Institutional Investor Legal Origins and Corporate GHG Emissions Disclosure Quality

Abstract

Disclosure of corporate environmental performance has become a critical element of firms’ overall ethical behavior. We examine how foreign institutional ownership and its legal origin affect the quality of carbon disclosure. Using a large sample of firms from thirty-six countries, we find that foreign institutional ownership from civil law countries tends to improve the quality of a firm’s greenhouse gas (GHG) emissions reporting. This is borne out by emissions verification levels and Carbon Disclosure Project scores. The relationship appears causal, and is not affected by selection bias. The effect is stronger in firms from common law countries, i.e., when the gap between firms’ corporate social responsibility (CSR) standards and investors’ CSR targets is potentially larger, and in less international firms, suggesting that foreign investors substitute for lower levels of internationalization. Additional analyses also indicate that firms with better GHG emissions reporting quality receive higher valuations.

Keywords: Carbon disclosure, corporate environmental responsibility, institutional investors, foreign ownership, legal origin