Abstract
This paper examines the value relevance of corporate environmental performance (CEP) using individual environmental performance indicators and multidimensional constructs derived from Trumpp et al. (2015). Accounting information can be described as ‘value-relevant’ when the information in financial statements has the ability to explain firm value. In recent years, stakeholders such as governments, public institutions, firms, customers, and local communities have recognized the importance of corporate environmental performance. Thus, one of the main research questions is whether corporate environmental performance is value relevant. The empirical results in this paper indicate that only a few individual environmental performance indicator variables are value relevant, while most environmental performance constructs have a significant impact on firm value. Our findings suggest that firm value significantly increases with improved environmental management or operational performance. In addition, environmental performance indicators and environmental performance constructs have a significant impact on firms in environmentally sensitive industries, confirming the notion of higher value relevance of environmental information for firms in these industries. This study contributes to prior literature by carrying out a comprehensive analysis on the multidimensional nature of corporate environmental performance and its impact on value relevance. This paper also reconciles extant literature on the construct validity of environmental performance indicators and environmental performance constructs by formulating standardized composite measures of CEP following Larker et al. (2007).
Highlights
In Korea, the publication of sustainability reports has increased steadily in recent years as stakeholders such as governments and public institutions, firms, customers, and individuals in local communities recognize the importance of corporate environmental performance
Using observations of 218 Korean firms for which both financial and environmental performance data were available for the years 2009 to 2013, we find that some environmental performance indicators (EPI) show additional value relevance compared to the traditional Ohlson model, while others do not
It is worthwhile to note that adding some EPIs, such as POL2, energy consumption (ENERGY), and waste produced (WASTE) cause multicollinearity problems, indicated by high Variance inflation factors (VIFs)
Summary
In Korea, the publication of sustainability reports has increased steadily in recent years as stakeholders such as governments and public institutions, firms, customers, and individuals in local communities recognize the importance of corporate environmental performance (hereafter CEP). Scholars with considerable interest in CEP examine whether capital markets utilize environmental information in the process of firm valuation [2,3,4]. They empirically investigate whether environmental information can provide additional explanatory power, adding the value relevance of accounting information. Since each research has its own proxy for environmental performance, McWilliams and Sigel [6] warn that the empirical findings in prior studies cannot be reliably compared For this reason, it is necessary to establish an explicit and comprehensible definition of CEP and clear indicators for common use in research [7,8]
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
