An Empirical Analysis on the Relation between Corporate Environ-mental Performance and Discretionary Environmental Disclosure Using Stand-alone Environmental Reports or Supplementary Web Disclosures

Previous literature provides mixed results on the relationship between corporate environmental performance and the level of environmental disclosures. This study was motivated by the lack of consistent evidence and the relative paucity of researches devoted to this topic under Korean context. We investigate the relation between the level of corporate environmental disclosures and firm environmental performance using the sample of 180 cases of stand-alone environmental (or sustainability) reports and/or environmental information disclosed on web sites of individual sample firms in 2007. The level of environmental disclosure was measured using content analysis index developed by Clarkson et al. (2008) based on the Global Reporting Initiative sustainability reports. The environmental performance was measured based on the information available from TRI (Toxics Release Inventory) database. We document a positive association between corporate environmental performance and the level of discretionary environmental disclosures after controlling for firm size, environmental sensitivity, forthcoming financial performance, environmental concern, and public visibility. This result suggests that companies with good environmental performance want to differentiate themselves from companies with poor performance by attempting to increase discretionary environmental disclosures. In doing so, they potentially increase firm valuation since knowledgeable investors will infer that exposures to latent environmental liabilities are lower for good performers. In an additional analysis, we also examined the relations among environmental performance, environmental disclosure, and economic performance within a simultaneous equation model to control for a potential endogeneity problem as suggested by Al-Twaijri et al.(2004). We do not find significant endogenous relations among the three constructs, however, which is also corroborated by the Hausman (1978) test result.