Abstract
Despite the potential benefits of a firm’s corporate environmental commitment to its information environment, few empirical studies examine the relationship between corporate environmental responsibility (CER) and firm information risk in emerging markets. In such markets, better corporate transparency and less information asymmetry are becoming increasingly important owing to firms’ poor governance structures, the lack of protection for investors, the substantial participation of unsophisticated individual investors, and so on. Using a comprehensive sample of firms engaged in CER for the period from 2005 to 2016, we find that a firm’s CER score has a negative effect on measures of firm information risk in the emerging Korean market, which is characterized by poor corporate governance and a strong influence of owner–managers. Furthermore, our results show that the negative relationship between CER and information risk is more pronounced for firms with higher uncertainty (lower transparency). Thus, we conclude that CER enhances a firm’s information environment by reducing investors’ information risk.
Highlights
Environmental protection has largely been a government responsibility with the private sector reacting to government regulations, sanctions, and incentives
Francis et al [16,17] empirically demonstrate the theoretical concepts of Easley and O’Hara [18] and Lambert et al [19] by analyzing the effect of accruals quality (AQ) on the cost of capital and stock returns, where AQ serves as a proxy for firm-level information risk
Using a sample of 2,314 observations of firms listed on the Korea Exchange for the period from 2005 to 2016, we found that corporate environmental activity is negatively related to firm information risk
Summary
Environmental protection has largely been a government responsibility with the private sector reacting to government regulations, sanctions, and incentives. Francis et al [16,17] empirically demonstrate the theoretical concepts of Easley and O’Hara [18] and Lambert et al [19] by analyzing the effect of accruals quality (AQ) on the cost of capital and stock returns, where AQ serves as a proxy for firm-level information risk (precision or asymmetry). They find that the costs of debt and capital are greater for firms with poor AQ than they are for firms with good AQ. To the best of our knowledge, this study is the first to present empirical evidence substantiating the effect of CER on information risk in Korea
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