4.

4 Endogeneity Issue
We find that firms with higher adoption of IR4.0 are associated with high social well-being,
especially SW and WORKF. However, we recognise that firms’ reporting of social well-being
and decisions to report IR4.0 can be endogenously determined. To the extent that firms with
high SW and WORKF scores are more likely to disclose IR 4.0, our results may suffer from
self-selection bias. To control for such possible self-selection bias, we employ Heckman’s
(1979) two-stage estimation procedure. In the first stage, we estimated a probit regression to
explain the determinants of disclosure decisions of IR4.0. We include ROA in the first model.
The estimated parameters from the probit regression are used to calculate the inverse Mills
ratio (IMR), which is then included as an additional explanatory variable in the second stage
OLS regression model. The first stage of probit regression is estimated as follows:
INDREV= α0 + β1 SIZEit + β2LEVit + β3LIQUIDit + β8HILITit (2)
+ β9DUALITYit + β10BDSIZEit + β11ROAit + θ1-nYear effects
+ δ1-nIndustry effects + εit
where ROA is the ratio of net income to total assets, and other variables are as previously
defined.

The results for the first and second stage estimations are presented in Table 3. The result for
the probit model, as reported in column (1), reveals that firms with a larger size, high
profitability, large board of directors, and low liquidity are more likely to report IR 4.0.
The results for the second stage, as reported in columns (2) and (3), show that the coefficients
of INDREV remain positive and significant, indicating that firms with IR 4.0 disclosure exhibit
high SW and WORKF scores, respectively. The coefficients for DA in columns (2) and (3) also
reached a similar conclusion that firms with lower discretional accruals or high financial
reporting quality will have a greater tendency to disclose IR 4.0. From the second-stage
estimations, we find an insignificant coefficient of MILLS, thus alleviating our concern
regarding self-selection bias.

Thus, our evidence on the positive relationship between the adoption of IR4.0 and social well-
being remains robust. As indicated by the results, one way in which IR4.0 can contribute to
social well-being could be through improved access to healthcare. IR4.0 can also have positive
effects on social well-being through increased access to education and information. Online
learning platforms and educational resources allow employees to access education and training
regardless of their location or financial means, thereby reducing educational barriers and
promoting lifelong learning. Similarly, the widespread availability of information through the
Internet and social media can promote transparency and accountability, enabling stakeholders
to hold a company accountable and promote social justice.

In terms of the workforce, IR4.0 has the potential to create new job opportunities and improve
working conditions. While some jobs may be automated, others require new skills and expertise
in areas such as data analysis and digital literacy. Technologies such as robotics and
exoskeletons can help reduce physical strain and injury in manual labour jobs, while AI-
powered tools can improve decision-making and productivity. Moreover, IR4.0 can enable
flexible and remote work arrangements, reducing commuting times and increasing work-life
balance. This can benefit not only employees, but also employers, who may see improved
retention rates and reduced overhead costs.
Table 3: Two-stage Heckman regression estimates of the effect of IR 4.0 and financial reporting
quality on social well-being
First Stage Second Stage
Dependent IR4 SW WORKF
variable
(1) (2) (3)
Intercept -12.527*** Intercept -18.197 -58.068
(-4.447) (-0.617) (-1.255)
SIZE 0.504*** INDREV 16.278** 21.377*
(3.949) (2.322) (1.943)
LEV 0.142 DA -144.636** -243.394**
(0.207) (-2.053) (-2.201)
LIQUID -0.251** SIZE 2.838** 4.576**
(-2.055) (2.057) (2.113)
HILIT -0.517 LEV -0.601 23.856*
(-1.339) (-0.075) (1.888)
DUALITY 0.978* LIQUID 1.691 4.383**
(1.804) (1.297) (2.141)
BDSIZE 0.155*** HILIT -4.602 -2.824
(3.334) (-0.749) (-0.293)
ROA 10.423*** DUALITY -1.681 -5.517
(4.445) (-0.298) (-0.624)
BDSIZE -1.117** -0.881
(-2.029) (-1.019)
GROWTH 11.703** 13.098
(2.159) (1.540)
BDIND -0.078 1.489
(-0.009) (0.112)
ACIND -8.822 -30.807*
(-0.769) (-1.712)
MILLS -5.644 -5.929
(-1.378) (-0.922)
Fixed Effects Included Fixed Effects Included Included
Pseudo R2 0.2269 Adj.R2 0.59 0.46
N 232 N 232 232
LR chi2 64.84 F-stat 10.104 6.301
*, ** and *** represent significance at p<0.10, <0.05 and <0.01, respectively. t-values are reported in
parentheses. SW is the social pillar scores (measured by four pillars; community, human rights, product
responsibility and workforce) as provided by Refinitiv database; WORKF is the relative weight
calculated from controversy scores published in the media linked to workforce diversity and
opportunity, health and safety, wages or wage disputes and the occurrence of a strike or an industrial
dispute that led to lost working days; HUMAN is the relative weight calculated from the number of
controversies published in the media linked to child labour issues, and human rights issues; PROD is
the relative weight calculated from the number of controversies published in the media related to
consumer complaints on company’s products or services, customer health and safety, employee or
customer privacy and integrity, product access, over-marketing of unhealthy food to vulnerable
consumers, and responsible research and development; INDREV takes value 1 if the company discloses
any information related to the adoption or application of IR 4.0, otherwise 0; DA is the absolute
discretionary accruals based on Dechow et al (1995); SIZE is the natural logarithm of firm’s total assets;
LEV is the ratio of total debt to total assets; GROWTH the percentage changes in sales; LIQUID is
current assets to current liabilities; HILIT is the dummy variable, 1 for the firm operating in a high-
litigation industry, and 0 otherwise; DUALITY a dummy variable that takes the value of 1 if the CEO
and chairman are the same person, otherwise 0; BDSIZE is the number of board directors; BDIND is
the number of independent board of directors and ACIND is the number of independent audit
committees.