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The Relevance of Environmental Disclosures for Investors and Other Stakeholder Groups: Are Such Disclosures Incrementally Informative?

This study examines the impact of voluntary environmental disclosure on the cost of equity capital and firm value, and on the public perception about a firm’s environmental performance. A salient feature of the study is that our analysis controls for corporate environmental performance using actual toxic emissions data and for firms’ general disclosure propensity. We measure voluntary environmental disclosures in standalone environmental reports, CSR reports, and corporate web sites using a disclosure index consistent with the Global Reporting Initiative disclosure framework. Using a sample of firms from the five most polluting industries in the U.S., we find that voluntary environmental disclosures are incrementally informative for investors over current toxic emissions data in our firm valuation analyses. We also find that investors appear to use toxic emissions data to assess the firm risks and unbooked future environmental liabilities. In addition, we find that voluntary environmental disclosure is positively associated with the Janis-Fadner coefficient, consistent with voluntary environmental disclosure enhancing non-investor stakeholder perception about firms’ environmental performance. However, we do not find evidence that voluntary environmental disclosures affects firm’s cost of equity capital.