Environmental disclosure quality in large German companies: Economic incentives, public pressures or institutional conditions?

Abstract

Investors and stakeholders in continental Europe are becoming increasingly concerned about corporate environmental policies. As a result, many firms are voluntarily increasing the extent of their environmental disclosure in their annual report. While mostly unregulated, corporate environmental disclosure does have potential economic significance considering the scarcity of alternative information sources. The purpose of this study is to identify determinants of corporate environmental disclosure using multi-theoretical lenses that rely on economic incentives, public pressures and institutional theory. The study focuses on large firms from a continental Europe country, Germany, with a distinct legal and regulatory context and where environmental concerns are especially acute.  Results show that Risk, Ownership, Fixed Assets Age, Firm Size as well as routine determine the level of environmental disclosure by German firms in a given year. Moreover, consistent with institutional theory, results suggest that German firms' disclosure is converging over time. Overall, results strongly suggest that environmental disclosure is multidimensional and is driven by complementary forces.

Keywords:

• Environmental disclosure
• disclosure quality
• information costs
• routine
• public pressures

Acknowledgements

The authors wish to express their appreciation to the Social Sciences and Humanities Research Council of Canada, the Fonds FQRSC (Québec) and the Lawrence Bloomberg Chair in Accountancy for financial support. Also, the authors wish to acknowledge the helpful comments of Walter Aerts from Antwerp University, workshop participants at Laval University (Québec) and conference attendents at the European Accounting Association in Athens.

Notes

¹Based on a survey of the top 100 firms in each of ten countries, half of them in the European Union, KPMG finds that environmental disclosure increased significantly in all European countries from 1996 to 1998. In contrast to European trends, the proportion of top American firms disclosure environmental information fell significantly for the same period. According to KPMG, this could be due to resentment among American firms that they are suffering over-regulation plus fears that giving too much information would open the door to lawsuits.

²Recently, the European Commission has published detailed recommendations on the recognition, measurement and disclosure of environmental issues (Official Journal of the European Communities, 13 June 2001, L 156/33–42).

³However, in the absence of a specific event such as a disaster, Buhr (2001) shows that managers do not see themselves as accountable to report about their environmental performance in connection with NAFTA (North American Free Trade Agreement) although this treaty has a direct impact on the environment (e.g. Mexican factories along the US border).

⁴Recently, Leuz (2003) shows that, for New Market German firms, the choice between IAS and US GAAP is of little consequence for information asymmetry and market liquidity.

⁵For instance, respondents to an IRRC (Investors Responsibility Research Center) survey identified the disclosure of environmental facts such as environmental debts as highly useful and relevant (IRRC, 1992).

⁶For the fourth time IÖW and future e.V. assess the quality of German environmental reports in the ‘Ranking of Environmental Disclosure’. Results are published in the latest edition of the German business journal CAPITAL. On hundred and fifty of the largest companies, according to employees and turnover, were examined (industry (100), banking (10), insurance agencies (10), trade (20), service (10)). As before, the printing and publishing industry is in the lead. The winner of the Ranking 2000 is the report from Mohn Media.

⁷In a comparative analysis of corporate environmental reporting from 1985 to 1995, Adams and Kuasirikun (2000) find that the proportion of German companies reporting environmental information and the mean volume of such reporting is consistently higher compared to UK firms through the period.

⁸Results are not sensitive to the use of a different cut-off point, i.e. between 5% and 20%. Moreover, as another proxy for capital market reliance (e.g. Nagar et al., 2003), we use the change in the number of stocks outstanding over the last two years. Again, results remain similar.

⁹In the current study, 31% of sample firms are widely held.

¹⁰Other potential indicators for proprietary costs such as unionization and regulations are not firm-specific in the present context since all sample firms are unionized and specifically regulated. However, since unions as well as regulations tend to be industry-specific, dummy variables are introduced into the analysis to capture any relation between a given industry and environmental reporting.

¹¹Under Securities and Exchange Commission (SEC) requirements, firms must report about the impact of current and future environmental legislation, environmental legislation fulfilment, present and future environmental expenditures, environmental debts that exceed 5% of their total debts, and lawsuits related to polluting activities.

¹²For example, for an increase of 10% in beta (∂ X _i ), for the calculation of the prediction rates using 0.50 as cut-off level (P=0.50):

¹³ z-Statistics are computed in the following manner: z ₁=1/N ^1/2 (∑t _j /(k _j /(k _j −2)^1/2) z ₂=(average(t)/standard deviation(t))/(N−1)^1/2