit
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A firmÕs environmental voluntary reporting strategy, as reflected in its annual and environmental reports, is coded using a 39-item instrument. Cormier and MagnanÕs (1999) initial 19-item instrument is extensively reworked and modified to better capture the increased complexity and scope of corporate environmental reporting. Items are grouped into six categories: Environmental expenditures and risks, laws and regulations, pollution abatement, sustainable development, land remediation and contamination (including spills) and environmental management (see Appendix A). Two persons reviewed reporting scores while a third person reviewed scoring disagreements. 3.3. Explanatory variables measurement 3.3.1. Information costs InvestorsÕ information needs with respect to a firmÕs environmental management, and their implicit information costs, are proxied by five variables that, with the exception of Foreign Ownership, are derived from Cormier and Magnan (1999, p. 437). In that regard, Bauer and Bertin-Mourot (1996) discuss how French firmsÕs and institutional investorsÕ executives and directors are drawn from a very small pool of graduates from a few elite institutions. However, if a large proportion of a firmÕs shareholders are foreign, it may be difficult for them to obtain information about it from alternative sources. For the firm, it becomes efficient to enhance its environmental reporting since it is a value-added service for these shareholders (KPMG, 2000, p. 6). Hence, consistent with Hypothesis 1, all information cost variables are predicted to exhibit a positive relation with environmental reporting. 3.3.2. Proprietary costs The ability of a firm to incur proprietary costs as a result of its environmental reporting strategy is dependent upon its financial condition. Hence, it appears that only firms that are financially sound may be able to trade off the benefits from additional environmental disclosure with the costs of revealing potentially damaging information with respect to their environmental performance. Consistent with Cormier and Magnan (1999, p. 437), three variables proxy for a firmÕs ability to withstand these potential proprietary costs. Hypothesis 2 predicts that accounting and market returns (leverage) are positively (negatively) associated with environmental reporting. 3.3.3. Environmental media visibility Active monitoring by stakeholders, which reflects societal concerns about a firmÕs activities, is likely to provide a firm with additional benefits from a proactive environmental reporting strategy. A proxy for such monitoring is the intensity of a firmÕs press coverage (media visibility) (e.g., Neu et al., 1998,
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p. 276). Consistent with Hypothesis 3, a positive relation is expected between media exposure and the extent of environmental reporting. 3.3.4. Control variables Consistent with Cormier and Magnan (1999, p. 438), control variables (fixed assets age, firm size and SEC registrant 7) are introduced that are expected to be positively associated with environmental reporting. Explanatory variables and measurement Measurement Information costs Risk Capital markets Volume Widely held ownership Foreign ownership Proprietary costs Accounting return Market return Leverage Media visibility Media visibility Control variables Fixed assets age Firm size SEC
7
Beta (systematic risk) 1 if a firmÕs debt-to-equity ratioÕs year-to-year change is more than 20%, 0 otherwise 8 Annual trading volume (on all exchanges) divided by total shares outstanding 1 if no investor or related investors own more than 20% of a firmÕs votes, 0 otherwise 9 1 if foreign investors own more than 20% of a firmÕs voting shares, 0 otherwise 10 Net earnings divided by lagged assets (in %) Annual stock market return (in %) (Long term financial debt)/(Equity) Number of environmental newsstories reported in ABI/Inform for a particular firm in a given year [Accumulated depreciation]/[Depreciation expense] Ln(Assets) 1 if a firm, or a subsidiary, are registered with the Securities and Exchange Commission, 0 otherwise
SEC regulations mandate some level of environmental disclosure. Results are not sensitive to the use of a different cutoff point, i.e., between 5% and 20%. 9 According to International Accounting Standards (2000, IAS 28, paragraph 4), an ownership stake of 20% defines significant influence over a firmÕs affairs. 10 The 20% ownership cutoff is dictated by data availability in the DAFSA directory. 8
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4. Results 4.1. Descriptive analyses Table 1 reports mean firmsÕ environmental reporting from 1992 to 1997. The reporting score is divided into six categories: environmental expenditures and risks, laws and regulation, pollution abatement, sustainable development, land remediation and contamination, and environmental management. From Table 1 we can see that average environmental reporting for all sample firms increases from 1992 to 1993 (2.5–4.5), is stable around 5.0 from 1993 to 1996 and increases again in 1997 (from 5.1 in 1996 to 8.2 in 1997). Patterns vary across industries. On average, firms in the consumer goods, water–energy–chemicals and drugs and, food and beverages industries report little information about their environmental management. For instance, throughout the 1992–1997 period, environmental reporting averaged 0.8 per year for consumer goods and services firms, 0.8 per year for water–energy– chemicals and drugs firms and 1.7 for foods and beverages firms. In contrast, distribution and heavy industry firms have more than doubled their level of environmental reporting from 1992 to 1997. Finally, high-tech and manufacturing firmsÕ environmental reporting does not exhibit any particular trend, with high-tech firms showing the highest average level of reporting among all industrial sectors. Table 2 shows Pearson cross-correlations between all variables used in the study. As expected, environmental reporting is positively related with risk (0.19), trading volume (0.28), widely held ownership (0.40), media visibility (0.44), fixed assets age (0.12), firm size (0.33) and SEC (0.42). Cross-correlations
Table 1 Sample firmsÕ average environmental reporting scores by year and by industry Consumer goods and services 1992 1993 1994 1995 1996 1997 Average for 1997–1992 N
0.0 0.6 0.4 0.4 0.8 2.0 0.8 28
Light and industrial manufacturing 0.0 1.5 2.7 4.0 5.7 3.0 3.3 15
Water, energy, chemicals and drugs 0.0 0.0 1.3 1.0 0.8 1.3 0.8 23
Distribution
2.5 5.8 10.0 11.7 13.5 13.0 10.7 31
Food and beverages 0.4 1.1 2.9 2.4 1.8 0.8 1.7 51
High technology
10.3 21.0 19.0 13.0 9.1 22.0 16.4 36
Heavy industry
3.8 1.7 2.0 3.5 5.2 7.5 4.0 62
Firms from all industries 2.5 4.5 5.2 5.0 5.1 8.2 5.4 246
52
Variable Reporting Risk Capital markets Trading volume Widely held ownership Foreign owner. Accounting return Market return Leverage Good/bad news Age Firm size SEC Consumer goods Manufacturing Water, energy Distribution Food beverages High-tech Heavy industry
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
2
3
4
5
6
0.19
0.05 0.06
0.28 0.09 0.02
0.40 0.05 )0.07 0.05 )0.05 0.15 )0.05 )0.01 )0.10 0.11 )0.01 0.08 )0.06 )0.09 0.31 0.26
7
8
9
10
11
12
13
14
17
19
20
0.42 )0.20 ).08 0.49 )0.18 )0.06 )0.16 0.22 0.07 )0.27 0.03 0.09 ) .10 )0.03 0.06 0.10 0.02 0.04 )0.13 )0.04 0.13 0.01 )0.01 )0.04
0.25
0.05
0.41
0.30 )0.14
0.08 )0.16 )0.07
0.20
0.10
0.08
0.33
0.34
0.18
0.09 )0.05 )0.02
0.02 )0.11
0.00 )0.13
0.24 )0.27 )0.08
0.01
)0.03 )0.04 0.25 )0.02 )0.01 )0.02 0.04 )0.08 )0.10 )0.04 )0.02 0.09 )0.30 0.04 )0.08 )0.02 )0.04 )0.04 0.12 0.04 0.02 )0.09
18
0.33 0.38 0.15
0.07
0.02
16
0.44 0.12 0.05 0.09 0.04 )0.04
0.16
0.08
15
0.06 )0.01 )0.03 )0.09 0.03
0.19 0.08
0.08
).11 0.13 0.02 )0.15
0.07 0.04 0.01 0.00 0.05 0.06 )0.04 0.02 )0.05 0.14 )0.07 0.02 )0.08 )0.10 )0.03 )0.09 )0.10 0.02 0.21 0.35 )0.10 0.03 0.36 )0.07 )0.07 )0.07 )0.05 0.11 0.03 )0.08 )0.03 0.00 )0.03 )0.11 )0.08 0.28 )0.07 )0.28 )0.13 0.32 0.11 )0.01 )0.09 )0.06 )0.16 )0.01 0.39 )0.10 )0.06 )0.05 0.03 n.r. n.r. n.r. n.r. n.r. n.r. n.r.
n.r. n.r.
n.r. n.r. n.r.
n.r. n.r. n.r. n.r.
n.r. n.r. n.r. n.r. n.r.
Cross-correlations greater than or equal to (smaller than or equal to) 0.08 ()0.08) are significant at 10% (two-tailed). n.r.: non-relevant cross-correlation since industry-specific dummy variables are, by definition, correlated with each other (a firm that is in one sector is automatically not in the other sectors).
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Table 2 Pearson cross-correlations between variables
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also corroborate the evidence shown in Table 1 with some industries (water– energy–chemicals and drugs, heavy industry) exhibiting higher levels of environmental reporting and other sectors (consumer goods, distribution, high-tech) showing lower levels of environmental reporting. No cross-correlation among explanatory variables is higher than 0.39. However, some information costs and proprietary costs variable do seem to overlap with control variables such as firm size and SEC. For instance, firm size is significantly correlated with risk (0.38), capital markets (0.15), trading volume (0.41), widely held ownership (0.33), leverage (0.14) and media exposure (0.21). SEC is also associated with trading volume (0.30), widely held ownership (0.34) and media exposure (0.35). In light of these findings, and to ascertain the incremental contribution of each set of variables in explaining environmental reporting, hierarchical regressions are used to introduce explanatory variables in blocks. 4.2. Determinants of environmental reporting 4.2.1. Environmental reporting as a continuous variable––control and experimental models Columns 3 and 4 of Table 3 show results from two distinct pooled crosssectional ordinary least squares (OLS) regressions between environmental reporting and control variables (column 3) or experimental variables (column 4). As a group, control variables (industry, fixed assets age, firm size and SEC) explain 39% of overall variance in environmental reporting. As expected, firm size and SEC are associated with more extensive environmental reporting. The experimental model regression includes only information and proprietary costs variables as well as media visibility. As a group, these experimental variables explain 28.6% of overall variance in environmental reporting. There is evidence that information costs (Hypothesis 1) and media visibility (Hypothesis 3) drive a firmÕs environmental reporting. However, there is only weak evidence in support of Hypothesis 2, with leverage being negatively associated with environmental reporting. 4.2.2. Environmental reporting as a continuous variable––full model Column 5 of Table 3 shows the results from a pooled cross-sectional OLS regression between environmental reporting and its determinants, combining all variables from the control and experimental models. The full model regression explains 43.3% of overall variance ðp 6 0:000, two-tailed), a result that confirms the initial diagnostic that there is significant overlap in explanatory power between experimental (adjusted R-square of 28.6%) and control (adjusted R-square of 39.0%) variables.
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Table 3 Pooled cross-sectional regressions of the relation between environmental reporting and its determinants (n ¼ 241) Explanatory variable
Prediction
Dependent variable: firm-specific environmental reporting Control modela Experimental model Full modela 6.19b (4.31)c;f
Intercept Information costs Risk Capital markets Trading volume Widely held ownership Foreign ownership
þ þ þ þ þ
3.32 1.89 3.15 5.58 2.72
Proprietary costs Accounting return Market return Leverage
þ þ )
0.45 (0.04) 1.36 (1.01) )1.39 ()1.72)e
)0.26 ()0.03) 1.92 (1.43)d )1.40 ()1.86)e
Media visibility Good news/had news
þ
3.88 (5.50)f
2.33 (3.28)f
Control variables Fixed assets age Firm size SEC
þ þ þ
Adjusted R2 F statistic Incremental R2 : Experimental ) Full Incremental R2 : Control ) Full
(2.45)f (1.19) (1.47)d (5.55)f (1.97)f
)0.01 ()0.25) 1.36 (3.76)f 3.00 (1.71)e 39.0% 11.96f
1.83 1.87 3.85 2.55 1.78
(1.29)e (1.29)e (1.67)e (2.29)f (1.36)e
)0.03 ()0.81) 0.61 (1.40)e 1.53 (0.83) 28.6% 11.66f
43.3% 8.98f 17.5%f 6.2%f
a
Industry-specific and year-specific intercepts not reported. Coefficient (t statistic). c T statistic. d p 6 0:10, one-tailed for regression coefficients and two-tailed for regressionsÕ explanatory power. e p 6 0:05, one-tailed for regression coefficients and two-tailed for regressionsÕ explanatory power. f p 6 0:01, one-tailed for regression coefficients and two-tailed for regressionsÕ explanatory power. b
However, F -tests reveal that each set of variables has incremental explanatory power over the other. All variable-specific variance inflation factors 11 are found to be smaller than 10.0, thereby providing no indication of multi-
11 The variance inflation factor (VIF) for Xj is 1=1 RSQj , RSQj being the R-square from the regression of Xj on remaining k 1 predictors. If Xj is highly correlated with the remaining predictors, its VIF is very large.
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collinearity. At 1.89, the Durbin–Watson statistic does not suggest the existence of autocorrelation. Coefficients for all five information costs proxies are in the expected directions. Environmental reporting is positively related to risk (1.83; t ¼ 1:29, p 6 0:10 one-tailed), capital markets (1.87; t ¼ 1:29, p 6 0:10 one-tailed), trading volume (3.85; t ¼ 1:67, p 6 0:05 one-tailed), widely held ownership (2.55; t ¼ 2:29, p 6 0:01 one-tailed) and foreign ownership (1.78; t ¼ 1:36, p 6 0:10 one-tailed). Thus, consistent with Hypothesis 1, in determining their environmental reporting strategy, firms appear to be sensitive to investorsÕ information needs, as proxied by the five information costs variables. Among proprietary costs variables, as expected, an increase in market return (1.92; t ¼ 1:43, p 6 0:10 one-tailed) and a decrease in leverage ()1.40; t ¼ 1:86, p 6 0:05 one-tailed) are associated with additional environmental reporting. However, accounting return is not associated with environmental reporting. These results, which are consistent with Hypothesis 2, suggest that firms in good financial condition engage in more extensive environmental reporting while poorly performing firms minimize the level of environmental information they provide to investors. The coefficient for media visibility (2.33; t ¼ 3:28, p 6 0:01 one-tailed) suggests that, consistent with Hypothesis 3, active media monitoring influences the extent of a firmÕs environmental reporting. In fact, it could be inferred that firms with a more aggressive environmental reporting strategy may also be more active in using the media. Among control variables, only firm size is significantly associated with more environmental reporting (0.61; t ¼ 1:40, p 6 0:10 one-tailed). Except for water, energy, chemicals and drugs firms and for heavy industry firms, all industry membership coefficients are negative at conventional significance levels.
4.3. Sensitivity analyes––measurement of environmental reporting 4.3.1. Firm-specific environmental reporting relative to annual industry median In light of the apparent importance of industry membership in explaining a firmÕs environmental reporting, an additional analysis is performed with firmspecific environmental reporting scores net of year and industry-specific median environmental reporting scores. These results are presented in column 3 of Table 4. As a group as well as individually, control variables such as fixed assets age, firm size and SEC do not add to our understanding of environmental reporting when used concurrently with information costs, proprietary costs and media visibility variables (incremental R-square of 0.1%; p > 0:01; not reported). The regression is statistically significant (adjusted R-square: 11.6%; p 6 0:01 two-tailed). The reduction in adjusted R-square from the regression shown in
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Table 4 Sensitivity analyses of the relation between environmental reporting score and its determinants (n ¼ 241) Variable
Prediction
Logit regressiona Dependent variable: 1 if environmental reporting score >2; 0 if environmental reporting score 6 2
)3.32b
Intercept Information costs Risk Capital markets Trading volume Widely held ownership Foreign ownership
OLS regression Dependent variable: firm-specific environmental reporting less annual industry median
þ þ þ þ
0.59 1.96d 5.05e 2.14e
1.07c 1.46d )0.50 0.78c
þ
0.87
2.48e
þ þ )
)2.56 2.09d )0.93d
3.46 1.27d )0.94e
Media visibility Good news/bad news þ
1.34e
1.44d
Control variables Fixed assets age Firm size SEC
)0.01 0.14 0.44
0.05 0.46d )0.43
Adjusted R2 11.6% F statistic 3.62e
Pseudo R2 47.6%f Chi-square 155.9e
Proprietary costs Accounting return Market return Leverage
þ þ þ
a
Industry-specific and year-specific intercepts not reported. Coefficient. c p 6 0:10, one-tailed for regression coefficients and two-tailed for regressions explanatory power (F statistic). d p 6 0:05, one-tailed for regression coefficients and two-tailed for regressions explanatory power (F statistic). e p 6 0:01, one-tailed for regression coefficients and two-tailed for regressionsÕexplanatory power (F statistic). f Cox and Snell r-square. b
Table 3 is due to the elimination of fixed year and industry effects from the regression and does indicate the relative importance of industry membership in determining environmental reporting. Overall, inferences to be drawn from information costs, proprietary costs, media visibility and control variable coefficients are highly similar to the evidence presented in Table 3 except that risk
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and foreign ownership are no longer statistically significant at conventional levels. Hence, there is still evidence that is consistent with the predictions contained in Hypotheses 1–3. 4.3.2. Firm-specific environmental reporting as a dichotomous variable The analysis presented in Table 3 relies on the assumption that environmental reporting is a continuous variable that is measured with a minimal margin of error. However, there are a fair number of firms without any relevant environmental reporting in any given year and the measurement of environmental reporting does have some interpretative aspects. Therefore, for sensitivity purposes, environmental reporting scores are recoded in a dichotomous fashion with environmental reporting scores greater than 2 being coded 1 and scores less or equal than 2 being coded 0. The cutoff point, 2, is the sampleÕs median level of environmental reporting. These relative environmental reporting scores are then analyzed using a logistic regression (column 4 of Table 4). Results from incremental significance tests corroborate findings reported in Table 3 as both the control set of variables and the experimental set of variables contribute in explaining a firmÕs environmental reporting status. Only the results for the full model logit are now explicitly discussed. As expected, among information cost variables, risk (1.07; p 6 0:10, onetailed), capital markets (1.46; p 6 0:05, one-tailed), Widely held Ownership (0.78; p 6 0:10, one-tailed) and foreign ownership (2.48; p 6 0:01, one-tailed) are associated with more extensive environmental reporting. Overall, these findings provide partial support for Hypothesis 1. Among proprietary costs, results are similar to the ones reported in the OLS regression (Table 3) with environmental reporting being associated positively with market return (1.27; p 6 0:05, one-tailed) and negatively with leverage ()0.94; p 6 0:01, one-tailed). Both findings are consistent with Hypothesis 2. Finally, consistent with Hypothesis 3, media visibility (1.44; p 6 0:05, one-tailed) is associated with more extensive environmental reporting. Among control variables, only firm size (0.46; p 6 0:05, one-tailed) is associated with a high level of environmental reporting. 4.4. Additional sensitivity analyses To assess the resultsÕ robustness to the measure of environmental reporting, additional analyses are also performed. First, one-year lagged environmental reporting is added to the regression model. Such a specification explicitly assumes that environmental reporting follows a random walk, with current yearÕs disclosure being the best predictor of next yearÕs disclosure. Second, the pooled regression is reestimated without outliers (identified using
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Belsh–Kuhley procedure, Hair et al., 1998, p. 218). Results from these regression analyses (not reported) using alternate specifications provide similar results to those reported in Tables 3 and 4. Year-specific regressions are also performed (not reported). However, inferences from such regressions are not entirely reliable considering the small number of degrees of freedom in each annual regression (between 11 and 25). In fact, adjusted R-squares from these regressions are found to be quite volatile. Z statistics (Z1 and Z2 ) are then computed to evaluate if mean t statistics for the period under investigation are statistically different from zero (see Barth and McNichols, 1994, p. 200, for a description of both tests). 12 Results from these Z statistics then allow conclusions to be drawn for the overall period. Overall, results from annual regressions are consistent with the results obtained from the pooled regression reported in Table 3.
5. Conclusion 5.1. Overview of findings By investigating the determination of environmental reporting by French firms, our study extends Cormier and Magnan (1999) approach into a continental Europe context. Our main results suggest that economically derived variables such as information costs (risk, reliance on capital markets, trading volume, ownership) and proprietary costs (leverage, profitability) are significant determinants of a firmÕs environmental reporting strategy (Hypotheses 1,2 respectively). Moreover, corporate environmental reporting does appear to be related to a firmÕs media visibility (Hypothesis 3). Results also suggest that environmental reporting is conditioned by industry membership. That corporate disclosure strategies seem to be determined in a similar way, irrespective of a given countryÕs socio-cultural environment, is an illustration of the strong impact of globalized stock markets on fostering convergence in corporate practices. Further analyses are required to validate this claim but it is a promising avenue for future research. The evidence that large firms tend to report more extensively about their environmental management than small firms would be consistent with them subject to more intense external monitoring. Significant inter-industry differences in environmental reporting are also found.
12
Z statistics P are computed in the following manner (Barth and McNichols, 1994, p. 200): Z1 ¼ 1=N 1=2 ð tj =ðkj =ðkj 2ÞÞ1=2 Þ; Z2 ¼ averageðtÞ=ðstandard deviationðtÞ=ðN 1Þ1=2 .
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5.2. Comparison with Cormier and Magnan (1999) and contribution These findings contribute to the literature in the following ways. First, it appears that French firms provide less extensive voluntary environmental reporting than comparable North American firms (see Cormier and Magnan, 1999, p. 440, for Canada and Walden and Schwartz, 1997, pp. 138–144, for the United States). These findings are observed despite the use of a more comprehensive coding instrument, a context that is less litigation-prone and French societyÕs perceived environmental concerns. Second, in a manner similar to Canadian firms, French firmsÕ disclosure decisions do appear to be based upon an assessment of their information economics position and of their investorsÕ needs. Such a finding contrasts with the traditional view that French firmsÕ disclosure is regulatory-driven, e.g., use of the ‘‘Plan Comptable’’ (or Accounting Plan) for financial reporting (Gray, 1988, p. 12). In fact, French firmsÕ environmental reporting is related to their stock market performance: Cormier and Magnan (1999) do not observe such a relation for their sample of Canadian firms. Third, French firms appear to be quite sensitive to public perceptions, as proxied by their media visibility, when determining their environmental reporting strategy. This finding confirms French firmsÕ growing accountability to external stakeholders. In that regard, no evidence is provided by Cormier and Magnan (1999). Fourth, while firm size is a major determinant of environmental reporting in Cormier and Magnan (1999), its relative importance is much less for French firms. This finding suggests that environmental reporting in France is less institutionalized or subject to ritual than in Canada. Finally, in both countries, industry membership does appear to play an important role in determining a firmÕs environmental reporting strategy. 5.3. Limitations and future research The studyÕs limitations include the narrow scope of its sample, the way environmental reporting is measured and its reliance on a specific, but perhaps limiting, conceptual framework. Future research could consider contrasting environmental reporting predictions from different theoretical frameworks. The determination of environmental reporting in multi-countries samples could be considered also. This would allow richer disclosure models to emerge.
Acknowledgements Financial support from the Fonds FCAR (Quebec) and from the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged.
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Appendix A. Environmental reporting ratings Environmental expenditures and risks: Pollution control equipment and facilities Past and current expenditures Future estimates of expenditures Future estimates of operating costs Financing Environmental debt Risk provision Provision for charge
Land remediation and contamination: Sites Efforts of remediation (present and future) Cost/potential liability (provisions for site remediation)
Spills: Number Nature Efforts to reduce Liabilities (actual and potential)
Laws and regulations: Litigation (present and potential) Fines Orders to conform Corrective actions Incidents Future legislation or regulation requirements
Sustainable development reporting: Conservation of natural resources Recycling Life cycle information
Pollution abatement: Air emission information
Environmental management: Environmental policies or company concern for the environment
Water discharge information Solid waste disposal information Control, installations, facilities or processes described Compliance status of facilities Noise and odours
Environmental management system Environmental auditing Goals and targets Awards Department or office for pollution control ISO 14000 Participation in elaboration of environmental standards Joint projects with other firms on environmental management
Rating scale: 3, item described in monetary or quantitative terms; 2, item described specifically; 1, item discussed in general.
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