Are third-party assurances preferable to third-party comments for promoting financial accountability in environmental reporting?

Abstract

The purpose of this paper is to provide empirical insights into whether third-party reviews such as comments and assurances promote financial accountability in environmental reporting by ensuring the credibility of reported information. This paper empirically tests the hypothesis, based on voluntary disclosure theory, that companies proactively improving their environmental performance and management enhance their shareholder value by reporting environmental information with high credibility. The main findings from a regression analysis of data from Japanese manufacturing companies selected from the Nikkei 500 Index for the period 2007–2015 are as follows. Although companies proactively improving their environmental performance and management are more likely to report environmental information voluntarily, those that do so are unlikely to have any higher shareholder value than companies that do not report this information. However, if companies report more credible information through third-party reviews, especially third-party comments, they improve their shareholder value more than companies that merely publish their own environmental information. These findings support the view that third-party reviews promote financial accountability in environmental reporting. In other words, environmental reporting fulfills the financial accountability role assumed by voluntary disclosure theory only after the credibility of reported information is ensured by third-party reviews. Note that this does not apply to third-party assurances. Therefore, our findings imply that the improvement of environmental performance and management alone is insufficient to enhance shareholder value; companies should also report credible environmental information through third-party comments. On the other hand, this does not mean that any kind of third-party review is positively evaluated by the stock market. An expectation gap in third-party assurances may exist.