Voluntary disclosure of environmental performance after regulatory change

Purpose - The purpose of this study is to use recent US legislative activity surrounding changes to the Environmental Protection Agency (EPA)/Clean Air Act in 2010, which changes the practice of environmental policy of a firm, and the unique setting of Utility industry to examine the relationship between a firm’s voluntary accounting disclosure and environmental performance. Design/methodology/approach - This study features hand-collected data of environmental disclosure and examines its relation with environmental performance. To address the endogeneity problem, a difference-in-differences test with propensity score matching is performed to study the impact of policy change on environmental disclosure. Findings - The findings of this study show that measures of environmental performance have a significant and positive association with a firm’s voluntary disclosure. The results from difference-in-differences test show that adjustments in environmental performance after regulatory change have a causal and positive effect on a firm’s voluntary disclosure. Research limitations/implications - The findings support theories of signaling and voluntary disclosure that better-performing firms provide more information disclosure of their environmental performance. Practical implications - The findings show real adjustments in firm environmental performance and consistent voluntary disclosure around the enactment of environmental legislation, which may have important implications for environmental rule making bodies and management about the effectiveness of their regulations. Originality/value - This study is among the first to examine the causal relationship between environmental performance and disclosure within the context of recent changes in US environmental regulation. This study also provides the Utility industry experiment with difference-in-differences test to tackle endogeneity in the relation between performance and disclosure.