Institutional Investor Legal Origins and Corporate GHG Emissions Disclosure Quality

Abstract

The disclosure of corporate environmental performance is an increasingly important element of a firm’s ethical behavior. Building on stakeholder theory and legitimacy arguments as well as prior research that proposes legal origin as a major determinant of corporate social responsibility (CSR), we examine how foreign institutional ownership and its legal origin affect the quality of carbon disclosure. Using a large sample of firms from 36 countries, we find that foreign institutional owner-ship from civil law countries improves the quality of a firm’s greenhouse gas (GHG) emissions reporting, as indicated by emissions verification levels and Carbon Disclosure Project scores. This relation is robust to addressing endogeneity and selection bias. This relation is more pronounced in firms from non-climate-sensitized countries, for which the gap between firms’ CSR standards and investors’ CSR targets is potentially larger, and in less international firms. Further analyses indicate that firms with a better GHG emissions reporting quality exhibit higher valuations.