Audit quality, media coverage, environmental, social, and governance disclosure and firm investment efficiency. Evidence from Canada

• DOI: https://doi.org/10.1108/IJAIM-03-2019-0041
• Pages: 45-72
• Date: 13 January 2020
• Published date: 13 January 2020
• Author: Ahmad Hammami,Mohammad Hendijani Zadeh
• Subject Matter: Accounting/accountancy,Accounting & Finance

Audit quality, media coverage,

environmental, social, and

governance disclosure and f‌irm

investment ef‌f‌iciency

Evidence from Canada

Ahmad Hammami and Mohammad Hendijani Zadeh

John Molson School of Business, Concordia University, Montreal, Canada

Abstract

Purpose –The purpose of this study is twofold: f‌irst, to introduce two determinants of environmental,

social and governance (ESG) disclosuretransparency, namely, audit quality and public media exposure; and

second,to investigate the impact of ESG transparency on f‌irm-levelinvestment eff‌iciency.

Design/methodology/approach –Ordinary least square (OLS) regressions are applied to explore the

relationship between the two variables of interest (audit quality and public media exposure) and ESG

transparency on a sample of publicly listed Canadian f‌irms during the period 2008 to 2017. Then, an

econometricmodel is used to investigate the association betweenESG transparency and investment eff‌iciency

under two identif‌iedscenarios, under-investment and over-investment.

Findings –Results show that audit quality and public media exposure are two main drivers of ESG

transparency, hence, commitment to high-quality audits and exposure to high public media coverage drive

f‌irms to disclose more extensive and transparent ESG information. The authors also f‌ind a negative

association between ESG transparency and f‌irm-level investment ineff‌iciency. Thus, ESG transparency

generates inf‌luential incremental information that helps mitigatethe information asymmetry between f‌irms

and stakeholderswhile fostering better resource allocationthrough investment eff‌iciency.

Originality/value –This study contributesto the corporate social responsibility (CSR) and ESG literature

by identifying audit quality and public media exposure as two determinants of ESG transparency; and by

noting that higher ESG transparency has a signif‌icant economic effect on capital investment decisions

through higherf‌irm-level investment eff‌iciency.

Keywords Corporate social responsibility, Audit quality, Investment eff‌iciency, Environmental,

Social and governance disclosure, Public media exposure

Paper type Research paper

1. Introduction

In recent years, there has been a growing public demand for f‌irms to pay more attention to

ethical, social and environmental issues. This demand has motivated f‌irms to undertake

socially appropriate measures and create an alignment between corporate operations and

social value (Cormier and Magnan, 2014). In addition, this public demand has pressured

f‌irms to create a desirable corporate social responsibility (CSR) image in society, and to

disclose more informationabout environmental, social and governance (ESG) issues as these

matters are of high importance to stakeholders (Ioannou and Serafeim, 2012). Cormier and

Magnan (2014) note that f‌irms are responding to those pressures, where, an increasing

number of Canadian companies are inclined to incorporate ESG as part of their core

mandates in response to both investors’demands for more ESG-related disclosures, and to

Firm

investment

ef‌f‌iciency

45

Received25 March 2019

Revised29 May 2019

12July 2019

Accepted17 August 2019

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 1, 2020

pp. 45-72

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-03-2019-0041

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

investors’consideration for these issues in their investment decision process. Prior ESG

literature has primarily concentratedon ESG performance (Benlemlih and Bitar, 2018;Chih

et al.,2008;De Bakker et al.,2005;Waddock and Graves, 1997), yet there is little research

that focuses on:

how audit quality and public media impact ESG transparency; and

how ESG transparency is associated with investment eff‌iciency.

This is the gap that we intend to f‌ill in our study.

Based on a sample of 151 companies listed in the S&P/TSX Index of the Toronto Stock

Exchange over the periodof 2008 to 2017, this paper explores:

whether audit quality and public media exposure act as determinants of ESG

transparency; and

whether ESG transparency is associated with investment eff‌iciency.

Following prior literature (Eccles et al., 2011), we rely on Bloomberg’s ESG score as a

measure of ESG disclosure andtransparency. This score ranges from 0 to 100 and indicates

the quantity and transparency of information disclosed by f‌irms. Further details of

Bloomberg’s ESG scoreare provided in the research design section.

Based on prior literature (Atkins, 2006;Hemingway and Maclagan, 2004), we propose

that commitment to high-quality audits is a mechanism that boosts the reliability of CSR

reports and renders those reports more informative to investors. Therefore, we believe that

the reliability of CSR reporting is ref‌lected in higher ESG transparency. We rely on two

commonly used proxies for auditquality:

audit fees (Caramanis and Lennox, 2008); and

absolute discretionary accruals as proposed by DeFond and Park (2001).

Our results show a positive(negative) association between audit fees (absolutediscretionary

accruals) and ESG transparency, indicating increased ESG transparency with higher audit

quality. Our results are robust to using auditors’industry specialization as an alternate

measure of audit quality(Sun and Liu, 2011).

With respect to public mediaexposure, we argue that in the face of high media exposure,

as media coverage can assist f‌irms in communicating their ESG activities to different

stakeholders, f‌irms are more likely to improve the quantity and transparency of ESG

disclosures in an attempt to be perceivedas more trustworthy and to preserve/improve their

legitimacy and reputation, as described by the legitimacy theory. We use the number of

news reports published about each f‌irm in the Dow JonesFACTIVA database as a measure

of public media exposure. Our f‌indings conf‌irm our prediction by showing a signif‌icant

positive associationbetween public media exposure and ESG transparency.

Finally, with respect to investment eff‌iciency, we hypothesize a positive association

between ESG transparency and f‌irm investment eff‌iciency. We argue that mitigating

information asymmetry between f‌irms and other stakeholders helps promote investment

eff‌iciency, and we believeESG transparency acts in such a manner. We measure investment

eff‌iciency as the variation from normal investment levels, based on the methods used in

previous studies (Biddle et al.,2009;Chen et al., 2011;Chen et al., 2017). As predicted, our

results indicate that ESGtransparency is positively (negatively) associatedwith investment

eff‌iciency (ineff‌iciency) in our sample, displaying improved f‌irm resource allocation with

increased ESG disclosure. Our f‌indings are robust to using a different measure of

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