Does board independence moderate the relationship between environmental disclosure quality and performance? Evidence from static and dynamic panel data

• DOI: https://doi.org/10.1108/CG-06-2018-0196
• Pages: 580-610
• Published date: 28 February 2019
• Date: 28 February 2019
• Author: Mohammad Alipour,Mehrdad Ghanbari,Babak Jamshidinavid,Aliasghar Taherabadi
• Subject Matter: Corporate governance,Strategy

Does board independence moderate

the relationship between environmental

disclosure quality and performance?

Evidence from static and dynamic

panel data

Mohammad Alipour, Mehrdad Ghanbari, Babak Jamshidinavid and Aliasghar Taherabadi

Abstract

Purpose –This study aims to link environmental disclosure quality (EDQ) to firm performance and

examinethe moderating role of board independencein this relationship.

Design/methodology/approach –Drawing on agency theory and stakeholder theory, the authors

developed and tested hypotheses using original survey data from 720 firm-year observations collected

from 120 Iranian companiesover six years between 2011 and 2016. In this paper, theyconducted static

and dynamicpanel data analysis.

Findings –After correcting for endogeneity bias, the results showedthat there is a significant positive

relationship between EDQ and firm performance. The results also showed that board independence

significantly reinforces the positive effect of EDQ on performance, and firms with more independent

board membersare involved environmental disclosure for improvedperformance. This is consistent with

agency theory,which posits that a more independent board of directorscan better monitor the CEO and

reduce incentives for pursuingpersonal interests, which in turn improves performance.The results are

robustafter performing sensitivity tests.

Research limitations/implications –This paper takes the perspective of corporate governance to

empirically examine the effect of EDQ on firm performance. This study makes a contribution to the

literatureby showing that board independencemoderates the effects of EDQ on firmperformance.

Practical implications –The evidencesupports the emphasis that recent policy statementshave put on

increasing the number of independent directors on corporate boards. This study offers insights to

policymakersinterested in enhancing themonitoring role of corporate boards.

Originality/value –The study adds value to the understandingof the effect of the EDQ on performance

and how boardindependence influences this relationship,particularly in an emerging economylike Iran.

Keywords Company performance, Corporate governance, Emerging market,

Corporate social responsibility, Emerging markets, Board of directors, Board Independence,

Independent Directors, Corporate environmental reporting (CER)

Paper type Research paper

1. Introduction

One of the outcomes of industrial development has been the emergence of a link between

economy, ethics and politics as well as an interaction between economic issues and moral

and social values. As a result, managers of business entities no longer merely focus on

higher productivity, but also address various environmental, ethical, racial and social

issues. Along with these changes, corporate environmental reporting (CER) has gained

Mohammad Alipour,

Mehrdad Ghanbari and

Babak Jamshidinavid are

all based at the Department

of Accounting and

Management, Kermanshah

Branch, Islamic Azad

University, Kermanshah,

Iran. Aliasghar Taherabadi

is based at the Department

of Accounting and

Management, Kangavar

Branch, Islamic Azad

University, Kangavar, Iran.

Received 3 June 2018

Revised 8 October 2018

27 November 2018

Accepted 7 January 2019

PAGE 580 jCORPORATE GOVERNANCE jVOL. 19 NO. 3 2019, pp. 580-610, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-06-2018-0196

increasing importance since the 1980s. Studies show that in 2014 more than 7,000

companies worldwide engaged in corporate social reporting (CSR) (Khan et al.,2016). In

the literature, CSR and CER are explained using the win-win relationship between

businesses and stakeholders as a means for increasing profitability and improved firm

performance (Brown and Fraser, 2006).Many studies have examined the direct relationship

between CER and firm performance to address whether firms get involved with CER to

improve their performance (Freedman and Jaggi, 1988;Murray et al.,2006;Liu and

Anbumozhi, 2009;D’Amico et al., 2016;Chen et al., 2015;Lee, 2017). Literature reviewalso

reveals that the inconsistency of these results of these studies, with some studies reporting

a positive relationship,while others reporting a negative or no relationship.

The majority of relevant studies have been done in developed countries and emerging

economies. The following issues make the case for performing a similar study in Iran. First,

CSR and CER studies are often performed in countries where social and environmental

disclosure is mandatory, while in Iran these disclosures are voluntary. As a result, the

emerging economy of Iran provides a unique opportunity for investigating voluntary

environmental disclosures. Second, past studies have some methodological issues. For

instance, none of these studies have considered the problem of endogeneity and as a

result may have inconsistent results. This creates a significant gap in the literature.

Inconsistency may also have been because of the failure to take certain factors into

account, including the effect of corporate governance on the relationshipbetween CER and

performance. Third, since firms engage in social reporting to increase profitability and

improve performance (Friedman, 1970), we can predict a positive relationship between

environmental disclosure quality (EDQ) and firm performance (of course the present

research is not designed based on this assumption). An inverse relationship can also exist

between these two variables because of the dynamic nature of CER, since the current year

EDQ may have affected the achieved performance of previous years. Unlike previous

studies, the present research uses dynamic panel data generalized moments methods

(GMM) along with static panel data because of endogeneity and dynamic nature of CER

and the challenge of identifyingappropriate instrumental variables that affect performance.

The main goal of this study is to examine the relationship between EDQ and firm

performance. Unlike previous studies,this research also investigates the effect of corporate

governance on this relationship, as well as the role of board independence in improving

CER, consequently improving performance. EDQ is measured based on the very

comprehensive Global Reporting Initiative standard (GRI, G4). The reason for choosing this

measure of EDQ is that its instructions and indicators have been globally recognized and

are widely used in the CER literature (Adams, 2004). Firm performance is evaluated using

Tobin’s Q and accounting measures of performance, which are again widely used in the

literature. According to the agency theory,board independence plays a significant role in a

firm’s CER (Gul and Leung, 2004;Lim et al.,2007). We thus argue that board

independence can affectthe relationship between CER and performance. To the bestof our

knowledge, no study has examined this interactive effect, and the present research seeks

to fill this gap in the literature on corporate governance and EDQ. Therefore, this is the first

research to examine the effect of board independence on the relationship between EDQ

and measures of firm performance. To this end, the stakeholder theory and agency theory

form the basis of the study to examine both the effect of EDQ on firms performance and the

role of corporate governance in environmental disclosures.

This study uses data from Iranian firms for several reasons. First, Iran is an emerging

economy and the second biggest economy in the Middle East and North Africa

(MENA). Because of cultural and religious differences, Iranian companies have unique

leadership styles (Soltani et al., 2015). Publication of the Corporate Governance Code

in 2004 by the Research and Development Center of the Tehran Stock Exchange (TSE)

provided a framework for accountability and transparency for Iranian companies

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