(This paper appeared in the International Journal of Accounting and Finance, –
Inderscience Publications, Vol 3 , No 2, page 109-130,2011)
Determinants of Environmental Disclosures by Indian Industrial Listed Companies in
Their Websites: Empirical Study
Dr Prem Lal Joshi
Professor of Accounting , University of Bahrain, Bahrain
Email: joshi@buss.uob.bh
and
Dr. Mishiel Said Suwaidan,
Associate Professor of Accounting
Department of Accounting
Yarmouk University
Irbid, Jordan
Email: msuwaidan@yu.edu.jo
and
Dr. Rajesh Kumar
Assistant Professor of Finance,
Institute of Management Technology, Dubai.
Abstract
The purpose of this paper is to examine the factors influencing the level of environmental disclosure
information from a sample of 45 Indian industrial listed companies in their websites and annual reports.
The evidence shows that there is a tendency to disclose the environmental protection information but the
level of disclosures is still low. Multiple regression analysis shows a positive association between log of
total assets, and industry type with the disclosure index. Large sized firms which are heavily polluted,
tend to disclose higher level of information. However, profitability and financial leverage have no
impact on the disclosure level. The study’s findings help understand Indian industrial listed firms
behavior in terms of environmental disclosure.
Key words: Disclosure index, environmental information, signal theory, firm size, industry type, India.
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Introduction
Environmentalism is both a societal and economic imperative for the modern world. Environmental
reporting has been seen as a way of increasing accountability of organizations regarding environmental
issues. There is a worldwide debate on the issue of environmental management, on the basis of evidence
about ecological degradation caused by economic development. In 1996, in US the Environmental
Protection Agency has identified 36,000 hazardous waste sites where 1,405 sites classified under National
Priorities List (NPL) to cleanup. The total expected cost to cleanup these sites due to ignorance about the
impact to human in the past can reach as high as $500 billion to $1 trillion over the next 50 years.
Traditionally development has been defined as a rise in GNP, or rise in personal incomes, or with
industrialization and technological advancement. Later on the consensus towards economic development
is focused in terms of reduction of poverty, inequality and unemployment for a developing economy.
Industrialization unabated has resulted in heavily polluted environment that adversely affected the quality
of life .World have started to realize that sustainable development is of prime importance than unhindered
industrialization for overall economic development. In this context the social responsibility of corporate
is of wider significance. Internationally regulatory efforts are geared towards reduction of the quantum of
pollution by making it commercially viable and an attractive unexplored business opportunity .Carbon
trading is one such positive initiative towards abating pollution internationally.
With the unprecedented growth of internet, globally companies use internet to disseminate financial and
non-financial information. Internet reporting is increasingly preferred by companies, as it has the
advantages of easy accessibility, instant availability, cost effective and environment friendly means of
disseminating information among all stakeholders.
Corporations have been using environmental issues to enhance their image in the public eye. Patagonia has a long term
goal to reduce its impact on environment at every level of its manufacturing and distribution process. Patagonia
donates 10 per cent of pretax profits to environmental groups. The Body Shop created a lucrative niche in the
cosmetics market by emphasizing reusable packaging and no animal testing. McDonald’s have collaboration with
environmental groups to minimize waste and increase use of recycled and recyclable materials. 3M’s Pollution
Prevention pays program initiated in 1975, was one of the first waste reduction efforts by a leading US Company.
Eastman Kodak built a fifty-million-pounds-a-year recycling plant for Kodak and the community at their Kingsport,
Tennessee facility. The plant, which serves a region of 500,000 people, won a national award from Keep America
Beautiful. IBM’s corporate environmental policy was initiated in 1970 .IBM has successfully eliminated CFC use from
its manufacturing operations .AT&T’s early phase out of CFCs saved the company hundreds of thousands of dollars in
tracking and labeling expenses by eliminating them from processes before the 1995 ban when labeling requirements
kicked in. On the other side, Du Pont successfully delayed the phase out of CFCs for fifteen years as the world's largest
producer. As the deadline approached, the company stepped up its promotion of the substitute of HCFCs instead of
developing alternatives. In 1991, Du Pont emitted 254 million pounds of toxic substances. That is more than twice as
much as Dow, BASF, Ciba-Geigy, Union Carbide, and Hoechst chemical companies combined.
United Technologies' failure to meet environmental requirements led to a $5.3 million fine, the imposition of a monthly
compliance audit, and coverage in the New York Times.
Source: Steven L Skalah, William J Russell, Journal of Corporate Accounting and Finance /winter 1993/94.
Indian Scenario
The economic reforms started by Government of India during early 90s, have paved way to rapid
economic development and accelerating the process of industrialization. As the industrialization is also
creating more environmental problems such as pollution, companies have started providing information
about their environmental performance and policies owing of increased accountability. At the same time,
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there has been a growing awareness internationally on the disclosure of environmental performance,
particularly from those firms that have a direct and substantial influence on the environment like
manufacturing, power generation, mining etc, to provide information regarding the environment
implications of their operations
Multinational Companies of European Union, United States of America (USA) and Japan are
strengthening their global presence in India. These international companies bring in their responsible
good practices thereby helping Indian companies to set higher international disclosure standards.
Environmental awareness among different Indian stakeholders gets strengthened with advancement in
communication technology.
As per the 42nd Constitutional Amendment Act made in 1976, it is the duty of the state and every citizen
“to protect and improve the environment and to safeguard the forests and wildlife of the country”. The
Water (Prevention and Control of Pollution) Act 1974, The Air (Prevention and Control of Pollution)Act
1981, The Environment Protection Act 1981 are three important acts made by Government of India to
translate the constitutional mandate into action .The National Conservation Strategy on Environment &
Development of 1992, the Policy Statement for Abatement of Pollution of 1992, and the National Forest
Policy of 1988 perhaps are the three documents related to the policy framework concerning
environmental protection in Indian context. These documentations aim
to control emissions from
production processes, lay down stringent equipment specifications that are required to be implemented by
the polluting industries for air quality regulations.
The Ministry of Environment and Forests is the apex body in India which is responsible for planning,
promotion, coordination and overseeing of Environmental programmes in India .Central Pollution Control
Board (CPCB) and State Pollution Control Board (SPCB) were set up under Water Act and form the
regulatory and administrative core .The CPCB have identified seventeen categories of industries (large
and medium) as highly polluting industries.
In order to minimize the global environmental problems, India has made the production and abatement
technology mandatory (Chakrabarti and Mitra, 2005).
The National Environmental Policy (NEP) 2006, approved by the Ministry of Environment and Forest
recommends the use of the use of “standardized environmental accounting practices and norms” in
preparation of statutory financial statements for large industrial enterprises, in order to encourage greater
environmental responsibility in investment decision-making, management practices, and public scrutiny.
The regulatory framework governing corporate disclosure in India includes the Companies Act 1956 and
the Securities and Exchange Board of India (Amendment) Act 2002. However, neither the company law
nor the accounting standards/guidelines issued by Institute of Chartered Accountants of India (ICAI)
prescribes disclosing norms for the environmental related matters in the corporate financial statements. In
such a case, poor environmental performance may bind them to non-disclosure or less disclosure
(Pramanik et al., 2007). Therefore, Indian companies disclose environmental information on a voluntary
basis.
Mastrandonas and Strife (1992) find that investors and other stakeholders are demanding more disclosure
of company environmental information because of their concerns about the magnitude of costs and
liabilities associated with environmental issues.
Objective of the Study
The main objective of this paper is to examine the relationship between environmental disclosure
practices of Indian industrial listed companies and the selected influencing variables. The multiple
regression technique is used to analyze the data.
Theory
In order to explain the reasons for the disclosure of environmental information by Indian industrial listed
companies, legitimacy theory is applied in this paper (see, Neu et al., 1998; Dowling and Pfeffer, 1975).
It is claimed that legitimacy theory is the most cited theory in social and environmental reporting
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(Gray et. al., 1995). Furthermore, it is argued that socio-political theories, such as legitimacy or
stakeholders theories provide a comprehensive perspective on environmental disclosure as they clearly
recognize the fact that organizations are evolving within the society that involves many social political
and institutional frameworks (see, Deegan, Rankin and Tobin, 2002; O’Donovan, 2002; Cormier and
Gordon, 2001; Roberts, 1992; Pattern, 1991). According to legitimacy theory, the organizations should
appear to consider the rights of the public at large and not merely those of the investors only. Dowling
and Pfeffer (1975) argued that organizations seek to establish congruence between social values
associated with or implied by their activities and the norms of acceptable behavior. When there exists a
legitimacy gap between the expectations of the society and organization’s value system, this may create
threats to organizations in the form of legal, economic and other sanctions.
Recently there have been concerns for environmental issues all over the world and India as a fast
developing country is, no exception. Bhate (2002) reports that the Indian respondents are most involved
with environmental issues, similar to the involvement of UK respondents. Economic liberation and
deregulation of Indian industries have created more awareness among Indians concerning environmental
issues; therefore, we expect that there is increased disclosure of environmental information in companies’
websites and annual reports in order to gain organizational legitimacy.
Another useful theory to explain the environmental reporting practice in Indian which perhaps overlaps with the
legitimacy theory, is the stakeholder theory. There are two strands of theory, namely, the normative
stakeholder theory and empirical stakeholder theory (Gray et. al., 1996). The Normative stakeholder
theory, the more relevant of the two, posits that an organization (this would mean any parties interested in
the corporate environmental performance including NGOs, government and the public at large) will report on the
environment simply because the ‘environment’ is one of its many stakeholders and its information needs must be
fulfilled. Thus, in the absence of any mandatory reporting, a company should report on the environment voluntarily
to discharge its environmental accountability to the public.
Literature Review and Hypotheses Development
Harte and Owen (1991) analyzed the annual reports of 30 British companies to investigate the
environmental reporting practices in their annual reports and suggested for external standards on
environmental reporting. Their study revealed that most of the environmental reporting was still at a
general level and very close to a mere general commitment to green issues.
Ahmed and Sulaiman (2004) examined the extent and type of voluntary environmental disclosures in
annual reports for the year 2000 by Malaysian companies belonging to construction and industrial
products industries. Their study concluded that the extent of environmental disclosure was very low. And
that the environmental information disclosed in annual reports was scattered all over the report and not
concentrated in a specific section.
Cunningham and Gadenne (2003) investigated whether an enhancement in environmental regulations acts
as a momentum for changes in annual report disclosure behavior, through an examination of voluntary
environmental disclosures by Australian corroborations during the Australian National Pollutant
Inventory (NPI) implementation period. They concluded that there is a relation between the level of
publicly disclosed pollution emissions of Australian companies and the quantity of voluntary
environmental disclosures in the annual reports of these companies. They further argued that
environmental regulation acts as an impetus for companies to include information on certain
environmental issues in the annual report.
Gray, Javad, Power and Sinclair (2001) examined the relation between corporate characteristics and
environmental disclosures by taking a sample of 100 UK companies drawn from the Centre for Social and
Environmental Accounting Research (CSEAR). The authors observed that the volume of disclosure in
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each individual year from 1988 to 1995 inclusive, together with the whole eight-year period, is related to
the turnover, capital employed, number of employees and profit, as larger and more profitable firms have
disclosed more environmental information.
Similar to the above study, Cormier, Magnan and Velthoven (2005) examined the determinants of
corporate environmental disclosure using multi-theoretical lenses that encompassed economic incentives,
public pressures and institutional theory, taking a sample of 385 firm year observations (1992-1998). The
result was that risk, ownership, fixed assets, age, firm size as well as prior period’s environmental
disclosure quality, determined the degree of environmental disclosure by German firms in a given year.
Highlights of other select studies
Study
Gamble et al (1995)
Highlights
This study investigates the quality of environmental disclosures in
10K and annual reports (ARs) for 234 companies within 12
industries for the years 1986 through 1991
The principal findings are: (1) total AR disclosures have
significantly increased since 1989; (2) petroleum refining,
hazardous waste management, and steel works and blast furnaces
provided the highest quality of AR disclosures; (3) the 1989-1991
time period produced a significant increase in 10K environmental
disclosures; (4) petroleum refining, hazardous waste management,
and steel works and blast furnaces provided the highest quality of
10K disclosures; and, (5) the overall quality of environmental
disclosures is low.
Carlos et al (2002)
Archel et al (2001)
Katsuhiko et al
Eighty per cent of companies in Spain do not provide any
environmental information.
Analyzed environmental disclosures in the 1995–1998 annual
reports of a sample of Spanish companies. They consistently found
that both size and environmental sensitivity are corporate
characteristics that explain the extent of environmental reporting.
There is no significant difference in corporate size (sales, total
assets, and operating profits) between companies which disclose
environmental accounting information in their environmental
reports and those which do not.
There is also significant difference according to industrial sector
among companies which disclose environmental accounting
information in their environmental reports.
King and Lenox (2001)
Mathur & Mathur (2000)
Examined the nature of relationship between environmental
performance and financial performance for 652 US firms during the
period 1987-96 and found an inverse relationship between financial
evaluation and pollution. They concluded that fixed characteristics
such as firm size , R&D intensity could be causing this negative
relationship
Used event study methodology to analyze stock price reaction to the
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Lu & Batten (2001)
Connelly et al (2004)
Shuchi (2009)
green marketing strategies of 73 companies during 1989-95.They
documented negative price reactions
Asian firms do not have a tradition of disclosure since insiders often
control the operating and reporting systems
Empirical results reveal that there is no relation between
environmental activity reporting and accounting performance.
The results provide strong evidence in support of the influence of
variables size, profitability, sector, industry and environmental
performance on Environmental Disclosure Practices.
Hypotheses
Corporate size
Most of the studies found positive relationship between environmental disclosures and size. According to
Cowen et al (1987), company size is an important influencing factor on corporate social responsibility
disclosure. The larger the company is, the higher the political costs it may have. A number of prior studies
report that large sized companies disclose more information on environment ( for example, Joshi and
Gao, 2009; Jaffar et al., 2002; Gray et al., 2001; Ince, 1997; Deegan and Gordon, 1996). Jaffar et al.
(2002) study indicated that company’s size and environmental performance provided an explanation on
the variability of environmental disclosure among companies in Malaysia.
It is also argued contrary to the smaller enterprises, large-size companies need to raise more external
funds. In order to attract the investors, larger companies are willing to disclose more information to
reduce agency costs arising from asymmetric information and to gain public support.
Firm size is probably the most commonly used proxy for firm visibility (Barth, McNichols, & Wilson,
1997; Cormier, Magnan, & Velthoven, 2005; Guthrie & Parker, 1989; Hughes et al., 2001). While size is
widely known as a representative of firm visibility, it also represents firm capacity to be involved in social
and environmental programs and to report such activities. Studies on the relationship between size and
environmental responsiveness highlight organizational resources or organizational slack as the main
alternative logic (Bowen, 2000; Sharma, 2000). This study uses log of total assets as the indicator of
size.
H1: The level of corporate environmental disclosure is positively associated with firm size.
Profitability: The economic performance of a firm is considered as an important factor in determining
whether environmental issues will be a priority or not, It is also argued that in periods of low economic
performance, the firm’s economic objectives may be given more attention than environmental concerns.
Perhaps investors generally perceive that in the absence of voluntary disclosure of environmental
information, there is an indication of bad news about the firm. Signaling theory suggests that highly
profitable firms may have reasons or incentives to differentiate themselves from loss making firms or
less successful firms in order to raise capital at the lower costs. Fan (2006) reports that profitability has a
significant impact on voluntary disclosure in Chinese context. On the other hand, Smith et al. (2007)
found a significant inverse relationship between disclosure score and the return on assets for
environmental disclosure in Malaysian context.
Profitability is also used widely to predict firm visibility in environmental context (Frost, 1999; Neu,
Warsame, and Pedwell, 1998; Walden, 1997). Similar to size, profitability in absolute terms also suffers
6
from inherent weakness, because large firms usually have large amount of profit/loss in absolute terms.
To avoid this problem, many studies used the ratios of profitability measures (e.g., ROA, ROI, ROE,
Profit Margin). This study uses Return on Equity (ROE) to measure firm profitability.
H2 : The level of corporate environmental disclosure is positively associated with firm’s
profitability
Financial leverage
As the “agency theory” suggests that with the increase of debt proportion in capital structure, the greater
is likely to be the interest conflicts between shareholders, creditors and managers, the higher the agency
cost, and the managers have an incentive to disclose more information. From the perspective of social and
environmental responsibilities, companies with higher financial leverage are more inclined to establish
good relations with stakeholders; therefore, they are more likely to disclose more environmental
information. In their study, Clarkson et al. (2008) have considered that firms that raise financing in debt
have a higher propensity for disclosures in voluntary channels.
In relation to the association between environmental disclosures and corporate financial performance,
Yusoff and Lehman (2009) report that there was no significant difference between financial performance
and environmental disclosures among Malaysian companies, but Australian companies. (this sentence is
not clear ).They state that this highlights the continuing inconsistent findings on the matter as presented
by previous studies (for instance, Freedman and Jaggi, 1988; Cormier and Magnan, 2001). Jiufang et al.
(2009) in the context of China, report that asset/ liability ratio have negative impacts on environmental
disclosure, which is opposed to the original assumptions.
H3: A firms’ financial leverage is positively associated with its environmental disclosure.
Industry type
It is argued that the industry with higher pollution and stricter regulation (such as chemicals, minerals,
refineries, utilities and other industries) tend to disclose more environmental information. Meek et al.
(1995) found that industrial variance has an impact on level of non-financial information disclosure.
It is also argued that higher the environmental sensitivity of an industry, the more likely its shareholders
may be concerned with the environmental disclosure. For example, Dierkes and Preston (1977) argued
that firms which are directly operating and have high impact on environment, such as extractive
industries, are more likely to disclose environmental information than other industries. Halme and Huse
(1997) in the context of Scandinavian countries report that industry is the most influential factor in the
disclosure of environmental information. Other studies ( e.g. Baneerj, 2002; Frost and Wilmshusrt,
2000; Deegan and Gordon, 1996) also reported a positive correlation between industry factor and
environmental disclosures, while a study by Alnajjar (2000) revealed no significant relationship between
the industry factor and environmental disclosure,.
H4: Highly environmental sensitive companies tend to disclose more environmental information
than less sensitive companies.
Accounting firms
7
The smaller accounting firms are more concerned about the demand of their customers. But for large
firms, it is not likely for them to rely on only one or two customers. In that case, they usually ask their
customers to disclose more information on their annual reports. Thus, the authors put forward hypothesis
five: the companies audited by the “Big 4”in the world and China’s “Big 10” accounting firms tend to
disclose more environmental protection information. (Why China’s case is mentioned here in the context
of hypothesis by authors)
Previous research suggests that auditing firms that belong to the Big 4, Big 5 or Big6 (hereafter Big N)
are more sophisticated or have better audit quality (Gupta and Nayar, 2007; Qiu, 2004) than non-Big N
auditing firms . Higher quality auditor may help clients prepare more sophisticated annual reports with
advanced financial and non-financial information, including environmental disclosures.
H5: The level of environmental disclosure is higher for firms audited by big size auditing firms.
Legal Ownership
Ownership of firms arguably determine the level of monitoring and consequently the level of disclosure
( Eng and Mak, 2003). Nazli (2007) reports in Malaysian context that companies in which the directors
hold a higher proportion of equity shares (owner-managed companies) disclosed significantly less CSR
information, while companies in which the government is a substantial shareholder disclosed significantly
more CSR information in their annual reports
H6: Companies with government ownership will have significantly higher disclosure of
environmental information than the private sector companies.
Age of the company
The variable age is included in the regression model as a control variable for the perceived stability of the
company. Age is the number of years since the company was started. Liu and Anbumozhi (2009) also
tested age of the company for environmental disclosure.
H7: Age is expected to be positively associated to environmental disclosure.
Foreign operations
Firms with higher foreign sales will have more foreign operations, labor and capital. Zarzeski (1996)
conclude that companies with higher foreign sales or customers tend to disclose more information.
Similarly, Archambault and Archambault (2003) also reported similar findings based on a larger set of
countries.
It has been found that environmental protection rules are quite stringent in developed countries
particularly in countries like the US, the UK and Australia. Companies operating in these countries tend
to disclose a lot of environmental information .Hence it could be possible that subsidiary companies
operating in India will disclose more environmental information than the domestic companies
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H8: Companies with foreign operations will have significantly higher disclosure of environmental
information,
Model Construction
DI = a+ b1SIZE+b2PROFI+b3LEV+b4INDU+b5AF+b6FO+b7OWN+AGE+ e
where:
DI= Environmental disclosure score.
a =Constant.
b1 to b7 = Regression coefficients.
SIZE= total assets
LEV= debt equity ratio
Profi= return on equity
INDU= 1 if the firm belongs to the most polluted industry ; 0 otherwise.
AF= accounting firm; 1 if big4; 0 small firm.
FO= foreign operations,; 1 if firm has foreign association, 0 otherwise.
OWN= ownership; 1 if the firm is from public sector , 0 otherwise
AGE = age of the company; 1 if age> median value, otherwise 0
e = error term
Sample
The sample selection for this research is chosen from the
list of companies provided in
http://en.wikipedia.org/wiki/List_of_companies_of_India, This list contains 190 listed companies. After
a scrutiny of all companies, we dropped from our sample companies from banking, other financial
institutions, services, trading etc. because they are not prone to towards environmental pollution or
damage. A total of 45 industrial companies were selected for this study. All these companies are listed
with both Bombay Stock Exchange and National Stock Exchanges, Therefore, the reason for choosing
the industrial companies was that of their special characteristics as their production and products are
more prone to environmental damage. These industries are confronted with more social responsibilities
and environmental protection and they are subjected to comply with various enactments. The data for
2008 was selected for this study from the websites of the companies.
We also selected 19 items of environmental protection disclosure items. The scoring method for each
item was based on the following procedure. A score of two was awarded to a disclosure item if the
companies disclose detailed information (both descriptive and quantitative) about that item. A score of
one was given to a disclosure item, if the companies disclose summary information (description only),
and zero point was given to the disclosure item if no information was disclosed by the companies in their
websites.
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Results and Discussions
Descriptive Statistics
Descriptive statistics of the variables are shown in Table 1a and 1b respectively. The dependent variable
(disclosure Index) shows a minimum score of 0.026 and a maximum of 0.657 with a mean value of 0.179
indicating insufficient disclosure practices of Indian listed companies. The ROE, as a measure of
economic performance, indicates that the sampled companies have an average return of 12.6%. The debt
ratio ranges from a low of 0.095 to a high of 0.851. The mean of 55.8% indicates that the majority of the
sampled companies are highly credit geared. The log of total assets vary from a minimum of 2.337 to a
maximum of 5.390
Table 1b shows that 73.3% of the sampled firms are categorized to be environmentally sensitive.
Approximately 66.7% of the companies are from the corporate sector and the rest are from the public
sector. Furthermore, a very high percentage of companies (77.8%) have foreign operations, while 73.3%
of companies are audited by small sized audit firms and the rest by Big4 audit firms. About 44 per cent of
the sample firms can be considered as relatively old firms.
A perusal of Table 4 reveals that about 55.6% of Indian companies disclose information on energy
saving in details (quantitative information). Also 22.2% of companies disclosed summary information on
energy savings. Other information companies disclose related to environment are environmental awards,
renewable resources used, to certain extent environmental impact. However, it is surprising that Indian
companies fail to disclose much information related to hazards, water pollution, ground water protection,
contamination of land, air pollution, global warming, adour etc. Twenty per cent of companies disclose
descriptive information about the environmental impact. Almost 90 per cent of the companies do not
disclose any information on global warming. Approximately 98 per cent of the companies do not disclose
any information on contamination of land.
In competitive industries, the fear that disclosure of environmental information will adversely affect the
competitive position may prevent such companies from publishing environmentally sensitive information.
Multiple Regression Results
A perusal of Table 3a reveals that the overall regression model is significant at 0.05 level as the F value
of the model is 2.905. The value of adjusted R2 is only 0.281, thereby, indicating that probably there
are more explanatory independent variables which have not been captured in the model. There is
absence of multicollinearity problem as the VIF of the independent variables are less than 10. This also
shows that the sample data can be applied to multi-regression model.
On the other hand, the coefficient values of the regression model (Table 3b) reveals that log of total
assets (SIZE) and industry nature (INDUS) turned out to be same as expected because these two
variables have passed the significant tests at 0.05 level. However, contrary to our expectation, ROE
and leverage ratio showed a negative relation with the disclosure index and they did not pass the
significant tests. The coefficient symbol of profitability is contrary to the expectation. As reported by
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previous studies, a significant inverse relationship between disclosure index and profitability (ROE) is
apparent, suggesting that perhaps environmental disclosure in India has different priorities from
disclosures than in the Western countries. This is in line with previous studies by Jinfeng and Huifeng
(2009) and Smith et al. (2007).
Besides, as expected, we found positive and significant relationships between the existence of
environmental reporting and company size and environmental sensitivity. The results explain that bigger
companies disclose a higher volume of environmental information in their websites. This is consistent
with the findings of Halme and Huse (1997), Wilmshurst and Frost (2000), Romlah et. al. (2002), and
Cormier and Magnan (2003).
According to Cormier and Gordon (2001), a larger company becomes more visible and accountable to the
public and, therefore, more accountable with respect to environmental issues. Consequently, a larger
company will disclose more environmental issues to decrease public pressure.
Small companies may not have the necessary resources to gather huge amount of information which
could be costly to collect and disseminate to public. In large companies these information may already
have been collected for internal reporting and decision making. Hence they can easily communicate it to
external stakeholders by publishing it in their reports. Moreover the actions of large companies are under
the constant watch of public and government authorities .Large companies have more shareholders which
includes both individuals and institutional investors. Companies ought to believe that disclosure of
environmental information will create confidence among different stakeholders thereby minimizing
criticism from public.
Our findings also found that companies operating in highly environmentally sensitive industries tend to
disclose more environmental information in their websites, which is consistent with earlier studies by
Halme and Huse (1997), Romlah et. al. (2002), Cormier and Magnan (2003) and Zauwiyah et. al, (2003).
According to Romlah et. al. (2002), the purpose of the reporting is to minimize the potential political cost
that can be imposed on the companies in the future and this is especially true for companies that pollute
the environment. Both these findings provide support to the legitimacy theory.
The environmental (Protection) Rules 1992 give a list of most polluting industries. These industries have
to submit an “environmental statement “to relevant State Pollution control board every year. Hence due to
regulatory constraints, these companies may spend more on environmental aspects and tend to disclose
more environmental information.
Regression Summary
Dependent Variable
DI
Independent Variables
SIZE
***
PROFI
LEV
INDU
**
AF
FO
OWN
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**,*** Statistically significant at 5% and 1%
Conclusion
The results of multiple regression support
SIZE and INDUS hypotheses in this study. However
hypotheses related to accounting firm (AF), profitability (PROFI), age of the company, (AGE), foreign
operations (FO) and leverage (LEV) are not supported by the empirical findings in Indian context.
The R Square under the model is 0.428, which indicates that the model is capable of explaining 42.8% of
variability of the disclosure of environmental information in the sample of Indian companies in the study.
The adjusted R-square indicates that 28.1% of variations in the dependent variable in the model used here
is explained by the variations in the independent variables. Furthermore, the F-ratio indicates that the
regression model significantly explains the variations in environmental disclosure of Indian companies.
The actual signs of two independent variables (PROF and Leverage) were not found in the direction as
expected.
The study documents the positive relationship between environmental reporting and size of the firm. The
nature of industry is another significant determinant for environmental disclosures.
Implications & Suggestions
In the present study, signaling theory can explain the environmental-related information disclosure
behavior for Indian industrial companies to some extent. Our results show that the correlation and
regression have positive and significant correlation between company size and disclosure index. Large
sized firms have the motivation to disclose more environmental information in order to reduce the
“agency cost” because of information asymmetry.
On the other hand, industrial type has also an influence towards disclosure of environmental information.
Our results show that Indian companies with environmentally sensitive from heavy pollution industries
are likely to disclose more environmental protection information than others. Probably, this is due to the
stricter regulatory measures and risks. However, our study indicated that profitability has no obvious
influence on the environmental disclosure. There is an indication that companies with high profitability
may not disclose more information. It seems that such companies perceive that there may not be valueadded effects from disclosing environmental protection information. Investors may also may not find this
information very relevant for their investment portfolios.
In addition, the leverage factor did not pass the test which may probably be due to the fact that creditors
are not concerned about corporate environmental information in Indian context.
Consistent with Patten (1991) and other studies the present study reports that both company size and
industry are significantly associated with environmental disclosures, and that profitability is not a factor.
The lack of a significant relationship between environmental disclosures and actual firm performance
may provide an explanation for the lack of consistent investor use of social disclosures.
Companies may be reluctant to present environmental disclosures due to scenarios of worries about the
cost of providing this information and shareholder complaints about such costs and inability to gather the
appropriate information to quantify environmental programs. Many see environmental issues against the
backdrop of accusation, litigation and regulation. To achieve the goal of environmentally committed,
companies have to take proactive steps beyond compliance of industry standards.
Environmental issues has to emerge as the core values which shape the competitive future .In this context
, future development must be in tune with the public’s understanding of environmental stewardship
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Currently, there are hardly any requirements for the listed companies to disclose environmental protection
information in annual reports in India. It will be good if some guidelines for the environmental related
disclosures are incorporated by the Securities Exchange Board of India (SEBI), particularly for heavily
polluted industries in order to enhance the financial transparency in companies’ websites and annual
reports and also to improve corporate governance structure. Thus, there should be compulsory and
voluntary environmental protection system to encourage more companies to disclose environmental
information in Indian context.
Limitations of the Study
We selected only one year data for analysis which may lead to deviation of regression result due to
abnormal indicators from the limited sampled companies. We also observed that the R-squared value of
the regression model is somewhat low which may also indicate that some important variables have not
been introduced to this study. By adding more independent variables, we would probably be able to
increase the power of the regression model and hence a better explanation could be provide for the
industrial companies motives to environmental disclosure. Though these limitations may not affect
our conclusions, yet further research may be warranted on this important topic.
A limitation of the study arises from the focus on the firm reported environmental activities rather than on direct
observation of the firms’ environmental activities.
13
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Appendix
Table:1a: Descriptive Statistics
N
Maxim
um
.657
Mean
.179
Disclosure
Index
43
Minimum
.026
Std. Deviation
Log Total
Assets
43
2.337
5.390
4.006
.695
Return on
Equity
45
-.281
.932
.126
.193
Debt ratio
44
.095
.851
.558
.194
.183
Table 1b: Descriptive statistics on independent variables
Variable
Age of the company
Industry type
Ownership
Audit firm
Companies have foreign
operations
Frequency
Group 1 >median value
Group 2 <median value
Group 1 = heavy
environmental sensitive
Group 2= less environmental
sensitive
Group 1= private sector
Group 2 public sector
Big audit firms 1
Small audit firms 2
Group 1 Yes
Group 2 No
20 (44.4%)
25 (55.6%)
33 (73.3%)
12 (26.7%)
30 (66.7%)
15 (33.3%)
12 (26.7%)
33 (73.3%)
35 (77.8%)
10 (22.2%)
Table: 2 Correlation Matrix for independent variables
18
Log
Total
Assets
Log of
Total
Assets
Pearson
Correlation
Return
on
Equity
-.094
Debt
Ratio
.061
Age of
the
company
.104
Industry
Type
.138
Ownership
-.135
Auditor
.184
Foreign
Operation
.399**
.548
.703
.508
.378
.387
.238
.008
43
43
42
43
43
43
43
43
-.094
1
-.209
-.051
.149
-.077
.231
-.123
.173
.739
.329
.616
.126
.421
1
Sig. (2tailed)
N
Return on
Equity
Pearson
Correlation
Sig. (2tailed)
N
Debt ratio
43
45
44
45
45
45
45
45
Pearson
Correlation
.061
-.209
1
.104
-.212
.177
-.158
.169
Sig. (2tailed)
.703
.173
.503
.168
.251
.307
.274
42
44
44
44
44
44
44
44
Pearson
Correlation
.104
-.051
.104
1
-.270
.063
.067
.263
Sig. (2tailed)
.508
.739
.503
.073
.680
.660
.081
43
45
44
45
45
45
45
45
Pearson
Correlation
.138
.149
-.212
-.270
1
-.107
.023
.040
Sig. (2tailed)
.378
.329
.168
.073
.486
.882
.793
43
45
44
45
45
45
45
1
.320*
.189
.032
.214
N
Age of the
company
N
Industry
nature
N
Legal
ownership
Pearson
Correlation
Sig. (2tailed)
N
Auditor
45
-.135
-.077
.177
.063
-.107
.387
.616
.251
.680
.486
43
45
44
45
45
45
45
45
1
.081
Pearson
Correlation
.184
.231
-.158
.067
.023
.320*
Sig. (2tailed)
.238
.126
.307
.660
.882
.032
N
Foreign
Operation
.548
Pearson
Correlation
Sig. (2tailed)
N
.599
43
45
44
45
45
45
45
45
.399**
-.123
.169
.263
.040
.189
.081
1
.008
.421
.274
.081
.793
.214
.599
43
45
44
45
45
45
45
45
19
Table 3a: Model summary
Model
1
R
.655a
R Square
.428
Change Statistics
Std.
Error of
R
Adjusted R
the
Square
F
Sig. F
Square
Estimate Change Change
df1
df2
Change
.281 .1591992
.428
2.905
8
31
.015
a. Predictors: (Constant), Foreign operation, industry type, audit firm,, debt ratio, age of the company,
return on equity, legal ownership, Log of total assets.
b. Dependent Variable: Disclosure Index.
Table 3b: Coefficients
Unstandardized
Coefficients
Model
1 (Constant)
B
-.457
Std. Error
.202
.142
.046
Return on Equity
-.124
Debt Ratio
Standardized
Coefficients
Beta
Collinearity Statistics
t
-2.269
Sig.
.030
Tolerance
VIF
.500
3.072
.004
.696
1.438
.140
-.133
-.886
.383
.817
1.224
-.153
.140
-.160
-1.090
.284
.853
1.173
Age of the
company
.053
.054
.141
.971
.339
.876
1.142
Nature of Industry
.149
.063
.348
2.360
.025
.849
1.178
Ownership
.065
.064
.165
1.028
.312
.714
1.401
Audit firm
.054
.066
.129
.811
.424
.729
1.372
Foreign
Operation
-.033
.072
-.076
-.455
.652
.652
1.533
Log Total Assets
20
DurbinWatson
1.675
Table 4: Extent of Disclosure
Item of Information
1. Ground Water Protection
(1)*
39 (86.6%)
(2)
3 (6.7%)
(3)
3 (6.7%)
2. Environmental Awards
24 (53.3%)
8 (17.8%)
13 (28.9%)
3. Environmental Budget
38 (84.4%)
5 (11.1%)
2 (4.4%)
4. Noise Pollutions
38 (84.4%)
6 (13.3%)
1 (2.2%)
5. Renewable Resources Used
24 (53.3%)
13 (28.9%)
8 (17.8%)
6. Hazards
40 (88.9%)
3 (6.7%)
2 (4.4%)
7. Energy Saving
10 (22.2%)
10 (22.2%)
25 (55.6%)
8. Water Pollution
38 (84.4%)
4 (8.9%)
3 (6.7%)
9. Recycling
32 (71.1%)
7 (15.6%)
6 (13.3%)
10. Environmental Impact
30 (66.7%)
9 (20.0%)
6 (13.3%)
11. Rehabilitation
37 (82.2%)
1 (2.2%)
7 (15.6%)
12. Emissions to Air
35 (77.8%)
4 (8.9%))
6 (13.3%)
13. Contamination of Land
44 (97.8%)
0 (0.0%)
1 (2.2%)
14. Global Warming
40 (88.9%)
4 (8.9%))
1 (2.2%)
15. Biodiversity
36 (80.0%)
1 (2.2%)
8 (17.8%)
16. Air Pollution
37 (82.2%)
5 (11.1%)
3 (6.7%)
17. Adour
41 (91.1%)
3 (6.7%)
1 (2.2%)
18. Legion Ella
42 (93.3%)
1 (2.2%)
2 (4.4%)
19. Climate Change
37 (82.2%)
4 (8.9%)
4 (8.9%)
* Where column (1) refers to number (%) of sample companies which made no
disclosure at all; column (2) refers to number (%) of companies which provided
summary information (mainly descriptive); and column (3) refers to number (%) of
companies which provided detailed information (including quantitative information).
21