Evidence on the pernicious effect of financial report environmental disclosure

Unlike previous US environmental regulations, the Toxics Release Inventory (TRI), passed into law in 1986, focused on using information as a tool for reducing pollution. As noted by Konar and Cohen [Journal of Environmental Economics and Management 32 (1997) 109], if investors cared enough about the pollution performance information required under the enactment to punish bad performers, firms would have a market-based incentive to reduce toxic emissions. However, legitimacy theorists suggest that corporations may use largely voluntary financial report environmental disclosures to offset or mitigate the negative aspects of other information or actions. Accordingly, these disclosures could reduce the market effect of the TRI program. This study examines the market reaction to the unexpected proposal by President George Bush in June of 1989 for revisions in the Clean Air Act to identify whether TRI information and 10-K report environmental disclosures had an impact. Based on a sample of 112 firms, we find that companies with worse pollution performance (higher levels of size-adjusted toxic releases into the air) suffered more negative market reactions than companies with better performance. However, companies with less extensive environmental disclosures in their 10-K reports suffered more negative market reactions than companies with more extensive disclosure. These results suggest that, while the TRI information may be inducing market effects that could in turn work as a quasi-regulatory device, financial report environmental disclosure reduces its impact. If concern about the environment is important, therefore, it appears that environmental disclosure under a largely voluntary regime is inadequate.