Capital market impact of the disclosure, assurance and management of Greenhouse Gas (GHG) Emissions: an international study

Abstract

This thesis examines the capital market impact of Greenhouse Gas (GHG) emissions disclosures. The effect of assurance of these disclosures, the type of assurance provider and GHG management performance is also examined. The sample consists of 2,734 firm-year observations covering the period 2006-2010 across 33 countries. A modified Ohlson (1995) model is applied to capture the effect on market value while the cost of equity capital analysis uses an average of measures used in prior literature (Hail and Leuz, 2006). After controlling for selection bias, this thesis finds a negative effect on market value for GHG emissions disclosures and that this effect is moderated if the emissions are assured, particularly when this assurance is provided by the accounting profession. Moreover, the negative effect is also moderated for firms that manage their GHG emissions, although no effect is found for firms that attain higher GHG management performance. A positive relationship is observed for the cost of equity capital, with this adverse effect reduced for firms that attain higher GHG management performance. This suggests that although investors view GHG emissions disclosures to be value reducing, firms are able to minimise such effects through obtaining assurance, and specifically from the accounting profession, as well as through GHG emissions management.

This thesis contributes to the scant literature on the market value and cost of equity capital impact of GHG emissions disclosures. It also contributes to the literature addressing the capital market impact of voluntary assurance and voluntary management of environmental risks. The findings of this thesis have implications for a number of stakeholders. Given that GHG emissions disclosures are informative to investors, analysts should consider such non-financial information when making stock recommendations. Further, firms have an opportunity to reduce the negative impact on market value that results from disclosing GHG emissions through managing and assuring these emissions, and also by hiring higher quality assurers. In addition, regulators or policy makers across the world may find these findings useful as they deliberately embrace the recent trend of regulatory requirements to disclose GHG emissions in countries such as Australia, U.K. and U.S.