ESG disclosure and firm performance before and after IR. The moderating role of governance mechanisms
DOI | https://doi.org/10.1108/IJAIM-09-2019-0108 |
Date | 27 March 2020 |
Pages | 429-444 |
Published date | 27 March 2020 |
Author | Khaldoon Albitar,Khaled Hussainey,Nasir Kolade,Ali Meftah Gerged |
Subject Matter | Accounting & Finance,Accounting/accountancy,Accounting methods/systems |
ESG disclosure and firm
performance before and after IR
The moderating role of governance mechanisms
Khaldoon Albitar
Department of Accounting and Financial Management, Portsmouth Business
School, University of Portsmouth, Portsmouth, UK
Khaled Hussainey
Portsmouth Business School, University of Portsmouth, Portsmouth, UK
Nasir Kolade
Department of Accounting and Finance, University of Northampton,
Northampton, UK, and
Ali Meftah Gerged
Leicester Castle Business School, De Montfort University, UK and
Faculty of Economics, Misurata University, Misrata, Libya
Abstract
Purpose –This paper aims to investigate the effect of environmental, social and governance disclosure
(ESGD) on firm performance (FP) before and after the introduction of integrated reporting (IR) further to
exploringa potential moderation effect of corporategovernance mechanisms on this relationship.
Design/methodology/approach –Ordinary least squares and firm-fixed effects models were estimated
based on data related to FTSE 350 between 2009 and 2018. The data has been mainly collected from Bloomberg
and Capital IQ. This analysis was supplemented with applying a two-stage least squares (2 SLS) model to address
any concerns regarding the expected occurrence of endogeneity problems.
Findings –The results show a positive and significant relationship between ESGD score and FP before and
after 2013, among a sample of FTSE 350. Furthermore, the study is suggestive of a moderation effect of corporate
governance mechanisms (i.e. ownership concentration, gender diversity and board size) on the ESGD-FP nexus.
Additionally, this paper finds that firms voluntarily associated with IR have a tendency to achieve better firm
financial performance.
Practical implications –The findings of the present study have several policy and practitioner
implications. For example,managers may engage in ESGD to enhance their firms’financial performance by
the voluntary involvement in IR, which believedto help investors to rationalise their investment decisions.
Likewise, the results reiterate the crucial need to integrate more social, environmental and economic
regulationsto promote sustainability in the UK. The paper also offersa systematic picture for policymakers in
the UK as well as future researchers.
Social implications –The findings of this paper indicate that IR plays a significant role in the relationship
between ESGD and FP, where IR firms seemed to be achieving better FP as compared with their non-IR
counterparts. This implies that stakeholders may have played a magnificentefforttoencouragefirms’voluntary
engagement in IR in the UK.
Originality/value –To the best of the authors’knowledge, this is the first study to explorethe potential
moderating effect of ownership concentration, gender diversity and board size on the relationship between
The authors gratefully acknowledge the constructive comments and suggestions given by colleagues
and attendees at the 13th Research and Innovation Conference, University of Portsmouth.
Moderating
role of
governance
mechanisms
429
Received16 September 2019
Revised2 December 2019
Accepted31 December 2019
InternationalJournal of
Accounting& Information
Management
Vol.28 No. 3, 2020
pp. 429-444
© Emerald Publishing Limited
1834-7649
DOI 10.1108/IJAIM-09-2019-0108
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1834-7649.htm
ESGD and FP and to examine whether firms’voluntary involvement in IR can lead to better FP after the
introductionof IR in 2013 in the UK.
Keywords Ownership concentration, Gender diversity, Integrated reporting, Board size,
Environmental disclosure, Social disclosure, Governance disclosure
Paper type Research paper
1. Introduction
As sustainability is increasingly significant to economic development, corporate
environmental and social responsibility have become an international trend, and this was
accompanied with a lack of firms’non-financial disclosure, such as environmental, social
and governance (ESG) information and practice(Li et al., 2018). Recently, there is a growing
demand for improving businessreporting, with more focus on encouraging firms to provide
more non-financial information(Lai et al.,2018). Sustainable development is not only related
to corporate social responsibility (CSR) and accounting standards but also associated with
customer satisfaction (Akisikand Gal, 2011). Previous research focuses on the effect of CSR
on firm value or the concept of socially responsible investing and lacks the perspective of
sustainabilityand integrated reporting (IR) (Kimbro and Cao, 2011;Li et al., 2019).
Environmental, social and governance disclosures (ESGDs) offer a more significant
opportunity to understand firms’non-financial reporting. Non-financial information can
help corporate managers in the fulfilment of their strategic environmental objectives
(Alewine and Stone, 2013). Furthermore, corporate ESGD appeared to be of imperative
importance to both academics and practitioners. In addition to this, stakeholders began to
raise questions about managers’credentials in integrating ESG considerations (Husted and
Sousa-Filho, 2018). According to the arguments of stakeholder and agency theories, firms
have to adopt a more sustainable and long-term value view, as stakeholders are concerned
about a company’s ESG factors to know where the firm invests and how the firm conducts
business (Eccles et al.,2014;Atan et al.,2018). For instance, the environmental concerns of
stakeholders might be related to natural environment protection, climate change and
environmental impactsarising from a business operation.
Moreover, social factors, which are important to stakeholders, could be human rights,
equality, diversity in the workplace and contribution to society. Further, concerns related to
governance issues are ownership structure, board independence, minority shareholders’
rights, transparency and disclosure quality. Investors may have a preference for products
that consider and reflect the relationshipbetween their investments and ESG as challenging
(Li et al.,2018). Further to this, by 2030, all firms are expectedto disclose information related
to their environmental and social effect according to the United Nations Sustainable Stock
Exchange Initiative(Sustainable Stock Exchanges [SSE], 2015).
ESG is a commonly researched concept,which has been considered as an important part
of the strategy of the firm because it might have a crucial effect on firm performance (FP)
(Aouadi and Marsat, 2018;Fatemi et al.,2017;Baldini et al.,2016;El Ghoul et al.,2017;
Nekhili et al.,2017;Aboud and Diab, 2018). ESG integration has become an essential issue
for investors, governments, regulators, firms and non-governmental organisations (Lee
et al.,2013). Understanding what motivates IR, therefore, is crucial following stakeholders’
demands. However, understanding what motivates sustainability reporting could be
developed by the conceptof reputation risk management (Hogan and Lodhia, 2011). Various
studies examine the relationship betweenESGD and FP; the findings are inconclusive (Cho
et al.,2006;Garay and Font, 2012;Madsen and Rodgers, 2015;Revelli and Viviani, 2015;
Bernardi and Stark, 2018;Li etal.,2018).
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