International Journal of Law and Management

The relation between voluntary carbon disclosure and environmental performance: The case of S & P
500
Grigoris Giannarakis, George Konteos, Nikolaos Sariannidis, George Chaitidis,
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Grigoris Giannarakis, George Konteos, Nikolaos Sariannidis, George Chaitidis, "The relation between voluntary carbon
disclosure and environmental performance: The case of S & P 500", International Journal of Law and Management, https://
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 The relation Between Voluntary Carbon Disclosure and Environmental
Performance: The case of S&P 500
Abstract
Purpose – The purpose of this study is to investigate the effect of environmental
performance on the environmental disclosure level.
Methodology - Carbon Disclosure Leadership Index (CDLI) score is considered as a proxy
of carbon disclosure level whilst Greenhouse Gas (GHG) emissions as a proxy of
environmental performance. In addition, six control variables are employed: return on assets,
financial leverage, company’s size, CEO duality, board size and percentage of independent
directors on board. The sample comprises 102 companies from a population of Standard &
Poor's 500 (S&P 500) companies over a five - year period 2009 -2013.
Findings - The results revealed that higher pollution levels in terms of GHG emissions affect
negatively the dissemination of carbon disclosure information suggesting a positive
relationship between environmental performance and environmental disclosure level. In
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addition, companies with good environmental performance in relation to their average

environmental performance disseminate more carbon information in their disclosures. Thus,
the carbon disclosure level is indicative of environmental performance consistent with the
voluntary disclosure theory.
Practical implications – The managerial behavior regarding the Relation of environmental
disclosure and environmental performance is explained. In addition, the findings should be
of use to those investors interested in finding carbon emission information so that they assess
investments and evaluate their current portfolios in terms of environmental sustainability.
Originality– It is intended to ascertain the reliability level of carbon disclosure regarding
carbon emission information by incorporating CDLI score and GHG emissions.

Keywords: Carbon Disclosure Leadership Index, Disclosure, Greenhouse Gas emissions,

Environment.

1. Introduction
Greenhouse Gas (GHG) emissions have been considered among the main threats that could
affect the human globalization in this century. The increased concentration of GHG on the
Earth’s surface and atmosphere causes adverse consequences in natural ecosystems and
humankind, burdening the phenomenon of global warming (United Nations, 1992; Liu et al.,
2015; Stern, 2006; Tsanaktsidis et al., 2016). Stakeholders, such as shareholders and
consumers exert pressure on companies to decrease their GHG emissions (Jeswani et al.,
2008; Weinhofer and Hoffman, 2010); thus, companies are expected to play a pivotal role to
reduce their GHG emissions stabilizing climate change (Luo and Tang, 2014). Therefore,
companies face an increased demand to disseminate more information into disclosures
relevant to actual performance in order to present that they satisfy their environmental
concerns (Meng et al., 2014).
The reporting initiative of GHG might be a starting point for companies to identify sources
of GHG savings and reduce emissions (Kauffmann et al., 2012). The question that arises is
whether the environmental information in disclosure reflects the actual environmental
performance. The link between corporate environmental information and performance is
becoming more and more crucial to investors and other stakeholders concentrating on the
environmental impacts of corporate activities (Clarkson et al., 2011; Hughes et al., 2001).
Investors use environmental information to assess investments and evaluate their current
portfolios in environmental terms (EY, 2014), determine the value, the future prospects of
businesses and costs of pollution control (Bewley and Li, 2000). Therefore, investors exert

1
 pressure on companies to disclose information related to their GHG emissions (Kolk et al.,
2008). Empirical studies have shown mixed results regarding the effect of environmental
performance on environmental disclosure (i.e Al-Tuwaijri et al., 2004; Wiseman, 1982,
Ingram and Frazier, 1980; Clarkson et al., 2008; Hughes et al., 2001; Yu, 2015).
The aim of the study is to investigate whether carbon disclosure can be affected by the actual
environmental performance, clarifying in this way the managerial behavior with respect to
disclosure. There are two major competing theories, namely, the voluntary disclosure theory
and the legitimacy theory which explain the managerial behavior regarding the link between
environmental disclosure and environmental performance (Verrecchia, 1983; Patten, 1992).
On the one hand, the literature in voluntary disclosure suggests that companies with higher
environmental performance have a positive effect on the environmental disclosure
differentiating themselves from the inferior type companies and avoid the adverse selection
problem (Dye, 1985; Verrecchia, 1983; Li et al., 1997). On the other hand, the legitimacy
theory predicts that lower corporate environmental performance have a negative effect on
environmental disclosure in order to alleviate the social pressure (Patten, 1992).
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As GHG emissions play a crucial role in climate change, this study focuses on the effect of
GHG performance on carbon disclosure level in the form of a Carbon Disclosure Project
report by companies in the United States (U.S) listed in S&P 500. For the purpose of the
study, a third party rating approach was adopted in order to estimate the level of carbon
disclosure. We employ the CDLI in order to measure both the depth and breadth of corporate
carbon information. The main advantage of CDLI is that it considers the content and quality
of disclosures as well as quantity (Cotter and Najah, 2012). Furthermore, six control
variables are incorporated in the econometric analysis; namely, return on assets, company’s
size, financial leverage, CEO duality, board size and percentage of independent directors.
This study contributes to the literature as follows: The study contributes to the ongoing
debate of the effect of environmental performance on the environmental disclosure
interpreting managerial behavior. Thus, different theories, such as legitimacy theory,
voluntary disclosure theory and other approaches are mentioned in order to explain
management behavior. This study incorporates GHG emissions which differs from other
proxies of environmental performance as it causes global warming. Furthermore, in the
absence of internationally accepted reporting standards, Carbon Disclosure Project (CDP)
questionnaire is employed as a proxy for carbon disclosure which can be considered
innovative as it incorporates the depth and breadth of corporate carbon information. We
consider US companies because they are the second heavier emitter after China1. In addition,
we develop a fixed-effects model in order to investigate the proposed model in relation to the
most traditional ones. Finally, a five year period data is employed by using the online
Bloomberg database.
The study tries to establish a relation between environmental performance and environmental
disclosure validating the reliability of the latter. The results could be of value to investors,
mostly to socially responsible ones who intend to combine financial and environmental
criteria. It is intended to ascertain whether carbon disclosure can be a signal of GHG
performance by interpreting managerial behavior.
The rest of the paper is organized as follows: Section 2 presents theories regarding
environmental disclosures along with previous empirical results followed by the
development of research. Section 3 outlines the methodological steps taken place in the
study. Section 4 presents the results of fixed effects analysis along with the discussion of

1
EPA United States Environmental Protection Agency:
http://www3.epa.gov/climatechange/ghgemissions/global.html (accessed 24 August 2015)

2
 results. Section 5 concludes the study by summarizing and making propositions for future
research.

2. Literature review
2.1 Theories of environmental disclosure
The first part concerns two main theories that have been developed in order to explain
voluntary corporate environmental disclosure, namely legitimacy theory2 and voluntary
disclosure theory3.
On the one hand, legitimacy theory is based on the concept of social contract (Mathews,
1993; Patten, 1992) according to which companies provide information in non-financial
disclosures in order to legitimize their activities and be consistent with the concept of
corporate citizenship (Hooghiemstra, 2000; Brammer and Pavelin, 2006). This theory is
based on the assumption that companies have no inherent right to exist. Corporate managers
use environmental disclosure to shape the stakeholder’s impression of the role and show the
satisfaction level of those responsibilities (Magness, 2006). Companies with poor
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environmental performance face greater exposure and so they are expected to provide more
information in their environmental disclosure in an attempt to confront the increased threats
to their legitimacy (Cho and Patten, 2007; Clarkson et al., 2008). When a company’s
legitimacy is threatened, it can implement different initiatives such as to increase the
disclosure level in order to educate and inform society in accordance with changes in its
performance, change perceptions about the performance, deflect attention from the issue of
concern by highlighting other accomplishments related to the social issue, or seek to change
public expectations of its performance (Lindblom, 1994).
On the other hand, voluntary disclosure theory, as supported by Dye (1985) and Verrecchia
(1983), predicts that a company’s high superior environmental performance motivate this
company to increase the disclosure level in order to keep investors and stakeholders
informed and differentiate Itself from companies with poor environmental performance.
Inferior environmental performers tend to restrict the provided information, being “silent”
for their performance and assigned to the pool of companies called “average type”. It
predicts a positive association between environmental performance and the level of
disclosure environmental disclosure (Clarkson et al. 2008, 2011). Environmental disclosures
can be considered as a vital corporate strategic tool in order to signal certain information so
as to attract investments and enhance corporate reputation (Verrecchia, 1983). Finally,
companies that convey good performance via disclosure can enhance their public image and
reputation (Guthrie and Parker, 1990) and build brand competitive advantage (Waddock and
Graves, 1997).
However, not all results can be explained by the aforementioned theories. For instance,
Bewley and Li (2000) stated that companies with good environmental performance can
decrease the information level for two reasons; firstly, because managers do not consider the
environmental performance is good news and, secondly, good environmental performance is
beyond the requirements of environmental accounting standards.

2.2 Previous empirical studies and hypotheses development

By the mid-1990s, North American pollutant companies have started taking into account the
climate change receiving the GHG emission regulations as a substantial threat (Kolk et al.,

2
Legitimacy theory along with stakeholder theory and political theory belong to socio-political theories (Gray
et al., 1995).
3
Voluntary disclosure theory is also referred as Signaling theory (i.e Luo and Tang, 2014).

3
 2008). In the US, the development of non-financial disclosure4 remains on voluntary basis
(Rodríguez and Le Master, 2007; Tschopp, 2005; Bashtovaya, 2014). The US companies
that elaborate non-financial disclosure in compliance with Global Reporting Initiatives
requirements have raised substantially from 114 companies in 2009 to 508 companies in
2013 (Global Reporting Initiatives, 2015). A number of US Social Responsible Investments
indices, such as Dow Jones Sustainability Index and KLD index incorporate CSR criteria
including reporting ones in order to assess the company’s social performance. Until today,
US companies have not been investigated extensively in relation to the relationship between
GHG emissions and carbon disclosure level as Prado-Lorenzo and Garcia-Sanchez (2010)
and Liao et al. (2015) focused on a sample from the U.K., and Luo and Tang (2014) took
into account U.S., U.K., while the Australian companies and Meng et al. (2014) took into
account a Chinese companies’ sample.
This part describes different approaches in order to clarify the link between corporate
environmental performance and disclosure (Meng et al., 2014; Luo and Tang, 2014; Hughes
et al., 2011; Clarkson et al., 2008, 2011; Al-Tuwaijri et al., 2004; Patten, 2002). Recently,
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the interest has shifted from the general aspect of environmental performance to emissions
performance (Luo and Tang, 2014). Therefore, a number of studies intended to find the main
determinants of carbon disclosure, CDLI; however they did not consider GHG emissions as a
main determinant that can affect the carbon disclosure level (Liao et al., 2015; Prado-
Lorenzo and Garcia-Sanchez, 2010; Tauringana and Chithambo, 2015; Meng et al., 2014).
The following literature review is restricted in notable and recent studies since the concept of
environmental responsibilities and reporting criteria is changing overtime adopting a
chronological ordering presentation (Igalens and Gond, 2005).
The results regarding the effect of environmental performance on the environmental
disclosure level are still ambiguous. Luo and Tang (2014), exploring a sample from U.S.,
U.K., and Australian companies revealed that environmental disclosure indicates the actual
carbon performance. Based on US companies, Al-Tuwaijri et al. (2004) found that
companies with good environmental performance tend to be more transparent and honest in
disclosing that performance in their disclosures. Clarkson et al. (2008) reached similar results
revealing that superior environmental performers tend to provide more discretionary
information via disclosure channels by incorporating the five most polluting industries in the
US. However, Patten (2002) indicated that there is a significant negative relation between
environmental performance and disclosure taking into account 131 US companies for the
year 1990. Similar results were found by Hughes et al. (2001) relied on Wiseman’s (1982)
study and showed that poor US environmental performer tend to present most of the
disclosures. However, a number of studies found mixed results regarding the relationship
between environmental performance and disclosure (Meng et al., 2014; Freedman and Jaggi,
2010) or no relationship existed between environmental disclosure and environmental
performance (Wiseman, 1992). A list of environmental disclosure items and proxies of
environmental performance of aforementioned studies are presented in Appendix. Finally,
Ullmann (1985) reviewed seven prior studies regarding the relation between social
performance and social disclosure. He concluded that no relationship exists between social
performance and disclosure. Possible explanations for this conclusion can be theory’s
inadequacy, inappropriate definitions of key terms and lack of empirical data.

4
The non-financial disclosure incorporates different terms that have been used in international literature, such
as Corporate Social Responsibility (CSR) disclosure (Saleh et al., 2010; Mohd Ghazali, 2007; Said et al., 2009;
Laidroo and Ööbik, 2014; Laidroo and Sokolova, 2015), social and environmental disclosure (Haniffa and
Cooke, 2005; Tagesson et al., 2009; Siregar and Bachtiar, 2010), Triple Bottom-Line disclosure (Jennifer Ho
and Taylor, 2007), sustainability disclosure (Michelon and Parbonetti, 2012) and voluntary disclosure (Alsaeed,
2006; Hossain and Reaz, 2007).

4
 A number of remarks could be underlined regarding the selective literature review. First of
all, the corporate performance is characterized by the absence of a generally accepted and
generally accepted measure; thus, it has been a crucial object of investigation (i.e. Characklis
and Richards, 1999; Ilinitch et al., 1998; Gerde and Logsdon, 2001). Many studies used
different measures as a proxy of environmental performance, such as Toxic Release Index
(i.e. Al-Tuwaijri et al., 2004; Patten, 2002; Clarkson et al., 2008, 2011; Chatterji et al.,
2009), Council on Economic Priorities’ environmental performance ratings (i.e. Freedman
and Wasley, 1990; Ingram and Frazier, 1980; Wiseman, 1982), ISO 14001 (Campos et al.,
2105), relative emissions and industry emissions (King et al., 2001) and ratings from KLD
Research and Associates, Inc. (i.e. Chatterji et al., 2009; Cho et al., 2010; Cho and Patten,
2007); thus, there is no consent regarding the proxy of environmental performance. Possible
explanations regarding the aforementioned limitations can be constrained data availability
(Clarkson et al., 2011) and different perception for the environmental performance.
Furthermore, there is no consensus as far as the disclosure items that consisted
environmental disclosure index. Apart from Luo and Tang (2014) and Freedman and Jaggi
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(2010), emissions related items are neglected from the calculation procedure of disclosure
index. A third remark is that the results of previous studies are based on one year period
corporate data and do not receive a longer period. The samples of prior studies consider large
companies, probably, because these companies are more likely to integrate CSR initiatives in
their operations than small-medium ones (Graafland et al., 2003; Freedman and Jaggi, 2005).
Finally, there is a confusion for the number of disclosure items and that constitute an
environmental index. In particular, Meng et al. (2014) identified 43 items across eight
categories to calculate the environmental information level where each item was scored
according to its level of disclosure, Luo and Tang (2014) used CDLI approach, Freedman
and Jaggi (2010) utilized 8 to 11 categories taking into account the GHG dimension adopting
an equal weighting scheme, Clarkson et al. (2008) developed an environmental index based
on Global Reporting Initiative criteria taking into account equally weighted approach, Al-
Tuwaijri et al. (2004) was based only on four key indicator assigned different weight
according to information level, Patten (2002) used both content analysis based on eight
aspects of environment and a line count, Hughes et al. (2001) was based on Wiseman’s
(1992) four environmental aspects and 23 disclosure items and Wiseman (1992) incorporated
18 disclosure items and line count index were selected for the environmental index.
Taking into account all of the aforesaid, two hypotheses are proposed regarding the effect of
GHG performance on carbon disclosure level as implied both by legitimacy theory and
voluntary disclosure theory.

H1: Higher levels of environmental performance affect positively the environmental

disclosure level as implied by voluntary disclosure theory.

H2: Good environmental performance affect positively the environmental disclosure level as
implied by voluntary disclosure theory.

3. Methodology
3.1 Sample
The initial sample was drawn from companies listed on the S&P 500 index for the period
2009-2013. The sample is based on large sized companies because they are more likely to
integrate environmental disclosure initiatives than small or medium sized companies (i.e.
Mohd Ghazali, 2007). Bloomberg is the only source to retrieve the data for both dependent
and independent variables. Thus, out of 500 companies, 102 companies were included in the

5
 final sample of the study because of missing corporate data on the Bloomberg online service.
Finally, the sample focused on US context in order to generate homogenous results
(Gamerschlag et al., 2010) and how US companies react in accordance to environmental
disclosure and investors’ requirements as operating in a country which takes the second
place of heaviest emitter after China (Luo and Tang, 2014).

3.2 Dependent and Independent variables

Regarding the dependent variable, a plethora of studies have developed environmental
disclosure indices by incorporating different disclosure items (i.e. Tagesson et al., 2009;
Monteiro and Aibar-Guzmán, 2010; Brammer and Pavelin, 2008; Meng et al., 2014; Al-
Tuwaijri et al., 2004; Clarkson et al., 2008; Wiseman, 1982). In addition, different
measurement approaches for environmental disclosures have been developed, namely
dichotomous technique (Wiseman, 1982; Patten 2002; Tagesson et al., 2009; Andrikopoulos
and Kriklani, 2012), Likert scale (Al-Tuwaijri et al., 2004; Meng et al., 2014) and different
weight of disclosure items (Al-Tuwaijri et al., 2004; Hughes et al., 2001) by applying the
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content analysis approach (Freedman and Jaggi, 2010; Clarkson et al., 2008). Furthermore,
different units of analysis have been adopted, such as lines (Patten, 2002; Wiseman, 1992),
and a number of pages (Gray et al., 1995). However, this study focuses on carbon
disclosure; thus, CDLI was used in order to measure the level of carbon disclosure (Luo and
Tang, 2014; Liao et al., 2015; Prado-Lorenzo and Garcia-Sanchez, 2010) supported by
Carbon Disclosure Project organization. It is an independent non-profitable organization that
provides carbon-related data from the largest companies in the world. The CDLI reflects the
comprehensiveness of a company's response in terms of the depth and breadth of its answers
to the CDP questionnaire5. The CDP methodology incorporates binary questions, while other
questions need qualitative or narrative answers (Luo and Tang, 2014). The CLDI
methodology is based on specific information relevant to carbon disclosure and climate
change rather than counting on the quantity of information (Cotter and Najah, 2012). Each
disclosure item does not have equal importance contrary to the majority of the prior
empirical studies which adopt an equal value of importance (i.e Wiseman, 1982; Patten,
2002; Clarkson et al., 2008, 2011; Andrikopoulos and Kriklani, 2012). A firm’s total
standardized disclosure score is equal to the total achieved scores divided by the total
available scores and then normalized to a 100-point scale.
The main consideration of the methodology is to incorporate a reliable proxy for a corporate
environmental performance in the proposed model. Delmas and Blass (2010) divided the
environmental measures in three categories, namely environmental impact, regulatory
compliance and organizational processes. Based on the environmental impact, the study tries
to receive the public concern as far as corporate GHG emissions is concerned as it has not
been used in the literature extensively and it is considered an appropriate and objective
measure as a proxy for environmental performance (Luo and Tang, 2014). It reflects an
observable and quantifiable result achieved by the company and a proper indicator to
evaluate a corporation's environmental performance. In order to prevent the results from
being driven by firms' heterogeneity; independent variables were also added in the proposed
model as control variables describing a company’s features. Two groups of control variables
are employed; the first concerns three variables based on financial measures namely sales,
financial performance and leverage, while the second group of variables is based on
5
CDP Scoring Methodology, (2014), CDP 2014 Scoring Methodology, Carbon Disclosure Project, available
at:https://www.google.gr/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjKjd2QwNTL
AhUKvBQKHVJLA2oQFggbMAA&url=https%3A%2F%2Fwww.cdp.net%2FDocuments%2FGuidance%2F2014%2FCD
P-2014-Climate-Change-Scoring-
Methodology.pdf&usg=AFQjCNHmPS44GV3qU6hkvEWo_m6XdjHUsA&sig2=qnBszD-Ua4hhRMu3aLYNTg (accessed
1 August 2015)

6
 corporate governance measure, namely CEO duality, board size and independent directors on
board6.
Larger companies receive more attention from the stakeholders such as government, unions,
and consumers; consequently, companies present higher levels of corporate information
under such scrutiny (Cowen et al., 1987). A number of empirical studies have found a
positive relationship between non-financial disclosure and the company's size (i.e. Haniffa
and Cook, 2005; Mohd Ghazali, 2007; Said et al., Bachtiar, 2010). This study employs the
total of operating sales expressed as natural log as a proxy of the size of the company
(Tauringana and Chithambo, 2015). In particular, it has been shown that the company’s size
affect the level of environmental disclosure positively (Monteiro and Aibar-Guzmán, 2010;
Andrikopoulos and Kriklani, 2012; Patten, 2002).
Financial performance is another control variable that is introduced in the proposed model.
Profitable companies feel free and flexible to present their corporate responsibilities to the
stakeholders (Haniffa and Cooke, 2005; Heinze, 1976; Khan, 2010). Therefore, return on
assets (ROA) is used as a proxy of financial performance (i.e Clarkson et al., 2014; Meng et
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al., 2014; Liao et al., 2015).

Financial leverage is introduced in the proposed model as a proxy of the creditor’s power as
they affect the level of non-financial disclosures (Purushothaman et al., 2000; Alsaeed, 2006;
Clarkson et al., 2008).
Another control variable is CEO duality which is defined as the person who holds both the
positions of CEO and a chairperson’s positions at the same time (Rechner and Dalton, 1991).
CEO is considered as an important determinant that affects the non-financial disclosure level
(Huafang and Jianguo, 2007; Gul and Leung, 2004). US regulators’ bodies and investors
recommend the distinct role between the CEO and the chair's duties because the companies
with CEO duality may suffer from poor corporate governance (Chen et al., 2008).
In addition, the board size is another crucial control variable because it can affect the
corporate governance in relation to non-financial disclosure and it can be used as a proxy for
effective monitoring (Said et al., 2009; Siregar and Bachtiar, 2010; Lee and Chen, 2011; Esa
and Mohd Ghazali, 2012).
Finally, independent directors tend to encourage companies to provide more information to
stakeholders as independent directors tend to have more long-term orientation in relation to
sustainable responsibilities (Johnson and Greening, 1999; Hillman and Dalziel, 2003). In
addition, Webb (2004) that socially responsible companies have more independent directors
in relation to non-socially responsible ones. Empirical studies revealed the significant
relationship between independent directors and non-financial disclosure (Chau and Gray,
2010; De Villiers et al., 2011). A precisely description of all variables and control variables
are presented in Table 1. All data are retrieved by online Bloomberg's terminal.

Table 1: Description of variables

3.3 Model development

Diverse types of regression analysis have been conducted in the field of non-financial
disclosure and its explanatory variables, such as multiple linear regression (i.e Siregar and
Bachtiar, 2010; Branco and Rodrigues, 2008; Haniffa and Cooke, 2005; Reverte, 2009;
Andrikopoulos and Kriklani, 2012; Meng et al., 2014; Patten, 2002), both univariate and
multivariate regression models (Liao et al., 2015), multivariate regression analysis through
stepwise method (Monteiro and Aibar-Guzmán, 2010), unranked and ranked regression

6
Different control variables intend to incorporate in the proposed model, such as the Number of Board
meetings and Board average age; however, they were statistically insignificant.

7
 (Jennifer Ho and Taylor, 2007), hierarchical regression analysis (Said et al., 2009), binary
logistic regression and ordinal logistic regression (Legendre and Coderre, 2013). Using
STATA 12 software, a fixed effect model was employed in this study because of the
advantages over traditional regression approaches; for instance, it removes the effects of
time-invariant causes, whether those causes are measured or not (Firebaugh et al., 2013).
Fixed effects approach removes the effects of time-invariant causes, independently on
whether those causes are measured or not alleviating omitted-variable bias in a less-than-
fully-specified model (Firebaugh et al., 2013). The following model is estimated by
introducing two alternative equations based on environmental impact:

CDLI  = b
+ b ∗ GHG1 + b ∗ ROA + b ∗ FL + b ∗ SIZE + b ∗ CEOD + b ∗ BS +
b ∗ IND + u (1)
CDLI  = b
+ b ∗ GHG2 + b ∗ ROA + b ∗ FL + b ∗ SIZE + b ∗ CEOD + b ∗ BS +
b ∗ IND + u (2)
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Where:
CDLI = Carbon Disclosure Leadership Index
GHG1 = Ratio of GHG or CO2 to sales revenue in the company's reporting currency
GHG2= Dummy variable, where value 0= good environmental performance, value 1 = bad
environmental performance
ROA = Return on Asset
FL = Financial Leverage
SIZE = Sales
CEOD = Dummy variable, where value 1=CEO and Chairman, value 0=otherwise
BS = Board Size
IND = Percentage of independent directors on the Board
uit = error term
i = company
t = time

Larger values for the GHG imply worsening environmental performance for the company.
Before conducting the fixed effects models, a number of statistical tests were implemented in
order to ensure that the data are appropriate for the statistical analysis. Shapiro-Wilk W test
was developed in order to test if the distribution is normal. Multicollinearity was checked
via correlation matrix, while the Modified Wald test for groupwise heteroskedasticity in
fixed effect regression model test is used to test for heteroscedasticity, a Lagram-Multiplier
test was developed for serial correlation. A number of intentions were made to include more
independent variables, such as return on equity and control variables, such as industry
competitiveness; however, the statistical results were not important.

4. Results
4.1 Descriptive results and correlation matrix
Table 2 illustrates a summary of the descriptive statistics of the CDLI and GHG1 emissions.
According to the mean score, it seems that companies present more information regarding
CDLI criteria every year ranging from 70 points in 2009 to 86 points in 2013 points while
the maximum score attains 100 points in 2012 and 2013. The arising question is whether
environmental dissemination level has limits. Companies develop business operations and
procedures in order to achieve a competitive advantage compared to their competitors.
Consequently, confidential information can be considered as a valuable asset for companies
and it should not be published (Delmas and Blass, 2010).

8
 As far as GHG emissions concerns, the mean score shows that emissions decrease through
the years from 768.909 tons per sales in 2009 to 576.578 tons per sales in 2013. The
maximum level decreased considerably from 11444.5 tons in 2009 to 7488 tons per sales in
2013 while the standard deviation decreased substantially. The high levels of skewness could
probably led to incorrect results; thus GHG emissions were transformed logarithmically in
the proposed model (Luo and Tang, 2014; Tuwaijri et al., 2014).
The third variable shows that the period 2011-2013 environmental performance was under
the average of the five year period and standard deviation seems to be steadily through the
investigated period.

Table 2: Descriptive statistics.

Table 3 presents the Pearson correlation among the set of independent variables. The
correlation shows no indication of multicollinearity as the correlations between independent
variables do not exceed 0.8 (Judge et al., 1985; Guajarati, 1995). The results revealed that
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Pearson correlations between explanatory variables range from 0.0805 to 0.3844, thus,
multicollinearity is not a serious problem.

Table 3: Correlation Matrix

4.2. Empirical results and discussion

Variables are transformed to make distribution approximately normal following reciprocal
transformation approach to reduce the impact of large scores (Field, 2013). The modified
Wald statistic reveals the presence of heteroskedasticity in two approaches while the
Lagram-Multiplier test for serial correlation shows that serial correlation exists in the two
approaches. Before deployed fixed effect results, Huber–White robust clustered standard
errors approach was taking into account in order to adjust any potential heteroskedasticity
and serial correlation (Wooldridge, 2002; Stock and Watson, 2007; Neter et al., 1983;
Kennedy, 1992; Field, 2013) and recommended by Core et al. (2006) and Ashraf et al.
(2014).

Table 4: Fixed effect results

Regarding the effect of GHG on CDLI, the proposed model is significant with R squared
equal to 0.6034 which indicates that the independent variables explain 60.34% of the
variance in EDS with F=7.92 (p<0.01). We find that when companies decrease the
environmental performance in terms of GHG1, they also decrease the carbon disclosure level
consistent to Al-Tuwaijri et al. (2004), Clarkson et al. (2008) and Luo and Tang (2014).
According to voluntary disclosure theory, when polluting level is decreased managers select
to provide lesser environmental information in order to be “silent” about their actual
environmental performance (Clarkson et al., 2008). Moreover, Luo and Tang (2014)
supported that maintaining both "silence" and an opaque of actual carbon performance are
possibly the best strategy for companies when environmental performance is decreased.
Consequently, companies minimize the environmental disclosure level because lower levels
of environmental performance is considered as “bad” news neutralizing the negative impacts
of their polluting activities. Thus, the carbon emission disclosure is used as a signal tool by
managers to present the corporate actual GHG emissions, which cannot be imitated by their
poor competitive companies (Luo and Tang, 2014).
As far as the second approach of CDLI explanation, the recommended model is significant
with R squared equals to 0.6241 which indicates that the independent variables explain

9
 62.41% of the variance in EDS with F=11.48 (p<0.01). It is implied, that companies with
good environmental performance disseminates more environmental information to carbon
disclosures consistent to the voluntary disclosure theory; thus, the same implications can be
achieved with the first approach.
In both cases, the managerial behavior is explained by the voluntary disclosure theory
suggesting the positive effect of GHG emissions on carbon emission disclosure. Thus, the
carbon disclosure can be a signal to investors and other stakeholders for the actual corporate
environmental performance as they include environmental considerations in their investment
decisions enhancing company’s value (i.e. Clarkson et al., 2011; Francis et al., 2008). The
CDLI can be considered as Environmental Accounting index that attempts to enclose the
actual environmental performance that helps both corporate managers and investors to
connect the traditional accounting indices and environmental goals. Environmentally
Responsible Investors have the opportunity to advance their portfolio management procedure
by incorporating conventional financial ratios with environmental performance via CDLI. As
concerns the managerial behavior, it is ascertained that managers are more forthright in
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disclosing that performance (Al-Tuwaijri et al., 2004). Consequently, the results of the study
support better carbon performers seem to be more emission transparent while poorer carbon
performers tend to implement a strategy that keeps their carbon profiles opaque.
Regarding the effects of control variables, the coefficient of a company’s size is positive and
significant at 5% level, indicating that managers of larger size companies incorporate more
information in their carbon disclosure as a part of a strategy to deal political costs and
stakeholders’ pressure (i.e. Watts and Zimmerman, 1978; Said et al., 2009; Haniffa and
Cooke, 2005; Branco and Rodrigues, 2008; Luo and Tang, 2014; Gamerschlag et al., 2010).
Financial performance shows a negative effect on carbon disclosure level, indicating that
lesser financial performance leads the management to disclose more environmental
information consistent with Lia et al. 2014, Jennifer Ho and Taylor (2007) and inconsistent
with Said et al., 2009, Roberts (1992). The effect of CEO duality bears a significant positive
effect on carbon disclosure level inconsistent to Gul and Leung (2004) and Huafang and
Jianguo (2007) in contrast to US regulators’ and investors’ recommendation.
In the case of the second equation, the number of board size seems to affect the carbon
disclosure negatively inconsistent to previous studies suggesting that prediction that larger
boards will be able to exercise better monitoring (Siregar and Bachtiar, 2010). Finally,
independent directors are statistically positively significant at 1% level of significance
indicating that greater Board independence shows greater concern about the information
level that is presented via carbon disclosure (Ibrahim and Angelidis, 1995; Hillman and
Dalziel, 2003; Liao et al., 2015).

5. Conclusions
This study intends to deal an unresolved environmental issue regarding the relationship
between corporate environmental disclosures and corporate environmental performance (i.e.
Hughes et al., 2001; Al-Tuwaijri et al., 2004; Meng et al., 2014; Luo and Tang, 2014). In
particular, it is investigated whether carbon disclosure is indicative of the environmental
performance under the voluntary disclosure theory and legitimacy theory. For the purpose of
study, GHG emissions is employed as a proxy of environmental performance because it
causes global warming and CDLI is used as a proxy of environmental disclosure level.
Inconsistent to previous empirical studies, CDLI reflects both the depth and breadth of
corporate carbon information as it is based in qualitative and quantity disclosure criteria. The
results show that managerial behavior is explained by voluntary disclosure theory in which
the relationship between environmental performance and disclosure level is positive. In
particular, environmental disclosure can be used as a signal tool by corporate management so

10
 as to present to investors and other stakeholders their actual environmental performance.
This signal is very important to investors in order to assess their value and future prospects
of businesses. Finally, companies that disseminate carbon emissions’ information vulnerably
via CDP questionnaire intend to have better environmental performance in terms of GHG
emissions. The implication of the results is that when a company is unwilling to reveal its
emission profile, it is possible to have a poor climate change record.
Similarly, superior environmental performers tend to increase the transparency level via
carbon voluntary disclosure. Providing objective and verifiable disclosure in order to
transmit the actual environmental performance, carbon voluntary disclosure can be a
strategic tool for superior performers to enhance company’s environmental image gaining a
green competitive advantage (Brammer and Pavelin, 2006). Moreover, financial performance
has a negative effect on carbon disclosure while a company’s size, CEO duality situation,
percentage of independent directors and board size affect positively the dissemination level
of carbon information in their disclosure consistent to previous empirical studies.
There are some limitations that need to be mentioned and addressed on in the future. Firstly,
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the results cannot be generalized as only large size companies are considered neglecting
small or medium size companies. The comparison of different size companies could provide
exact valuable information regarding environmental strategies and policies. Furthermore,
GHG emissions cannot be eliminated totally even if companies incorporate in their
operations the edge of technology; thus, new measures should be introduced as proxies of
environmental performance. Finally, even if the five year period of investigation between
GHG performance and GHG disclosure is made for the first time, it still needs to incorporate
a longer period in the future comparing the results with other different geographical regions.
Despite the limitations, this study contributes to the existing literature. It extends previous
studies by focusing on GHG performance on carbon disclosure level by incorporating the CDLI
focused on the US business environment. The two most competitive theories, legitimacy theory
and voluntary disclosure theory, are revised in order to explain the positive effect of GHG
emissions performance on carbon disclosure level and deduce the managerial behavior. Finally,
the investigated period is extended in relation to previous empirical studies.

Appendix

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17
 Table 1: Description of variables
Variables Measurement
CDLI Reflects the comprehensiveness of a company's response in terms of the
depth and breadth of its answers to the Carbon Disclosure Project (CDP)
questionnaire. The score is normalized to a 100-point scale.
GHG1 Ratio of Total greenhouse gas (GHG) if available, else total carbon
dioxide (CO2) intensity calculated as metric tonnes of greenhouse gases,
if available, else CO2 emitted to sales revenue in the company's
reporting currency.
GHG2 Dummy variable, Where value 0 = company’s environmental
performance below its average environmental performance of five year
period and Value 1= company’s environmental performance above its
average environmental performance of five year period.
Return on Asset (Net Income / Average Total Assets) * 100
Financial Leverage Average Total Assets/Average Total Common Equity firm's capital
structure
Sales Total of operating sales expressed as natural log
CEO Duality Dummy variable, where value 1=CEO and Chairman, value 0=otherwise
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Board Size Number of directors on the company’s board

Independent directors Percentage of independent directors on the Board
 Table 2: Descriptive statistics.
CDLI
YEAR mean min max sd skewness kurtosis
2009 70.4412 36 96 13.6987 -.257057 2.50922
2010 72.8725 35 99 15.6703 -.487756 2.41738
2011 79.9902 38 39 14.7517 -.950066 3.06777
2012 84.902 45 100 13.2699 -1.00802 3.21694
2013 86.7549 45 100 12.9504 -1.1536 3.60728
GHG1
YEAR mean min max sd skewness kurtosis
2009 768.909 4.8908 11444.5 2003.19 3.75717 17.0466
2010 740.102 4.8812 11182.7 1963.27 3.73132 16.7349
2011 705.34 4.6776 9814.85 1872.87 3.65324 15.7934
2012 652.13 3.2552 9526.35 1708.81 3.62532 15.7957
2013 576.578 3.5972 7488.44 1377.62 3.29097 13.2569
GHG2
YEAR mean min max sd skewness kurtosis
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2009 0.196078 0 1 0.398989 -1.53098 3.3439

2010 0.303922 0 1 0.462221 -.852609 1.72694
2011 0.666667 0 1 0.473732 .707107 1.5
2012 0.803922 0 1 0.398989 1.53098 3.3439
2013 0.745098 0 1 0.437958 1.1248 2.26518
 Table 3: Correlation Matrix
CDLI GHG1 GHG2 ROA FL SIZE CEO BS INDIR WB
CDLI 1.0000
GHG1 -0.1007** 1.0000
GHG2 -0.1681* 0.1252* 1.0000
ROA -0.1432* -0.2520* -0.0540 1.0000
FL 0.1552* -0.0608 0.0454 -0.2049* 1.0000
SIZE 0.1664* -0.1796* -0.0628 -0.1700* 0.1986* 1.0000
CEO -0.0000 0.0679 0.0823*** -0.1222* 0.0805*** 0.0842*** 1.0000
BS 0.1449* 0.0008 0.0049 -0.1519* 0.1022* 0.3528* 0.0534 1.0000
INDIR -0.0162 0.0921** 0.0218 -0.0286 0.0611 0.1337* 0.3061* 0.0043 1.0000
*** Significant at the 0.10 level (2-tailed), **Significant at the 0.05 level (2-tailed), *Significant at the 0.1 level
(2-tailed).
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 Table 4: Fixed effect results
CDLI (equation 1) CDLI (equation 2)
Coefficient Standard Coefficient Standard error
Variables error t-Statistic t-Statistic
GHG1 -0.0350981 * 0.0113127 -3.10
GHG2 0.001088* 0.0002235 4.87
ROA -0.0000171 * 4.26e-06 -4.01 -0.0000112*** 6.39e-06 -1.75
FL 0.0037093 0.004173 0.89 0.0027514 .0039494 0.70
SALES 11.25769 ** 4.812401 2.34 8.136226 ** 3.675538 2.21
CEO 0.0016043 * 0.0004954 3.24 0.0013655** 0.0005297 2.58
BS -0.0226417 0.0140158 -1.62 -0.0230767*** 0.0129753 -1.78
INDIR 0.6538723* 0.1866505 3.50 0.6201261* 0.1739639 3.56
Constant 0.00503 0.0033118 1.52 0.0047271 0.0030237 1.56
F Value 7.92* 11.48*
R-squared 0.6876 0.7039
Adj R-squared 0.6034 0.6241
*Significant at the 0.01 level (2-tailed), **Significant at the 0.05 level (2-tailed), ***Significant at the
0.1 level (2-tailed). Adj R-squared was calculated by areg command.
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 Appendix

Author(s) Environmental Environmental Disclosure categories

Performance
Meng et al. Environmental Based on eight dimensions (43 disclosure items)
(2014) violation events 1. Values, policy, and environmental organization
2. Environmental management system and initiatives
3. Technology, investment, and expenditure related to the
environment
4. Resource consumption and pollutant control
5. Environmental performance improvement
6. Important environmental issues and environmental impact
7. Compliance with environmental regulations
8. Environmental public welfare activities and other
Luo and Tang CO2 emission CDLI
(2014) intensity
Freedman and Carbon emissions Based on the following categories:
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Jaggi (2010) 1. Mention or allude to global warming or the Kyoto Protocol

2. GHG (or carbon) emissions for 2005
3. Prior years’ GHG (or carbon) emissions
4. Statement with regard to what causes the company to produce
emissions
5. Whether there is an outside firm doing an environmental
audit
6. Amount of energy used in 2005
7. Specific plans to reduce GHG emissions
8. Future expenditures for reducing GHG
For EU companies:
9. Stating their carbon allocation for 2005 (or 2006)
10. Whether they need to buy/sell carbon credits
For Non-EU companies:
11. Anything about obtaining carbon credits
Clarkson et al. Toxic Release Index Based on Global Reporting Initiative requirements
(2008) and Toxic waste
treated, recycled or
processed in the
production
Al-Tuwaijri et al. Toxic waste recycled Four key environmental indicators:
(2004) to total toxic waste 1. the total amount of toxic waste generated and transferred or
generated recycled
2. financial penalties resulting from violations of 10 federal
environmental laws
3. Potential Responsible Party (PRP) designation for the
cleanup responsibility of hazardous-waste sites
4. The occurrence of reported oil and chemical spills.
Patten (2002) Amount of toxics Eight aspects of environment:
released into the 1. Discussion or mention of specific environmental regulations.
environment 2. Discussion or mention of the firm’s processes, facilities, or
product innovations relative to reduction of environmental
degradation.
3. Statement or discussion of the company’s concern for the
environment.
4. Statement or discussion of the company’s environmental
compliance status.
5. Disclosure of current or past years’ capital expenditures for
pollution control or abatement.
6. Disclosure of projected future capital
Expenditures for pollution control or abatement.
7. Disclosure of current or past years’ operating costs for
 pollution control or abatement.
8. Disclosure of projected future operating costs for pollution
control or abatement.
Hughes et al. Council on Economic Based on Wiseman’s (1992) categories (23 disclosure items)
(2001) Priorities’ evaluations 1. Economic factors
of environmental 2. Litigation
performance 3. Pollution abatement
4. Other environmental related information
Wiseman (1992) Council on Economic Based on environmental reporting literature. Four categories (18
Priorities’ evaluations disclosure items):
of environmental 1. Economic factors
performance 2. Litigation
3. Pollution abatement
4. Other environmentally related information
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