Voluntary Environmental Disclosure Quality and Firm Value: Further Evidence

Abstract

This study examines the relationship between the quality of a firm’s voluntary environmental disclosures and firm value by exploring the relationship between the components of firm value (expected future cash flows and cost of equity) and voluntary environmental disclosure quality. We measure voluntary environmental disclosure quality using a disclosure index consistent with the Global Reporting Initiative disclosure framework for a sample of US firms across five industries. In addition to overall disclosure quality, we consider the type (i.e., hard/soft) and the nature (i.e., positive/neutral/negative) of the disclosure in our analysis. We also include controls for both positive and negative environmental performance. Based on this analysis, we document (1) a positive association between some aspects of voluntary environmental disclosure quality and future expected cash flows, and (2) both a negative and positive association between some aspects of voluntary environmental disclosure quality and a firm’s cost of equity capital. Our findings are consistent with increased voluntary environmental disclosure quality being associated with firm value through both the expected cash flow and cost of equity capital components. The results also highlight the benefit of parsing broader measures (e.g. voluntary disclosure quality) when examining complex relationships.