Do Foreign Institutional Investors Influence Corporate Climate Change Disclosure Quality? International Evidence

Abstract

Research Question/Issue: We examine the association between institutional ownership and climate change disclosure quality from 2006 to 2018 across 34 countries.

Research Findings/Insights: We find that firms with a higher level of foreign institutional ownership demonstrate better quality climate change disclosures, whereas domestic institutional ownerships have immaterial impacts on such disclosures. Furthermore, we find that the positive association between foreign institutional ownership and climate change disclosure quality is more pronounced for (1) firms domiciled in stakeholder orientated countries; (2) firms domiciled in countries that adopt emission trading schemes; and (3) firms with a greater level of information asymmetry. We utilize a difference-in-difference (DiD) analysis using a firm’s addition to the Morgan Stanley Capital International (MSCI) index as an exogenous shock to control for endogeneity. Our findings are robust to various other endogeneity controls. We also establish evidence on an indirect effect of climate change disclosure quality in mediating the positive association between foreign institutional investors and firm valuation.

Theoretical/Academic Implications: Our study contributes to climate change disclosures, corporate governance, and international business literature by showing that foreign rather than domestic institutional investors contribute to improved corporate climate change disclosure quality in their portfolio firms.

Practitioner/Policy Implications: Our study urges regulators to increase their market oversight, especially firms that have less foreign institutional ownership. This is required because such firms are prone to exhibiting poorer accountability for their climate risk management practices, and their disclosures are bereft of effective external monitoring mechanisms.

Keywords: Climate change disclosures, foreign institutional ownership, CDP, firm valuation, cross-country

JEL Classification: G15; G23; G30; M40; M41