Determinants of Environmental Reporting in Malaysia

This study empirically examines the incentives that motivate Malaysian listed companies to disclose environmental information in their annual reports. The study attempts to explain the occurrence of the environmental information with reference to some company specific characteristics from the contracting and political cost perspectives. Six variables are hypothesised to influence companies' decision to voluntarily disclose environmental issues in their annual reports. The results reveal that only two out of the four hypotheses are supported; that is, the voluntary disclosure of environmental information in the annual reports is negatively related to firms' financial leverage and that their accounts were audited by Big-5 firms. Explanations are proffered for these findings. Keywords: Environmental reporting, ' contracting theory, political cost theory, Malaysia. I. INTRODUCTION This study attempts to examine firm-wide factors that motivate Malaysian listed companies to voluntarily disclose environmental information in their annual reports. The disclosure of environmental information attracts attention as the information itself involves the living quality despite the fact that such reporting is voluntary in nature. The current study attempts to explain the occurrence of the environmental information with reference to some company-specific characteristics. Environmental information in annual report is defined as a subset of the corporate social responsibility, which includes information regarding waste management, recycling programs and environment control. Voluntary reporting in corporate annual reports is believed to be costly and therefore it is of interest to examine the motivation of companies' to present such non-mandated information. The said costs include compilation costs as the environmental information is usually not readily available in the financial records. The suggested motivations for companies to voluntarily disclose environmental information are varied. One of such explanations is in the concept of organisational legitimacy as developed by Lindblom (1984), who stated four reasons for such disclosure. The first reason is to reduce the "legitimacy gap" caused by the failure of performance on the part of the organisation by informing its "relevant publics" about changes in respect to how the organisation has performed due to environmental changes. For instance, a major oil spill in one financial year may result in disclosures concerning increasing environmental concern and safety. The second reason is to change the perception of itself, but not necessarily its actual behaviour; for example, a company may have an undesirable waste disposal practice but may show imagery of clean working environment. The third reason is to deflect attention from public concerns by using emotive imagery; for example, a company that pollutes the environment through its production processes may disclose information regarding a recycling program. The final reason for the voluntary disclosure of environmental information is to alter outside expectation of its performance when it feels its "relevant publics" have unrealistic expectations of its social and environmental performance. Apart from the reasons above, findings from prior studies have revealed other reasons for environmental reporting which will be discussed in a later section. The motivation behind the current study not only lies in explaining the reasons for voluntary disclosure but also to evaluate the issue, based on empirical evidence, from a contracting and political cost perspective. The remainder of this paper is organised as follow: Next is a section that discusses issues relating to environmental reporting, followed by a review of selected prior studies. The development of research hypotheses are later deliberated, and then followed by the research methodology. Finally, the paper presents the results and its implications, and some concluding remarks. …