Does managerial ability matter for corporate climate change disclosures?

• Published date: 01 January 2023
• Author: Hussein Daradkeh,Syed Shams,Sudipta Bose,Abeyratna Gunasekarage
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/corg.12436

ORIGINAL ARTICLE

Does managerial ability matter for corporate climate change

disclosures?

Hussein Daradkeh

1

| Syed Shams

1

| Sudipta Bose

2

|

Abeyratna Gunasekarage

3

1

School of Commerce, University of Southern

Queensland, Brisbane, Queensland, Australia

2

Discipline of Accounting and Finance,

Newcastle Business School, University of

Newcastle, Sydney, New South Wales,

Australia

3

Department of Banking and Finance, Monash

Business School, Monash University,

Melbourne, Victoria, Australia

Correspondence

Sudipta Bose, Discipline of Accounting and

Finance, Newcastle Business School,

University of Newcastle, Sydney, NSW 2000,

Australia.

Email: sudipta.bose@newcastle.edu.au

Abstract

Research Question/Issue: This study examines the association between managerial

ability and the extent of firm-level climate change disclosures and the moderating

role of corporate governance in this association.

Research Findings/Insights: Results based on a sample of 2298 firm-year observa-

tions from the United States (US) from 2005 to 2019 suggest that firms with more

capable managers tend to make more climate change disclosures. This significant

positive association is weakened when firms suffer from weak corporate governance.

These findings remain robust after addressing omitted time-invariant variable bias,

observable heterogeneity bias, sample selection bias, and reverse causality and when

using alternative climate change disclosure proxies. Further analysis shows that cli-

mate change disclosures have a mediating role in the association between managerial

ability and firm valuation.

Theoretical/Academic Implications: Given the growing importance of integrating cli-

mate change-related information into a firm's operations and the pressure exerted by

various stakeholders, understanding the drivers of climate change disclosures has

emerged as an important area of research in the accounting and finance literature. To

the best of our knowledge, this is the first study to examine any link between mana-

gerial ability and climate change disclosures.

Practitioner/Policy Implications: Considering the recent pressure imposed on com-

panies by regulatory authorities for more climate change disclosures, our study's find-

ings have important implications for regulators, policy makers, investors, financial

analysts, researchers, and firms.

KEYWORDS

climate change disclosures, firm value, governance, managerial ability

1|INTRODUCTION

Over the past two decades, climate change and global warming have

emerged as the most imminent global environmental issues. One of a

sustainable economy's biggest challenges is managing climate change

risk (United Nations [UN], 2020; World Bank, 2010), a risk that

organizations are confronting today owing to extreme climate

change-related events (Task Force on Climate-Related Financial Dis-

closures [TCFD], 2017). According to the Intergovernmental Panel on

Climate Change (IPCC) (2014), climate change threatens the existence

of mankind in the modern world. Consequently, companies are con-

tinuously pressured by various stakeholders to disclose information

Received: 4 February 2021 Revised: 18 February 2022 Accepted: 19 February 2022

DOI: 10.1111/corg.12436

Corp Govern Int Rev. 2023;31:83–104. wileyonlinelibrary.com/journal/corg © 2022 John Wiley & Sons Ltd 83

on their activities that affect climate change. This is evidenced by the

formation of the Task Force on Climate-Related Financial Disclosure

(TCFD) and the Carbon Disclosure Project (CDP). Given the growing

importance of integrating climate change-related information into a

firm's operations and the pressure exerted by various stakeholders,

understanding the drivers of climate change disclosures has emerged

as an important area of research in the accounting and finance litera-

ture. Previous studies suggest several of the firm-level factors that

drive firms' climate change disclosures (Ben-Amar et al., 2017; Bui

et al., 2020; Liao et al., 2015; Tauringana & Chithambo, 2015).

1

These

researchers argue that more extensive climate change disclosures are

made by firms with stronger climate governance (Bui et al., 2020),

environmental committees (Liao et al., 2015; Peters & Romi, 2014),

larger boards (Liao et al., 2015; Tauringana & Chithambo, 2015), and

gender-diverse boards (Ben-Amar et al., 2017; Haque, 2017; Liao

et al., 2015).

Although extant research helps to develop an understanding of

the various firm-level determinants of climate change disclosures,

evidence is lacking on whether climate change disclosures are

affected by managerial ability. Managerial ability reflects the knowl-

edge, skills, and experience possessed by the team that manages the

firm and the efficiency displayed by managers in transforming corpo-

rate resources to revenue (Demerjian et al., 2012). Managers who

are more capable are in a better position to understand advance-

ments in technology and industry trends, to correctly project future

product demands, to select and implement projects that generate

higher returns, and to improve resources productivity, as well as

being efficient in managing their employees. Finkelstein (1992)

argues that top managers are entrusted with the power to deal with

both internal and external uncertainty. Uncertainty is an integral part

of climate change issues (Stern, 2008). The interview evidence pres-

ented by Kumarasiri and Gunasekarage (2017) reveals that, while

perceiving climate change risk as a threat (both financial and reputa-

tional), company managers believed that climate change risk pres-

ented them with opportunities to develop new renewable energy

sources, introduce low carbon products, and support their customers

in managing their emissions.

Existing evidence on managerial ability reveals that the more

capable managers lead their companies to success during crisis

periods through efficient utilization of resources, making use of low-

cost debt financing and grabbing investment opportunities available in

the market (Andreou et al., 2017; Lee et al., 2018). Grenadier (2002)

contends that investments made during periods of severe uncertainty

can create strategic advantages in an imperfect setting by enabling

companies to acquire growth opportunities, thereby increasing their

market share. Therefore, capable managers should be in a position to

manage climate change risk by implementing climate change risk man-

agement policies while making use of any advantages arising from

uncertainty associated with climate change issues. From the legiti-

macy theory perspective, an organization exists only if the society

confers upon the organization the state of legitimacy (Deegan, 2002)

and managers use social and environmental disclosures as a means to

counter legitimacy threats (Deegan, 2019). The increased stakeholder

demand for the disclosure of climate change information (Ben-Amar

et al., 2017; Bui et al., 2020; Clarkson et al., 2015; Kolk et al., 2008)

can be viewed as societal pressure in this legitimization process.

Together with their desire to maintain the social license to operate,

capable managers' ability to manage the uncertainty associated with

climate change while making use of the opportunities presented by

the same scenario can consequently create a link between managerial

ability and firms' climate change disclosures.

Therefore, the main objective of our study is to investigate

whether managerial ability influences the disclosure of climate change

information at the firm-level. As prior studies show that firms' climate

change disclosures are influenced by corporate governance mecha-

nisms (Bui et al., 2020), we examine the moderating role played by

corporate governance mechanism in the association between mana-

gerial ability and climate change disclosures. Furthermore, we examine

the mediating role of climate change disclosures in the association

between managerial ability and firm valuation, given the inconclusive

findings of this association.

Using a sample of 2298 firm-year observations for the period

2005–2019, we examine the association between managerial ability

and the extent of firm-level climate change disclosures and the mod-

erating role of corporate governance in this association. We estimate

and measure managerial ability using a modified version of Demerjian

et al.'s (2012) firm efficiency model by adding board size, board inde-

pendence, and Chief Executive Officer (CEO) duality as additional

control variables, along with six firm characteristics (firm size, market

share, firm age, positive free cash flow, complex multisegment, and

international operations). We measure the level of climate change

disclosure with the CDP climate change disclosure score. To estimate

the regression models, we use the ordinary least squares (OLS)

regression method. As our findings may be affected by observable

and unobservable selection bias, we employ propensity score

matching (PSM) analysis and Heckman's (1979) two-stage analysis.

We undertake several robustness analyses, including firm fixed-effect

regression, instrumental variable (IV) analysis, and quasi-experimental

analysis. We also examine the mediating role of climate change dis-

closures in the association between managerial ability and firm

valuation.

We find that managerial ability has a positive and significant influ-

ence on the level of climate change disclosures of firms in our sample.

This finding supports the view that capable managers have less career

concerns and, thus, are motivated to disclose more climate change

information. We also find that the above influence is weakened if

firms have weak corporate governance. Our findings remain robust

after addressing the omitted time-invariant variable bias using firm

fixed effects, observable selection bias using PSM analysis,

unobservable selection bias using Heckman's (1979) two-stage analy-

sis, and endogeneity concerns by implementing two-stage analysis

with IVs and quasi-experimental analysis. We also find that climate

change disclosures have a mediating role in the association between

managerial ability and firm valuation.

Our study makes several contributions to the existing literature.

Firstly, as the TCFD recommends that companies demonstrate their

84 DARADKEH ET AL.