Voluntary disclosure of greenhouse gas emissions, corporate governance and earnings management: Australian evidence

This study examines the impact of corporate governance mechanisms on greenhouse gas emission disclosure and the extent to which the disclosure of greenhouse gas emission information is associated with earnings management and the liquidity of firms’ shares. The sample for this study is drawn from Australian publicly listed firms that voluntarily disclosed their greenhouse gas emission information through voluntary disclosure channels such as the Carbon Disclosure Project, annual reports, standalone sustainability reports, and corporate websites between 2006 and 2009. This study adopts the Carbon Disclosure Project 2010 scoring methodology to measure the quality of greenhouse gas emission disclosure. A content analysis was used to score the quality of voluntary disclosures in annual financial and sustainability reports, and the information provided on company websites. In this thesis, two competing views: the stakeholder value maximisation view and the shareholder expense view are examined in relation to the impact of corporate governance mechanisms on greenhouse gas emission disclosures and the extent to which the disclosure of greenhouse gas emission information is associated with earnings management. The stakeholder value maximisation view predicts that firms engage in socially responsible initiatives such as greenhouse emission reduction strategies and targets associated with climate change to fulfil the legitimate interests of stakeholders. On the other hand, the shareholder expense view suggests that firms engage in socially responsible initiatives such as greenhouse gas emission reduction initiatives at the expense of shareholders. This research contributes several new findings to the literature. Firstly, with regards to the relationship between corporate governance mechanisms and voluntary disclosure, this thesis has found that effective corporate governance mechanisms such as greater board independence, the absence of Chief Executive Officer duality, the presence of board gender diversity, decrease in directors’ share ownership, increase in institutional ownership and smaller size of the audit committee drive voluntary greenhouse gas emission disclosure. These results suggest that firms with effective corporate governance mechanisms focus on the legitimate interests of a broader group of stakeholders with regards to climate change, particularly greenhouse gas emission mitigation targets. This is consistent with the stakeholder value maximisation view of firms which is based on stakeholder theory and legitimacy theory as opposed to the shareholder expense hypothesis which is based on agency theory. These results are robust to control for self-selection using the Heckman two-stage sample selection procedure. Our results are also robust to the exclusion of financial sector firms which arguably could be affected by the Global Financial Crisis. Secondly, this research finds a weak negative relationship between voluntary disclosure of greenhouse gas emission disclosure and earnings management. This study has found only weak support for the stakeholder value maximisation view, suggesting that stakeholder-focused firms are less likely to engage in earnings management. In addition, Australian firms are trying to maintain a balance between the quality of greenhouse gas emission disclosure and the quality of financial reporting. As a result, they have difficulty satisfying multiple objectives simultaneously. These results are robust for endogeneity controls using the two-stage least squares method. Thirdly, this study has found that the voluntary disclosure of greenhouse gas emission information by firms has an impact on the liquidity of that firm’s shares. This suggests that firms that disclose more greenhouse gas emission information voluntarily experience improved liquidity of their shares. These results support the view of Balakrishnan et al. (2013) that managers’ decisions to disclose more voluntary information could directly affect the liquidity of their firms’ shares. Managers may shape the liquidity of their firms’ shares by providing more greenhouse gas emission information voluntarily through the Carbon Disclosure Project and their corporate reporting channels. Finally, larger and more visible firms tend to provide more information regarding climate change related due to social pressures. Firms with higher growth opportunities tend to provide less greenhouse gas emission information. Firm leverage and age are positively associated with the quality of greenhouse gas emission disclosure; indicating that longer-established firms with more leverage may disclose more the quality of greenhouse gas emissions in order to maintain their reputation among the stakeholders