The relationship between environmental disclosure quality and earnings quality: a panel study of an emerging market
| Pages | 326-347 |
| DOI | https://doi.org/10.1108/JABS-03-2018-0084 |
| Published date | 21 March 2019 |
| Date | 21 March 2019 |
| Author | Mohammad Alipour,Mehrdad Ghanbari,Babak Jamshidinavid,Aliasghar Taherabadi |
| Subject Matter | Strategy,International business |
The relationship between environmental
disclosure quality and earnings quality:
a panel study of an emerging market
Mohammad Alipour, Mehrdad Ghanbari, Babak Jamshidinavid and Aliasghar Taherabadi
Abstract
Purpose –The purpose of this paper is to examine the association between corporate environmental
disclosurequality (EDQ) and earnings quality(EQ).
Design/methodology/approach –The paper uses earnings persistence and accruals quality as a
measures of EQ. The paper alsouses panel data regression to examine the association between EDQ
and EQ for a sample of 107 Iran non-financial firms. Two different theoretical frameworks are used to
clarify whether and to what extentan association may exist as an explicit relationship betweenEDQ and
EQ.
Findings –After controlling for severalfirm-specific characteristics, the results show that between2011
and 2016, therehas been a significant positive relationship betweenEDQ and EQ.
Practical implications –This study shedslight on the relevance of regulatingcorporate reporting within
a setting where companiesare already voluntarily reporting on environmental information.Findings have
implicationsfor policymakers who have mandated or consideringmandating environmental reporting.To
the policymakers, in particular, this study highlights the need for incorporating, within the listing rules,
minimumrequirements in relation to the nature and contentof environmentalreports.
Social implications –The findings have implications for stakeholders in terms of effective information
quality. The findingsare important as more environmentally responsiblefirms may provide higher quality,
more reliableand more transparent informationto meet the ethical expectations of stakeholders.
Originality/value –This is the first study in Iran that considered the impact of EDQ on EQ. This study
contributes to the literature on the relationshipbetween EDQ and EQ by showing that the EDQ in Iran is
associatedwith the EQ.
Keywords Corporate social responsibility, Emerging markets, Voluntary disclosure, Earnings quality
Paper type Research paper
1. Introduction
During the past few decades, growing public concerns regarding the environment has
pressured companies to disclose the environmental impacts of their activities. Moreover,
demands and concerns of different stakeholders, including customers, investors,
employees, creditors, policy-makers and legislators, has made firms provide reports about
their environmental responsibility (Gray et al., 1996). Along with the traditional users of
financial information (i.e. shareholders and creditors), these stakeholders are interested in
the environmental behavior of businesses and demand information about the environmental
impact of their activities (Moneva& Llena, 2000).
Environmental reporting emerged in the 1980s as a major part of corporate disclosures.
Although there is no universally accepted definition of environmental reporting and it is
generally considered a part of corporate social responsibility (CSR), Wilmshurst and Frost’s
(2000) definition of the term has been widely used: “those disclosures that relate to the
Mohammad Alipour,
Mehrdad Ghanbari and
Babak Jamshidinavid are
all based at the Department
of Accounting and
Management, Kermanshah
Branch, Islamic Azad
University, Kermanshah,
Iran. Aliasghar Taherabadi
is based at the Department
of Accounting and
Management, Kangavar
Branch, Islamic Azad
University, Kangavar, Iran.
Received 12 March 2018
Revised 14 June 2018
5 November 2018
Accepted 14 December 2018
PAGE 326 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 13 NO. 2 2019, pp. 326-347, ©Emerald Publishing Limited, ISSN 1558-7894 DOI 10.1108/JABS-03-2018-0084
impact company activities have on the physical or natural environment in which they
operate”.
Environmental reporting is an indispensable part of the social reporting of companies
(Orlitzky et al.,2011). Advocates of environmental reporting argue that a firm’s formulation
of its environmental plan is positively influenced by pressure from customers, shareholders,
government regulatory agencies and neighborhoods and community groups (Henriques
and Sadorsky, 1999).
A review of the literature shows thatresearchers have used various methods and theories to
examine the relationship between environmental reporting and corporate financial
performance metrics, corporate governance and/or profit management (evaluated by
optional accrual items) (Andrikopoulos & Kriklani, 2013;Zeng et al., 2010;Cormier et al.,
2005;Prasad et al.,2016;Kathy Rao et al., 2012;Post et al., 2011;Meng et al.,2014;Sun
et al.,2010
;Patten & Trompeter, 2003).
Corporate transparency and accountability are very important for investors and other
stakeholders, and earnings quality (EQ) can provide useful information about the financial
performance of firms (Dechow et al., 2010). EQ is defined as “the degree to which reported
earnings capture economic reality, in order to appropriately assess a company’s financial
performance” (Krishnan and Parsons, 2008). EQ refers to the amount of earnings
attributable to higher sales or lower costs rather than artificial profits created by accounting
anomalies. In this research, we use two different measures of EQ: accruals quality and
earnings persistence. Thus, withthis accountability and firm performance relationship being
recognized, it would therefore be highly informative to be able to explore whether, and to
what extent, a relationship exists between a firm’s environmental reporting and their
earnings. This would add to the accountability and firm performance portfolio, particularly
for those wishing to assess the firm’s performance on returns. According to Martı
´nez-
Ferrero et al. (2015), there is still a gap in the literature regarding the effect of environmental
reporting (based on the GRI G4 Guidelines) on the quality of financial information.
Therefore, the relationship between the quality of environmental disclosure and EQ can be
the subject of empirical research. In this research, we aim to fill this gap in the accounting
literature and seek to answer whether better environmental reporting quality leads to higher
EQ.
According to Unerman and Bennett (2004), accountable businesses are those that address
social, ethical, economic and environmental concerns. We predict that more
environmentally responsible firms may provide higher quality, more reliable and more
transparent financial information to meet the ethical expectations of stakeholders. Unlike
previous studies that focused on earnings management or one dimension of EQ (i.e.
earnings persistence), this research examines the relationship between quality of
environmental reporting and EQ (accrualquality and earnings persistence). In fact, we seek
to determine whether a non-financial issue like environmental reporting has any impact on
EQ. Investigating the relationship between quality of environmental reporting and EQ can
lead to useful findings.
Examining the relationship between environmental reporting and EQ in Iran is important for
two reasons. First, Iran has an emerging capital market and a unique religious, social and
political system. Social and environmental reporting in Iran is voluntary, which distinguishes
it from advanced countries and can help expand the literature on voluntary disclosures. Ali
et al. (2017) showed that corporate social reporting is significantly different in advanced
and developing countries, as in developing countries, there is little public pressure for
social and environmental disclosures. This study can therefore be helpful for policymakers,
investors and other stakeholders who require environmental information. Second, this
research can help improve social and environmental reporting and promote disclosures
and transparency to protect the interests of all stakeholders based on the Code of
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