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Accounting, Organizations and Society 34 (2009) 1–27 www.elsevier.com/locate/aos
Media legitimacy and corporate environmental communication Walter Aerts a,*, Denis Cormier b,1 b
a Faculty of Applied Economics, University of Antwerpen, Prinsstraat 13, 2000 Antwerpen, Belgium E´cole des Sciences de la Gestion, UQAM, C.P. 8888, Succ. Centre-Ville, Montreal, Quebec, Canada H3C 1P8
Abstract Using a direct measure of environmental legitimacy, we explore the impact of annual report environmental disclosures and environmental press releases as legitimation tools. The sample comprises North American firms (Canada and the United States). The results obtained show that environmental legitimacy is significantly and positively affected by the quality of the economic-based segments of annual report environmental disclosures and by reactive environmental press releases, but not by proactive press releases. Moreover, our results suggest that negative media legitimacy is a driver of environmental press releases but not of annual report environmental disclosures. Ó 2008 Elsevier Ltd. All rights reserved.
Introduction We analyse the relationship between corporate environmental communication through annual report disclosures and press releases and environmental legitimacy. In concert with the strategic approach to organizational legitimacy, we contend that firms use corporate communication media
*
Corresponding author. Tel.: +32 32204110; fax: +32 2204064. E-mail addresses:
[email protected] (W. Aerts), cormier.
[email protected] (D. Cormier). 1 Tel.: +1 514 987 3000x8358.
(such as annual report disclosures and press releases) to manage perceived environmental legitimacy by signalling to relevant publics that their behavior is appropriate and desirable and, at the same time, to react to public pressures by adapting the level, content and quality of their environmental information dissemination processes. Legitimacy is mainly about perception. Central to the concept of legitimacy are the perceptions held by relevant publics and by society at large. Contrary to previous research on corporate environmental communication, we implement a direct measure of environmental legitimacy. We use public media data to assess generalized perceptions of a firm’s environmental legitimacy. We focus on
0361-3682/$ - see front matter Ó 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.aos.2008.02.005
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legitimacy as transpiring through media coverage and media evaluations as one of the most salient and prominent sources of societal legitimacy perceptions. In addition, by measuring environmental legitimacy as transpiring through the media we are able to directly assess the effectiveness of corporate environmental communication as an organizational perception management tool (Elsbach, 2003) to enhance its perceived environmental legitimacy. Credibility is an important factor in any impression management process and will have a significant impact on its effectiveness (Leary & Kowalski, 1990). Within a communication context, credibility refers to the congruence between the source’s verbal claims and the corresponding acts and events. Credibility issues with regard to corporate environmental communication have been hinted at in a number of environmental reporting studies (e.g. Patten, 2002a, 2002b), especially with regard to firms operating in environmentally-sensitive industries. Environmental legitimacy perceptions at the industry level may well have a significant effect on the ex ante believability of any corporate environmental communication act. In that vein, we integrate industry legitimacy as a factor moderating the effectiveness of a firm’s environmental communication initiatives. Previous environmental reporting research neglected the complementary roles of different communication channels in environmental legitimacy management processes. Communication channels such as annual reports and press releases differ in their capacity to process timely, focused and sensitive information cues. Press releases typically cover more fragmented issues and are mainly short-term, tactically oriented, whereas annual reports, by their nature, are more comprehensive in their approach and focus on more enduring issues. The more timely and flexible use of environmental press releases may well affect the impact of annual report disclosures on environmental legitimacy. By analyzing both annual report disclosures and press releases, taking into account their distinctive features, we explore the relative importance and roles of these two common information dissemination channels as perception management tools.
Our results show that environmental legitimacy is significantly and positively affected by the extent and quality of annual report environmental disclosures and by reactive environmental press releases. Press releases with a proactive environmental content do not seem to affect media legitimacy. The effect of annual report environmental disclosures seems to be driven by the extent and quality of the economic-based information segments. Moreover, the impact of annual report disclosures on media legitimacy is negatively affected if the firm belongs to an environmentally-sensitive industry. The impact of annual report environmental disclosures on media legitimacy is not affected by the use of proactive press releases, while it appears that the use of reactive press releases substitutes for the effect of annual environmental disclosures to a significant extent. Moreover, our results document that, in concert with the main assumption of legitimacy theory, negative prior environmental legitimacy is a significant driver of environmental press releases. Such a relationship can, however, not be demonstrated for annual report environmental disclosures, suggesting a more strategic orientation of annual report environmental communication. The remainder of the paper is organized as follows. Section 2 presents a theoretical framework for analyzing the interplay of environmental legitimacy and corporate environmental communication as well as hypotheses. The study’s empirical models and sample are described in Section 3. Findings are reported in Section 4. Finally, Section 5 provides a discussion regarding the potential implications of our findings.
Theoretical background and development of hypotheses Corporate environmental communication and media legitimacy The legitimacy concept, with its roots in institutional theory and socio-political research, has been a highly influential theoretical perspective within the domain of corporate environmental reporting research. Strategic legitimacy theory suggests that
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legitimacy is, to a certain extent, controllable by organizations (Ashforth & Gibbs, 1990; Oliver, 1991). It contends that organizations are able to make strategic choices to alter their legitimacy status and to cultivate the resource through corporate actions, by adapting their activities and changing perceptions. Organizations might take various action to ensure that their behavior is perceived to be legitimate. One of the main options is to attempt, through communication, to become identified with symbols, values, and methods of operation with institutions, values, or outputs that are strongly believed to be legitimate, and, as such, to demonstrate congruence between its organizational practices and the values professed by its social environment (Dowling & Pfeffer, 1975; Lindblom, 1994; Patterson & Allen, 1997). This strategic legitimacy perspective has been quite popular in environmental disclosure research in recent years and several studies explicitly adopt such a perspective (Bansal & Clelland, 2004; Brown & Deegan, 1998; Buhr, 1998; Cormier & Gordon, 2001; Deegan & Gordon, 1996; Deegan & Rankin, 1996; Deegan, Rankin, & Tobin, 2002; Hogner, 1982; Neu, Warsame, & Pedwell, 1998; O’Donovan, 2002; O’Dwyer, 2002; Patten, 1991, 1992, 2005; Savage, Rowlands, & Cataldo, 1999; Walden & Schwartz, 1997; Wilmshurst & Frost, 2000). However, a shortcoming of extant research related to the legitimacy theory perspective on corporate environmental reporting is that the legitimacy construct is seldom measured directly. As legitimacy is not directly observable, it is common for researchers to infer legitimation processes and effects by examining relationships between observable corporate performance attributes (like measures of environmental performance or environmental disasters in the oil and gas industry) or third-party actions (e.g. lawsuits for environmental matters) and environmental reporting measures. In this study, we use a direct measure of organizational legitimacy, grounded in the role of public media in social perception construction processes. With its roots in beliefs and perceptions, legitimacy can best be conceived as a social assessment or appraisal of acceptance, appropriateness and/or desirability (Fombrun, 1996; Rao, 1994; Suchman,
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1995; Zimmerman & Zeitz, 2002). It refers to a collective awareness and recognition of an organization in its organizational field as appropriate and acceptable. In the same vein, legitimation refers to ‘‘the characteristic of being legitimized by being placed within a framework through which something is viewed as right and proper” (Tyler, 2006, p. 376). As institutional intermediaries specializing in disseminating information about organizations or in evaluating their outputs, public media play an important role in such legitimation processes (Fombrun, 1996; Rao, 1998). They are believed to have superior ability to access and disseminate information by virtue of their institutional roles or structural positions (Rao, 1998, 2001) and are closely followed because of their perceived superiority in accessing and evaluating firms (Fanelli & Misangyi, 2006). Although different relevant publics may hold different perceptions of what good or bad environmental management is, these perceptions are filtered through the media lens to a kind of common impression. The information and evaluations provided by public media tend to be distributed more broadly than the opinions of the average stakeholder. As a result, they are likely to have a high degree of influence on which organizations and organizational properties become prominent in the minds of stakeholders (Fanelli & Misangyi, 2006). Media research within the agenda-setting paradigm (Caroll & McCombs, 2003; McCombs & Shaw, 1972) demonstrates a close alignment between the content of public media and public opinion (or the degree of salience that different topics have for the general public),2 corroborating the assertion that public media are actively involved in public impression construction processes (Gamson, Croteau, Hoynes, & Sasson,
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The agenda-setting hypothesis on media behavior posits that media do not mirror public concerns, but actively influence them, particularly through the transfer of salience from the media agenda to the public agenda (Caroll & McCombs, 2003; McCombs & Shaw, 1972). This indicates that the impact of public media on stakeholders’ perceptions derives primarily from their ability to focus public attention on the issues and entities that they select to report on (Deephouse, 2000; Pollock & Rindova, 2003).
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1992). Media research shows that the agenda-setting effect is especially strong for unobtrusive issues or issues with which individuals have little personal contact and for which they rely on the media as the primary (and sometimes only) source of information. Environmental issues are generally perceived as unobtrusive (Ader, 1995), reinforcing the relevance of a media proxy for environmental legitimacy. Moreover, from management’s point of view, media evaluations may be the only persistent and long-term proxy for collective legitimacy impressions on which it can benchmark and model its environmental communication strategy. In the same vein, Neu et al. (1998) argue that environmental disclosures focus on relevant publics that are dominant rather than peripheral and ‘critical’ ones. Previous research in corporate environmental reporting (Bewley & Li, 2000; Brown & Deegan, 1998; Deegan, Rankin, & Voght, 2000; Patten, 2002a) elaborates on the effect of media exposure on environmental disclosures, mainly establishing that higher public media coverage of environmental issues puts public pressure on firms to increase environmental disclosures. In addition, Brown and Deegan (1998) show a strong association between the industry-wide number of environmental articles that were negative in tone and the amount of ‘‘positive” corporate environmental disclosures. These studies mainly focus on the level of firm-specific media coverage as a proxy for public concerns regarding environmental issues. In this paper, we extend previous environmental reporting research by incorporating media exposure not only as an antecedent but also as a consequence of environmental communication acts. Moreover, we elaborate on the firm-specific evaluative content of media exposure in measuring corporate environmental (media) legitimacy. Given the potential relevance of corporate environmental communication as a legitimation tool, we posit the following hypothesis: Hypothesis 1. Enhanced corporate environmental communication (annual report disclosures and press releases) is associated with higher environmental (media) legitimacy.
Effect of industry Credibility is an important factor in any impression management process and will have a significant impact on its effectiveness (Leary & Kowalski, 1990; Shapiro, 1991). Perceived message credibility will depend on the perceptions of source competence, of actual or expected (incentives) bias behavior and of the characteristics of the message itself (Barton & Mercer, 2005; Birnbaum & Stegner, 1979; Mercer, 2004). More specifically, Tedeschi and Melburg (1984) distinguish between credibility and believability, with believability referring to the subjective probability the target assigns to any communication from a source. While a source’s credibility can be expected to have a direct effect on believability, other perceptions of the source and of the organizational field in which it functions may have a strong effect on the believability of its communications as well. In that respect, entire industries can have more or less legitimacy that can be conferred upon the firms operating within them (Aldrich & Fiol, 1994; Scott, 1995; Suchman, 1995). Industry-level legitimacy has to do with the degree to which the operations and business processes of firms in a given industry, and their products and services offered, are accepted as appropriate and useful by broader publics (Hannan & Freeman, 1989; Scott, 1995). Prior accounting-related studies document that financial reporting users appear to consider the consistency between a firm’s reporting incentives, which are to a large degree circumstantial, and its actual disclosures when assessing the credibility of the disclosures. Especially when the level of discretion in the reporting environment is high, users tend to discount the credibility (believability) of incentive-consistent disclosures (Anderson, Kadous, & Koonce, 2004; Hirst, Koonce, & Simko, 1995; Hodge, Hopkins, & Pratt, 2006). In this vein, industry legitimacy may be directly related to the believability of its constituents’ communications, especially in the field of voluntary environmental communication where there is a straightforward reporting incentive for management. Even if the objective credibility of the source is high, low industry legitimacy may undermine the believability of environmental reporting and thus
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the effectiveness of a firm’s communicative legitimation efforts. Prior research suggests that the believability of environmental reporting may be problematic. The believability of corporate environmental communication efforts would generally be validated through a positive association between environmental performance and environmental communication content, but previous research fails to clearly demonstrate such an association (Freedman & Wasley, 1990; Hughes, Anderson, & Golden, 2001; Ingram & Frazier, 1980; Wiseman, 1982). Some minor evidence of a significant positive relationship could be established for very specific pollution disclosures (e.g. Al-Tuwaijri, Christensen, & Hughes, 2004; Patten, 2002b), but surely not for more comprehensive disclosure measures. Moreover, Patten (2002b) documents a lower relationship between environmental performance and environmental disclosure within more environmentally-sensitive industries, suggesting that environmental disclosures may be perceived as less credible for firms from industries with high environmental exposure. Belonging to an environmentally-sensitive industry (with its negative connotations) may be the first observation one has about a firm, leading to a discounting of later positive messages coming from that firm and impeding the effectiveness of its legitimacy-enhancement efforts. Therefore, we hypothesize: Hypothesis 2. The association between the level of corporate environmental communication and environmental (media) legitimacy will be lower for those firms operating in more environmentally-sensitive industries.
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goals. Rich information media3 will generally be more effective in directing attention, establishing prominence and changing impressions (Daft & Lengel, 1986). For our purposes, the main information richness criteria to differentiate annual report disclosures and press releases are timeliness (and related feedback capability), topical focus and language variety. Press releases can be used in a more timely, more elaborate and focused fashion and with more expressive language than annual report disclosures to confront sensitive environmental issues. They may also be more effective in signalling commitment. In this vein, their use will be more tactical than that of the more comprehensive and longer-term characteristic of annual report disclosures. The use and effectiveness of information rich media will be more pronounced when timeliness (reaction speed) is important from a self-presentational perspective (Sheer & Chen, 2004). From a tactical impression management perspective, press releases can be used in a proactive or in a reactive fashion (Gardner & Martinko, 1988; Tedeschi & Melburg, 1984). Proactive (or acclaiming) verbal behavior aims at establishing a positive identity for an audience, most likely through verbal statements of accomplishments. It is not merely initiated as a reaction to situational demands. On the other hand, reactive self-presentational verbal behavior is mainly defensive and it is typically initiated as a response to a controversial situation in which negative and undesirable qualities may be attributed to the firm. Proactive (or acclaiming) content would stress the importance, relevance and scope of positive environmental outcomes or actions, whereas more reactive content would focus on downplaying the significance of negatively perceived or controversial events related to the natural environment. In this vein, proactive
Tactical verbal impression management Press releases are among the most common and widespread communication vehicles used by public firms to disseminate voluntary information and their content is highly discretionary. Further, they differ from annual report disclosures in their capacity to process rich information and, consequently, may fulfil complementary communication
3 Daft and Lengel (1984, 1986) define information richness as the ability of communication media to change understanding within a time interval, with face-to-face communication having the highest richness and periodic statistical documents positioned at the lower end. Information richness depends on the medium’s capability of immediate feedback (the most important aspect), the number of cues and channels utilized, personalisation and language variety.
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environmental press releases would express commitment to environmental concerns and generally focus on the positive aspects of corporate environmental performance. On the other hand, reactive press releases would tackle more equivocal concerns, with equivocality referring to the presence of multiple and possibly conflicting interpretations of the available information. From an information richness perspective, performance improves if richer media are used for more equivocal tasks and leaner media are used for non-equivocal tasks (Daft & Lengel, 1986). In that sense, reactive press releases would be more effective than proactive press releases. By enabling equivocal information to be conveyed quickly, timely reactive press releases can be used as a normalizing account, separating a negative environmental event or outcome from larger assessments of the firm as a whole and, in the end, putting a positive spin on events (Suchman, 1995). Traditional forms of defensive verbal impression management tactics, such as excuses, justifications, defences of innocence and apologies, have been shown to be effective as perception management devices in numerous research settings (Barton & Mercer, 2005; Elsbach, 2003; Kim, Dirks, Cooper, & Ferrin, 2006; Wood & Mitchell, 1981). In field settings, defensive impression management tactics are frequently accompanied by selective categorizations that stress and make salient other legitimate and competing dimensions along which a firm’s actions and performance should be assessed. By selectively directing and focusing attention on performance dimensions with positive ramifications, categorization processes relieve the dissonance related to a single dimension (e.g. a negatively perceived environmental outcome or event) and tend to bolster the believability of more straightforward defensive verbal tactics (Elsbach & Kramer, 1996). Defenses of innocence and justifications typically shift focus away from the negative towards the more positive aspects of an event or outcome and, in that vein, set the stage for acclaiming tactics with regard to the progress made toward environmentally desirable goals (Elsbach & Sutton, 1992). By its nature, timeliness will be more important for reactive impression management tactics relative to proactive impression management
and is thus expected to promote the relative effectiveness of reactive environmental press releases. Moreover, previous research suggested that specific occurrences of defensive impression management are more effective than assertive verbal behaviors in shaping evaluative perceptions of an external audience (Suchman, 1995). In this vein, Crant and Bateman (1993) documented that defensive causal accounts actually diminished observers’ assessment of blame for failure, whereas acclaiming causal accounts did not affect the assignment of credit for success. Given the importance of response timeliness in the face of equivocal environmental concerns and the relative effectiveness of defensive verbal impression management tactics, we hypothesize Hypothesis 3. The association between reactive environmental press releases and environmental (media) legitimacy will be higher relative to the association between proactive environmental press releases and environmental (media) legitimacy.
Sample selection and empirical models Sample The initial sample is comprised of 623 nonfinancial North American firms (205 from S&P/ TSX300 for Canada and 418 from S&P500 for the US). From the sample of 623 firms, we find environmental news exposure for 165 firms. Out of these 165 firms, 158 reported pollutants released in the environment (Toxics release inventory). These 158 firms (119 US, 39 Canadian) constitute our final sample. Environmental disclosure is collected from corporate annual reports on Internet sites and is coded for the year 2002. Financial data is collected from Worldscope and from firms’ Internet sites. The sample firms operate in the following industries (S&P classification): Consumer goods and services; Energy; Chemicals and drugs;
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Industrials; Information technology, Telecom and media; Mining and resources; Utilities.
Energy; chemicals and drugs; mining and resources (e.g. pulp and paper), and utilities are considered to be environmentally-sensitive industries (cf. Cho & Patten, 2007). Empirical models Based on Al-Tuwaijri et al. (2004), we posit that a firm’s environmental communication strategy simultaneously affects perceived environmental legitimacy, the extent of environmental news coverage and the content of environmental communication. As such, we endogenize the related variables in simultaneous equations models. The following two sets of structural equations models summarize the approach adopted in the empirical analysis. The first set integrates a firm’s annual report environmental disclosure while the second set integrates a firm’s press releases concerning environmental matters: Environmental legitimacyitþ1 ¼ ðb0 Annual report environmental disclosure þ b1 Annual report environmental disclosure
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þ b2 Size þ b3 Environmental performance ð1:3Þ þ b4 Industry þ b5 CountryÞit Environmental legitimacyitþ1 ¼ ðb0 Press releases þ b1 Press releases Environmentally-sensitive industries þ b2 Environmentally-sensitive industries þ b3 Legitimacy þ b4 Size þ b5 Environmental performanceÞit ð2:1Þ Press releasesit ¼ ðb0 Lag Legitimacy þ b1 Environmentally-sensitive industries þ b2 Leverage þ b3 Return on assets þ b4 Environmental news exposure þ b5 Environmental performance þ b6 CountryÞit ð2:2Þ Environmental news exposureit ¼ ðb0 Return on assets þ b1 Foreign listing þ b2 Size þ b3 Environmental performance þ b4 Industry þ b5 CountryÞit
ð2:3Þ
Description of dependent variables
Environmentally-sensitive industries þ b2 Environmentally-sensitive industries þ b3 Legitimacy þ b4 Size þ b5 Environmental performanceÞit
ð1:1Þ
Annual report environmental disclosureit ¼ ðb0 Lag Legitimacy þ b1 Environmentally-sensitive industries þ b2 Leverage þ b3 Return on assets þ b4 Environmental news exposure þ b5 Environmental performance þ b5 CountryÞit
ð1:2Þ
Environmental news exposureit ¼ ðb0 Return on assets þ b1 Foreign listing
Environmental legitimacy To assess corporate environmental legitimacy, we rely on a content analysis of press media coverage for corporate environmental issues. Institutionalists suggest that content analysis of press media sources may be particularly useful in studying legitimation processes, as detailed archives of media coverage exist for many industries and analyzing the content of those public sources offers a potentially powerful technique for operationalizing legitimation (Baum & Powell, 1995). News media content is extracted from the ABI/ Inform Global database and from three distinct sources: (1) Business, economics: local and regional business publications (local and regional business
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news coverage of large corporations, privately held companies, local start-ups, executive profiles, marketing, finance, and industry news. ABI Inform provides access to business information not typically found in national news sources. It contains news and analysis, information on local markets, and more data gathered from major business tabloids, magazines, daily newspapers, wire services, and city, state, and regional business publications); (2) Business, finance, economics: journals, company profiles, Wall Street Journal (most scholarly and comprehensive way to explore and understand business research topics. It includes nearly 1800 worldwide business periodicals for in-depth coverage of business and economic conditions, management techniques, theory, and business practices, advertising, marketing, economics, human resources, finance, taxation, computers, and more. It constitutes extensive international coverage with quick access to information on more than 60,000 companies with business and executive profiles); (3) Canadian newsstand, which offers unparalleled access to the full text of Canadian newspapers (Montreal Gazette, National Post and Toronto Star). We extracted articles using a firm’s name and the following keywords: ‘‘environment”, ‘‘sustainable development”, ‘‘recycling”, ‘‘pollution”, ‘‘toxic”, ‘‘ISO14000”, ‘‘conservation”, ‘‘remediation”, ‘‘spills”, ‘‘waste management”, ‘‘energy”, ‘‘awards”, ‘‘environmental audit”. The legitimacy measure is computed for 2003, 2002 (lag measure in legitimacy models) and 2001 (lag measure in disclosure models). In the summer of 2005, two research assistants found 413 articles: 226 provided good news, 172 provided bad news and 25 provided neutral news. Each article was coded in terms of its impact on the firm’s environmental legitimacy, i.e. neutral, negative, or positive (See Appendix 1). Good news stories are those that convey environmental commitment and that emphasize the positive aspects of a firm’s activities. Examples of good news stories include investment in facilities that will reduce energy consumption, or the reduction of greenhouse gas
emissions. The legitimacy score is computed based on this coding. The two coders agreed on 81% good news, 87% bad news and 96% neutral news. Internal consistency estimates (Cronbach’s alpha) computed over the 2001 and 2003 period show that the variance between the two coders’ scores is quite systematic (alpha = 0.888 for good news, 0.926 for bad news and 0.864 for neutral news). This suggests a high level of intercoder reliability (Weber, 1990). A researcher reconciled all coding disagreements between the two coders. Annual legitimacy measures were calculated using the Janis–Fadner coefficient of imbalance (Bansal & Clelland, 2004; Janis & Fadner, 1965). The Janis–Fadner coefficient ranges from 1.0 to +1.0; a high presence of favourable articles in a given year yields a value closer to +1.0, and a high presence of unfavourable articles yields a value closer to 1.0. The formula is as follows: Janis–Fadner coefficient ¼
ðe2 ecÞ if e > c t2 ðec c2 Þ if c > e t2
where e is the number of favourable environmental articles in a given year, c is the number of unfavourable environmental articles in a given year and t is the sum of e and c. Annual report environmental disclosure Environmental disclosure is measured using a coding instrument in a manner similar to Wiseman (1982), Cormier and Magnan (2003), and AlTuwaijri et al. (2004). The grid comprises 39 items measuring environmental disclosure quality where the items are grouped into six categories as follows: expenditures and risk; laws and regulations; pollution abatement; sustainable development; land remediation; and environmental management. The rating is based on a score from one to three. Three points are awarded for an item described in monetary or quantitative terms, two are awarded when an item is described specifically, and one is awarded for an item discussed in general. The information is coded according to the grid presented in Appendix 1. We believe that the use of a coding scale to qualify a firm’s environmental disclosure is appro-
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priate for the following reasons. First, it allows for some integration of different types of information into a single figure that is comparable across firms in terms of relevance. Second, while other disclosure studies rely on word counts to measure environmental disclosure (e.g. Neu et al., 1998; Williams & Ho Wern Pei, 1999), a qualitative scale allows for the researcher’s judgment to be utilized in rating the value or quality of the disclosures made by a firm. While this process is more subjective, it ensures that irrelevant or redundant generalities are not considered strategic environmental disclosures. To ensure consistency across firms, two persons reviewed all individual scores independently. All disagreements were subsequently reviewed by one of the co-researchers.4 Press releases We collected press releases related to environmental information from firms’ web sites in 2002 for 144 firms. Since the information was not avail4
A coding manual documenting coding instructions as well as standardized coding worksheets were prepared beforehand. Each coder then applied the following coding sequence: (1) independent identification of the occurrence of items relative to the different coding categories; (2) independent coding of the items according to quality level of content and (3) timed reconciliation on a subset of company reports. The coders were intensively trained in applying coding instructions and in using the coding worksheets. They were unaware of the research hypotheses. Initial differences in identifying grid items accounted for, on average, 6% of the maximum number of items identified. Of the information quality level coding, less than 10% had to be discussed for reconciliation. Disagreement between coders mostly occurred at the beginning of the coding process (essentially the first 20 firms in each country and the first 5 firms by industry). A researcher reconciled coding disagreements exceeding 5% of the highest total score between the two coders. Smaller disagreements were resolved by the two coders themselves. Overall, we think that this coding process provides a reliable measure of environmental reporting. Internal consistency estimates (Cronbach’s alpha on score components) show that the variance is quite systematic (alpha = 0.803). This is higher than Botosan (1997), who finds an alpha of 0.64 for an index including five categories of disclosure in annual reports. Cronbach’s alpha estimates the proportion of variance in the test scores that can be attributed to a true score variance. It can range from 0 (if no variance is consistent) to 1.00 (if all variances are consistent). According to Nunnaly (1978), a score of 0.70 is acceptable.
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able on the web page for 21 firms, we completed the data collection using the Lexis/Nexis database. We searched for press releases using the same keywords used for articles pertaining to environmental legitimacy. Two research assistants identified 236 press releases, 153 classified as proactive accounts and 83 as reactive accounts. Proactive accounts tend to bolster the positive environmental image of a firm through descriptive statements that describe various aspects of a firm’s environmental policy and accomplishments that reflect positively upon the firm and through the use of acclaiming tactics, including enhancements intended to boost the apparent desirability of specific environmental events or of firm-specific environmental actions and entitlements intended to heighten the firm’s perceived responsibility for the events or actions (Gardner & Martinko, 1988). Reactive accounts are verbal remedial tactics and are a reaction to environmental predicaments, i.e. situations with undesirable implications for a firm’s environmental image. They are mainly defensive in nature and tend to attenuate the negative meaning of events or outcomes. Excuses, justifications and causality denials are the more traditional forms of defensive impression management tactics. To put a positive spin on events, these traditional forms of impression management are frequently accompanied by selective categorizations highlighting alternate (positive) attributes of a firm’s environmental position and related entitlement and enhancement tactics. The coders agreed on 77% of proactive news and 89% of reactive news. Internal consistency estimates (Cronbach’s alpha) show that the variance between the two coders’ scores is quite systematic (alpha = 0.825 for proactive news and 0.834 for reactive news). A researcher reconciled all coding disagreements between the two coders. Smaller disagreements were resolved by the two coders themselves. Environmental news exposure The importance of news exposure in determining environmental disclosure indicates that firms need to achieve social legitimacy with their environmental management, i.e. their ultimate intent is strategic.
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The concerns of government and local communities are difficult to ascertain directly. However, prior work does suggest that environmental news exposure is an appropriate proxy for community concerns (Deegan & Rankin, 1996). A firm’s environmental news exposure is computed by taking the average number of articles concerning environmental issues for 1998 through 2002, as contained in the ABI/Inform Global database. We searched for articles using the keywords mentioned above. The reason for this choice is that disclosure this year (2002) may be affected by the number and types of articles that have been published about a firm in the recent past. A total of 764 relevant stories were identified over the period. We expect that as environmental news exposure increases, the firm will increase its environmental disclosure. Hence, a positive relationship is expected between environmental media coverage and environmental disclosure. Determinants of environmental legitimacy
model the inertia factor as a theoretically relevant determinant. Environmental performance Documentary evidence of a firm’s polluting activities might be directly discounted in how the media perceive a firm’s environmental posture. Environmental performance is proxied by the Toxics Release Inventory (TRI), a public database available from the Environmental Protection Agency (EPA) in the US and from Environment Canada. These databases contain information on toxic chemical releases and other waste management activities reported annually by manufacturing facilities. The Toxics Release Inventory is the sum of all chemicals released in the air and water and on land in 2002. Consistent with Clarkson, Li, Richardson, and Vasvari (2006), the measure is computed by summing all facilities for an individual company in pounds deflated by $1000 of sales. Higher values of the variable imply a worse environmental performance.
Size Size has been shown to be an antecedent of legitimacy (Baum & Oliver, 1991; Deephouse & Carter, 2005). Firm size will affect the firm’s visibility to the general public and tends to engender increased public scrutiny. Firm size, measured as ln(Assets), is introduced as a control variable, with no directional prediction.
Determinants of corporate environmental communication
Prior environmental legitimacy Reputation and legitimacy issues have been argued to be largely sticky (Schultz, Mouritsen, & Gabrielsen, 2001). Like reputation, legitimacy can be inertial or durable and have the tendency to reproduce itself over time. Hence, the lagged environmental legitimacy variable is introduced to capture the inertia factor. Adding the lagged dependent variable also implies control for omitted firm characteristics, including the fact that specific environmental norms and value expectations may vary from industry to industry. Alternatively, we could have expressed the dependent variable as a change variable. We chose not to do so because such a procedure constrains the coefficient of the lagged variable to equal one and we preferred to
Leverage It is expected that firms able to withstand potential proprietary costs from the disclosure of environmental information and benefitting from more open disclosure (firms in good financial condition) are likely to outweigh the costs from the disclosure of environmental information. By widely disseminating information about their environmental management and showing their ability to shoulder environmental obligations, these firms establish their credibility as a reliable and socially responsible partner. Roberts (1992) and Richardson and Welker (2001) find a positive relationship between leverage and social disclosure while Elijido-Ten (2004) does not find any significant relationship between leverage and environmental
Prior environmental legitimacy In line with strategic legitimacy theory arguments, we expect a negative relationship between prior media legitimacy and corporate environmental communication.
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disclosure. Conversely, Cormier and Magnan (2003) document a negative relationship between leverage and environmental disclosure.5 We measure leverage by the ratio of long-term financial debt over equity (Long-term financial debt/ equity). Since the actual impact of leverage on environmental disclosure is unclear, no directional predictions are made for the variable. Return on assets Many studies document a positive association between a firm’s level of disclosure and its financial performance (Cochran & Wood, 1984; Cormier & Magnan, 1999, 2003; McGuire, Sundgren, & Schneeweis, 1988; Mills & Gardner, 1984). Firms with superior earnings performance have a higher propensity to reveal their ‘‘good news”. Hence, Murray, Sinclair, Power, and Gray (2006) document that firms with consistently higher returns tend to have higher levels of total and voluntary social and environmental disclosure. In this vein, we expect a positive relationship between profitability, as measured by return on assets, and environmental disclosure. Media exposure A number of studies document that higher levels of media exposure relative to environmental issues increase public concerns and thus public policy pressure, to which companies react through greater environmental disclosure (Bewley & Li, 2000; Brown & Deegan, 1998; Deegan et al., 2000; Li, Richardson, & Thornton, 1997; Patten, 2002a). Environmental performance Many authors examine the association between environmental disclosure in annual reports and a firm’s environmental performance. Results are mixed. Ingram and Frazier (1980), Jaggi and Freedman (1982), Wiseman (1982), Rockness (1985), Freedman and Wasley (1990), Fekrat,
5 An explanation for the inverse relationship (positive association for social disclosure and negative association for environmental disclosure) could be that social disclosure is more likely to be good news than environmental disclosure.
11
Inclan, and Petroni (1996) do not find a significant association between environmental disclosure (in the annual report or in the 10K report) and the CEP index of environmental performance while Patten (2002b) establishes a negative relationship. More recent works document a positive association between environmental performance and the extent of discretionary environmental disclosures (Al-Tuwaijri et al., 2004; Clarkson et al., 2006). According to Al-Tuwaijri et al. (2004), a positive relationship conjectures that prior literature’s mixed results describing their interrelations may be attributable to the fact that researchers have not jointly considered Environmental disclosure, Environmental performance, and Economic performance. Since the actual impact of environmental performance on environmental disclosure is unclear, no directional predictions are made. Environmentally-sensitive industries Companies in environmentally-sensitive industries are generally subject to greater environmental scrutiny than other companies (Cowen, Ferreri, & Parker, 1987; Hackston & Milne, 1996; Patten, 1991) and have been documented to exhibit higher levels of environmental disclosure. Determinants of environmental news exposure We introduce five variables that determine a firm’s exposure to environmental news and its environmental ‘‘riskiness”: Firm size; Return on assets; Foreign listings; Capital intensity, and Environmental performance. Firm size: Prior evidence is consistent in showing a positive relationship between the extent of media coverage and firm size (e.g. Caroll & McCombs, 2003; Deephouse, 2000; Schultz et al., 2001). We predict a positive relationship between size and environmental news exposure. Return on assets: Since firms with consistently higher returns tend to have higher levels of environmental disclosure, we expect that such disclosure will attract environmental news media. Foreign listings: The degree to which firms are listed internationally can influence news coverage and public awareness. It may also be an indicator of diversification. Based on Hope’s study (2003), a
67.54 76.80 53.06 45.21 55.76 13.81 6.05 8.16 11.08 7.15 12.06 14.95 10.81 5.96 12.46 4.74 5.52 3.50 3.87 3.38 11.34 19.38 10.75 10.75 10.75 8.53 14.04 7.27 2.75 8.83 0.106 0.309 0.141 0.080 0.159 48 19 158 39 119
17.04 16.85 12.56 10.80 13.17
72.50 36.44 60.63 13.05 10.03 4.47 4.68 4.59 18.81 8.68 18.00 1.53 2.94 2.11 3.49 1.73 12.67 8.01 11.90 4.03 9.36 4.77 8.41 1.03 0.081 0.000 0.538 0.200 20 9 13 15
18.66 8.41 14.14 0.16
4.28 3.14 2.10 7.00 3.28 5.89 0.000 34
Consumer goods and services Energy Chemicals and drugs Industrials Information technology, Telecom and Media Mining and resources Utilities Total Canada US
Laws and regulations conformity Expenditures and risks
As illustrated in Table 1, the level of annual report environmental disclosure varies from a mean score of 13.05 for Technology, Telecom and Media to 76.80 for Utilities. Among the seven industries, the four industries for which firms’ activities are more likely to affect the environment exhibit the higher environmental disclosure scores: Utilities 76.80; Energy 72.50; Mining and resources 67.54; and to a lesser extent Chemicals and drugs 36.44. This result is consistent with Patten (2002b), who finds that those firms operating in environmentally-sensitive industries report more environmental information. On average, US firms publish more environmental information than Canadian firms except for sustainable development and environmental management. Table 2 provides some descriptive statistics regarding the sample firms’ dependent and independent variables. The 2003 mean legitimacy score is positive at 0.135. The 2002 mean environmental news exposure approaches one article per firm. As expected, there are twice as many proactive press releases compared to reactive ones. Firm size, on average, is quite large with mean total asset for the sample at 27.5 billion Canadian dollars. Average firm size is larger for US firms and Canadian
Legitimacy
Univariate results
Table 1 Environmental legitimacy and annual report environmental disclosure mean scores by industry
Results
Pollution abatement
Sustainable development
Land remediation and contamination
Environmental management
Total
listing on a domestic exchange and on foreign exchanges (except U.S. and London Stock Exchange listings) are given a weight of 1 per listing; London Stock Exchange and U.S. listings are given a weight of 1.5 because of their importance. The score for each firm is summed. We expect a positive association between the variable stock exchange listings and the level of environmental news exposure. Environmental performance: A firm’s risk of unfavourable environmental exposure is primarily determined by the relative perceived environmental risk of its activities. The poorer a firm’s environmental performance, the greater its environmental exposure and the more this will attract media attention.
25.69
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Sample
12
W. Aerts, D. Cormier / Accounting, Organizations and Society 34 (2009) 1–27
13
Table 2 Descriptive statistics – financial, legitimacy, and environmental news exposure variables
Legitimacy Legitimacy – highly sensitive industries Environmental news exposure (year average) Press releases – proactive Press releases – reactive Environmental performance
Min.
Max.
Mean
Std. Dev.
Mean US sample
Mean Canadian sample
1 1 0.17 0 0 0
1 1 7.33 18.00 18.00 17.29
0.14 0.11 0.68 0.96 0.52 1.03
0.47 0.48 1.12 2.24 1.80 2.72
0.16 0.13 0.72 1.09 0.60 0.58
0.08 0.06 0.57 0.56 0.28 2.67
575 000 0.64 0.20 4
27 500 0.24 0.03 0.97 158
59 800 0.13 0.08 1.27
32 700 0.24 0.04 0.94 119
8835 0.22 0.02 1.08 39
5
6
Toxic release inventory (pounds per $1000 of sales) Total Assets (million Can $) 349 Leverage (debt/assets) 0 Profitability (ROA) 0.49 Foreign listing 0 N
Table 3A Correlations – legitimacy model 2 1 2 3 4 5 6 7 8 9 10 *
Legitimacy Lag legitimacy Size Total disclosure Economic-based disclosure Social-based disclosure Sensitive industry Press release – proactive Press releases – reactive Environmental performance
3 *
0.220 1
0.028 0.073 1
4 0.044 0.097 0.110* 1
0.001 0.087 0.149* 0.974* 1
7 *
0.156 0.092 0.039 0.743* 0.572* 1
0.012 0.159* 0.275* 0.267* 0.248* 0.237* 1
8 0.073 0.025 0.358* 0.125* 0.144* 0.027 0.083 1
9
10 *
0.179 0.011 0.219* 0.072 0.074 0.035 0.076 0.643* 1
0.109* 0.044 0.004 0.171* 0.109* 0.295* 0.196* 0.003 0.008 1
Significant at 0.10 two-tailed.
firms show, on average, lower systematic risk. Media exposure and number of press releases are much higher for US firms while Canadian firms show, on average, higher levels of pollution and lower media legitimacy. Table 3 presents correlations for the legitimacy model, the disclosure model and the news exposure model. Reactive press releases (0.179) and Environmental performance (0.109) are significantly correlated with media legitimacy. Annual report environmental disclosure is correlated with Environmentally-sensitive industries (0.267), Environmental news exposure (0.318), and Environmental performance (0.171). As expected, environmental communication is negatively correlated with lagged media legitimacy, especially for press releases (0.214 for total press releases,
0.171 for proactive press releases and 0.223 for reactive press releases). Finally, environmental news exposure is correlated with size (0.393), Foreign listing (0.401), and Environmental performance (0.129). Multivariate results Selection bias From the sample of 623 firms, we find environmental media coverage for 165 firms. Because legitimacy is only measured for firms covered by the media, there might be a problem in terms of selection bias (Heckman, 1979). To correct this potential bias, Heckman’s two-step procedure was used. In the Heckman procedure (Heckman, 1979; Lee, 1983), the residuals of the selection
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Table 3B Correlations – disclosure model 1 1 2 3 4 5 6 7 8 9 10 11 12 *
Total disclosure Economic-based disclosure Social-based disclosure Total Press release Press release – proactive Press releases – reactive Lag legitimacy Leverage Return on assets Sensitive industry Environmental news exposure Environmental performance
1
2
3 *
0.974 1
4 *
5 *
6 *
7
8
9
10
11
12
0.744 0.571*
0.111 0.125*
0.125 0.144*
0.070 0.074
0.054 0.013
0.076 0.093
0.052 0.057
0.267 0.248*
0.318 0.294*
0.171* 0.109*
1
0.034
0.027
0.035
0.142*
0.001
0.020
0.238*
0.280*
0.295*
1
0.927*
0.884*
0.214*
0.127*
0.017
0.088
0.407*
0.006
1
0.643*
0.171*
0.075
0.032
0.083
0.338*
0.004
1
0.223*
0.157*
0.075
0.076
0.409*
0.008
0.115* 0.071 1
0.169* 0.081 0.057 1
1
0.092 1
*
*
0.131* 0.168* 0.089 0.039 1
0.091 0.048 0.018 0.196* 0.129* 1
Significant at 0.10 two-tailed.
equation in a probit/logit analysis (news exposure/ no news exposure) are used to construct a selection bias control factor, i.e. the inverse mills ratio:6 Expected value of news exposure=no news exposure ¼ a þ a1 Return on assets þ a2 Foreign listing
Table 3C Correlations – news exposure model
1 2 3 4 5
News exposure Return on assets Size Foreign listing Environmental performance
þ a3 Firm size þ a4 Capital intensity þ a5 Country þ a610 Industry Table 4 shows descriptive statistics for the control variables relating to the selected sample and the rest of the population with no media coverage over the selected period. We find that all the variables exhibit larger mean values for the firms selected and the differences are all statistically significant. The third column in Table 5 gives the results of the first-stage Logit regression (industry 6 Since we did not collect data on environmental performance for the remaining sample, we replace that variable by capital intensity. Physical plant and equipment makes a firm much more visible to the public and the community at large. Moreover, a firm’s capital intensity is likely to be related to polluting activities.
*
1
2
3
4
5
1
0.089 1
0.393* 0.133* 1
0.401* 0.111* 0.244* 1
0.129* 0.018 0.004 0.030 1
Significant at 0.10 two-tailed.
dummies not shown).7 The model is well specified with a pseudo-R-square of 37.0% and a classifica7 A disadvantage of the PROBIT procedure is that this procedure cannot directly compute predicted values. Lee (1983) has developed a method to estimate the selection model with a logit analysis that offers a less labour-intensive alternative for computing LAMBDA. Hence, we compute LAMBDA based on the following procedure: (1) save predicted probabilities using LOGIT regression (IKL); (2) using the inverse cumulative distribution function of the normal distribution, these individual probabilities are translated into the form they would have had when they would have been computed based on a probit model (IPS = probit (IKL)); (3) the IPS variable now includes the quasiprobit scores and can be used to compute LAMBDA in the same way as when using a probit selection model: LAMBDA = ((1/ sqrt(2 3.141592654)) (exp (IPS IPS0.5)))/cdfnorm (IPS).
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15
Table 4 Test of self-selection bias – control variable mean values
Return on assets Foreign listing Firm size (lnassets) Capital intensity N
Selected sample (with media coverage)
Remaining sample (without media coverage)
Mean difference p-value
0.032 0.857 23.323 0.444 165
0.009 0.697 22.031 0.341 458
0.088 0.013 0.000 0.000
Table 5 LOGIT and 3SLS regressions on the determinants of environmental legitimacy, environmental news exposure and environmental disclosure LOGIT Predicted sign Legitimacy Disclosure Disclosure Environmentally-sensitive industries Environmentally-sensitive industries Environmental performance Lag Legitimacy Size
+ ± + ±
Disclosure Lag legitimacy Environmentally-sensitive industries Leverage Return on assets Environmental news exposure Inverse Mills Ratio Environmental performance Canada
+ ± + + ± ± ±
Environmental news exposure Return on assets Foreign listing Firm size Environmental performance Capital intensity Canada
+ + + + ± ±
Nagelkerke R-square Chi-square = 182.24 (0.000) Overall classification rate = 80.1% R-Square Chi-square p-value N
3SLS Environmental news exposure 1/0
Legitimacy
Disclosure
Environmental news exposure
0.005** 0.005** 0.127 0.006*** 0.144*** 0.045 7.174 46.986*** 9.641 8.086 32.773*** 2.810 0.130 19.076** 0.569 0.390*** 0.317*** 0.009**
0.775 0.194** 0.881*** 0.487* 0.718***
0.346*
37.0%
616
24.3% 0.000 158
13.6% 0.000 158
One-tailed if there is a predicted sign, two-tailed otherwise. Coefficients for industry-specific dummies not reported. * p < 0.10. ** p < 0.05. *** p < 0.01.
32.8% 0.000 158
16
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tion rate of 80.1%. All coefficients except for Return on assets are statistically significant. This might be an indication of the presence of selection bias. In the second step of the Heckman procedure, based on the expected probability value, we use the selection bias control factor (Inverse Mills Ratio–Lambda) as an additional independent variable to control for the selection bias in corporate communication regressions. Simultaneous test of legitimacy, environmental disclosure, and environmental news exposure Since we posit that a firm’s communication strategy affects environmental legitimacy, environmental communication, and environmental media exposure, we first assess whether or not endogeneity exists between these variables using the Hausman test. Results confirm endogeneity between Environmental legitimacy and Annual report environmental disclosure (t = 1.839; p < 0.068). We also reject the null hypothesis of no endogeneity with respect to Annual report environmental disclosure and Media exposure (t = 1.620; p < 0.100). Therefore, it is important to control for firms’ incentives to disclose environmental information as well as the characteristics of firms facing environmental media exposure in assessing the determinants of a firm’s environmental legitimacy. Table 5 provides evidence regarding the simultaneous test of environmental legitimacy, (Eq. (1.1)), total annual report environmental disclosure (Eq. (1.2)) and environmental news exposure (Eq. (1.3)). Concerning the determinants of environmental legitimacy, consistent with Hypothesis 1, there is a positive relationship between environmental disclosure and environmental legitimacy (0.005, p < 0.05). Consistent with Hypothesis 2, the interaction term ‘‘Annual report disclosure Environmentally-sensitive industries” is negative and significant (0.005; p < 0.05) suggesting that environmental disclosure has a lower impact on legitimacy for those firms operating in more environmentally-sensitive industries. Moreover, as expected, Environmental performance (0.006; p < 0.01) is significantly and negatively related to a firm’s media legitimacy. Corroborating the sticky
character of media legitimacy, a firm’s prior legitimacy is significantly related to its current level of legitimacy (0.144; p < 0.01)8. As for the determinants of environmental news exposure, results show that a firm’s potential environmental visibility, as measured by Foreign listing (0.390; p < 0.01), Environmental performance (0.009; p < 0.05) and firm size (0.317; p < 0.01) lead to more environmental news. Concerning the determinants of Annual report environmental disclosure, self-selection bias related to news exposure does not appear to be an issue in this regression model. There is a significant relationship between Environmentally-sensitive industries (46.986; p < 0.01), Environmental news exposure (32.773; p < 0.01) and the total Annual report environmental disclosure score. Furthermore, total annual report environmental disclosure does not seem to be influenced by prior media legitimacy, or by the level of firm’s polluting activities as measured by the environmental performance variable. The absence of a significant relationship between Environmental disclosure and Environmental performance is not consistent with prevailing legitimacy theory arguments, but could be related to the content of the disclosures (Patten, 2002). In this respect, Cho and Patten (2007) argue that the legitimizing nature of different types of annual report environmental disclosures is not identical and that it is important to distinguish different types of information when assessing legitimation effects. They primarily distinguish between litigation related and non-litigation related disclosure. It is important to note that they do not distinguish between such types of information based on the information’s direct legitimizing effect, but rather on the association of environmental disclosures and environmental performance. In that vein, their results indicate that non-litigation related disclosure is higher for firms with lower environmental performance and for firms from environmentally-sensitive industries.
8
As a sensitivity analysis, we added the Market-to-Book and Return on assets variables to the model separately. None of the coefficients are significant and they do not affect our results.
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In our direct approach to measuring legitimation effects, we believe the association of environmental disclosure and environmental performance is not so much an indicator of the legitimizing nature of the information types, but a proxy for the information’s intrinsic believability. The higher the association between the type of environmental disclosure and environmental performance, the higher the message’s believability and the greater its potential to affect legitimacy perceptions. Although litigation related disclosures are to a large extent mandatory, their counterparts (non-litigation related disclosures) qualify more easily as incentive-consistent disclosures, the believability of which users tend to discount (Hirst et al., 1995; Hodge et al., 2006). Although our coding grid does not incorporate a clear distinction between litigation related and non-litigation related information, we distinguish between economic-based and social-based environmental information, with social-based environmental disclosure being more incentive-consistent than economic-based disclosure. This dichotomous split of disclosure types resembles the distinction made by Clarkson et al. (2006) between soft and hard environmental disclosures, with hard disclosures reflecting factual, objective information that cannot easily be mimicked by poor environmental performers. Economic-based types of information focus on the financial, legal and operational consequences of corporate environmental activities, most of which are required disclosures in 10-Ks for public companies listed with the SEC. This type of information is mainly comprised within the following four components of our content grid: expenditure and risk; compliance with laws and regulations; pollution abatement; and land remediation and contamination, whereas social-based information relates to the ‘sustainable development’ and ‘environmental management’ grid captions. Disclosure about sustainable development and environmental management is likely to be more discretionary, less factual and objective, and easier to imitate even without substance to support the claims made. In that vein, socialbased environmental information is likely to be more incentive-consistent and, thus, we might
17
expect this type of disclosure to have a lower impact on a firm’s environmental legitimacy than the more objective, economic-based disclosures. In our sample, environmental disclosure is mostly composed of economic-based information (78% of total disclosures) while more social-related information is reported by environmentally-sensitive industries (28% of total disclosures for Mining and resources). We estimate our model separately for economic-based and social-based disclosures. The results presented in Table 6 suggest that economic-based annual report environmental disclosure significantly affects a firm’s media legitimacy (0.006; p < 0.05), but that ‘‘social-related” environmental information segments (0.020; p < 0.26 one-tailed) do not.9 For economic-based environmental disclosure, consistent with Hypothesis 2, the interaction term ‘‘Economic-based annual report disclosure Environmentally-sensitive industries” is significant (0.005; p < 0.05), suggesting that environmental disclosure has a marginally different impact on legitimacy for those firms operating in more environmentally-sensitive industries. Moreover, as expected, a bad environmental performance negatively affects a firm’s legitimacy (0.006; p < 0.01). Concerning the determinants of annual report environmental disclosure, a striking difference between the types of content disclosed relates to the association of Environmental performance and Annual report disclosure score. Worse environmental performance is associated with more elaborate socialbased environmental disclosures but not with the economic-based variants.
9
The disclosure component Compliance with laws and regulation comprises some items that could communicate negative environmental image (e.g. fines, order to conform, incidents). These litigation related disclosures are more mandated in nature and less likely to be used as a legitimizing tool (Patten, 2002). Therefore, the economic-based disclosure model is re-estimated dropping the component Compliance with laws and regulation from the disclosure score. Results remain similar as those reported in Table 6 (Coefficient for economic-based disclosure = 0.007; p < 0.050, and Economic-based disclosure Environmentally-sensitive industries = 0.006; p < 0.050).
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Table 6 3SLS regressions on the determinants of environmental legitimacy, environmental news exposure and environmental disclosure Predicted sign
Legitimacy Disclosure Disclosure Environmentallysensitive industries Environmentally-sensitive industries Environmental performance Lag legitimacy Size
Economic-based (expenditures/ remediation/pollution abatement and norms)
Sustainable development and environmental management
Legitimacy
Legitimacy
Disclosure
Environmental news exposure
+
0.006** 0.005**
0.020 0.021
±
0.091
0.124
+ ±
0.006*** 0.151*** 0.043
0.006*** 0.130** 0.049
Disclosure
Disclosure Lag Legitimacy Environmentally-sensitive industries Leverage Return on assets Environmental news exposure Inverse Mills ratio Environmental performance Canada
+
8.035 39.029***
0.866 7.927**
± + + ± + ±
0.725 14.821 23.918*** 7.195 0.035 20.844***
7.471 5.846 8.630*** 9.814 0.101* 1.537
Environmental news exposure Return on assets Foreign listing Firm size Environmental performance Canada
+ + + + ±
R-Square F-statistic p-value N
0.666 0.379*** 0.342*** 0.009** 0.322* 27.3% 0.000 158
19.7% 0.000 158
34.8% 0.000 158
Environmental news exposure
0.505 0.426*** 0.285*** 0.009** 0.389** 18.2% 0.000 158
6.3% 0.000 158
32.8% 0.000 158
One-tailed if there is a predicted sign, two-tailed otherwise. Coefficients for industry-specific dummies not reported. * p < 0.10. ** p < 0.05. *** p < 0.01.
Since visibility factors are likely to differ across US and Canadian firms, we test for potential interactive country differences of the impact of disclosure on legitimacy. As a sensitivity analysis (results not tabulated), we add two interaction terms to the legitimacy model ‘‘Economic-based annual report disclosure Canada” and ‘‘Economic-based annual report disclosure Environmentally-sensitive industries Canada”. Coefficients for these two interaction terms are not significant (0.001;
p < 0.775 two-tailed, and -0.0008; p < 0.875 twotailed), suggesting that mixing US and Canadian data does not bias our results. Simultaneous test of legitimacy, environmental press releases, and environmental news exposure Table 7 provides evidence regarding the simultaneous test of environmental legitimacy, (Eq. (2.1)), environmental press releases (Eq. (2.2))
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Table 7 3SLS regressions on the determinants of environmental legitimacy, environmental news exposure and environmental press releases Predicted sign
Legitimacy
Legitimacy Press releases Press releases Environmentally-sensitive industries Environmentally-sensitive industries Environmental performance Lag Legitimacy Size
+ ± + ±
0.006 0.001 0.010 0.006*** 0.164*** 0.027
Press releases Lag Legitimacy Environmentally-sensitive industries Leverage Return on assets Environmental news exposure Inverse Mills Ratio Environmental performance Canada
+ ± + + ± ± ±
Environmental news exposure Return on assets Foreign listing Firm size Environmental performance Canada
+ + + + ±
R-square F-statistic p-value N
Environmental press releases
Environmental news exposure
1.216*** 0.161* 1.300 1.652 1.367*** 2.025 0.007 0.863 1.012 0.412*** 0.374*** 0.010** 0.836 28.9% 0.000 158
20.7% 0.000 158
33.4% 0.000 158
One-tailed if there is a predicted sign, two-tailed otherwise. Coefficients for industry-specific dummies not reported. * p < 0.10. ** p < 0.05. *** p < 0.01.
and environmental news exposure (Eq. (2.3)). Total press releases are not associated with a firm’s legitimacy (0.006; p < 0.306 one-tailed). In Table 8, we present separate regressions for proactive and reactive press releases. Consistent with Hypothesis 3, our results show that only reactive press releases increase a firm’s perceived environmental legitimacy (0.029; p < 0.05) while there is no impact for proactive press releases (0.009; p < 0.652 two-tailed). However, the interaction term ‘‘Reactive Press releases Environmentally-sensitive industries” is negative but not significant (0.001; p < 0.494 one-tailed), suggesting that the impact of environmental press releases on legitimacy does not differ for those firms operating in
more environmentally-sensitive industries. Concerning the determinants of environmental press releases, as expected, results show a negative relationship between prior media legitimacy and the use of environmental press releases (0.617; p < 0.05 for proactive press releases and 0.600; p < 0.01 for reactive press releases), suggesting tactical impression management motives behind the use of press releases with the objective of enhancing corporate environmental legitimacy perceptions. In order to explore whether annual report environmental disclosures and environmental press releases interfere in their effect on media legitimacy, we include both variables in simultaneous
20
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regressions of legitimacy, environmental press releases and environmental disclosure. We restrict the analysis to economic-based environmental disclosures. Including both economic-based annual report disclosures and proactive press releases (Table 9), we find that proactive press releases do not add to the legitimacy-enhancement effect of annual report environmental disclosures, suggesting that proactive press releases do not provide incremental information to the other with respect to environmental legitimacy enhancement. On the other hand, including both economic-based annual report disclosures and reactive press releases (Table 9), the effect of annual report environmental disclosure becomes insignificant, while the coefficient of reactive press releases remains positive and significant, suggesting a substitutional effect of reactive press releases with regard to annual environmental disclosures. In line with earlier results concerning the determinants of environmental communication, we find a negative relationship between prior legitimacy and press releases (0.629; p < 0.05 for proactive press releases and 0.598; p < 0.01 for reactive press releases) while there is no significant association between prior media legitimacy and current annual report economic-based disclosure.
Discussion and conclusion Symbolic management theory (Pfeffer & Salancik, 1978) and related impression management perspectives (Ginzel, Kramer, & Sutton, 1993; Suchman, 1995) suggest that a firm’s management is expected not only to manage the firm’s performance (including its environmental performance), but also perceptions of its (environmental) performance. In that sense, a firm’s environmental communication efforts through environmental disclosures in annual reports and environmental press releases represent predictable opportunities for impression management and legitimation for the firm’s environmental activities and performance. However, studying legitimation and legitimacy issues empirically has its methodological challenges, such as the practical problems of assessing subjective perceptions and beliefs of relevant pub-
lics. In this study, we investigated the impact of a firm’s environmental communication efforts on media legitimacy as a direct measure of perceived legitimacy. Public media content captures the perspective of the general public and has been used as a proxy for normative legitimacy issues (Bansal & Clelland, 2004; Deephouse, 1996; Elsbach & Sutton, 1992). Previous environmental reporting studies mainly focused on one communication channel (annual report disclosures). However, in most cases, annual report disclosures constitute only one part of the firm’s communication repertoire and the use of one channel may well affect the use and effectiveness of other channels. Moreover, different channels may not be equally efficient or effective in reaching specific communication goals (such as legitimacy enhancement). In this study, we looked at both annual report environmental disclosures and environmentally-related press releases which may function in complementary or substitutional roles. The results obtained in this paper suggest that perceived environmental legitimacy is positively affected by the extent and quality of economicbased segments of environmental disclosures in annual reports and by reactive environmental press releases. Consistent with Hypothesis 1, our results document a significant association between the extent of annual report environmental disclosures and reactive press releases on the one hand and environmental (media) legitimacy on the other. The association between annual report environmental disclosures and media legitimacy is essentially driven by the economic-based segments of the annual report disclosures. We did not find evidence to support Hypothesis 1 with regard to the extent of proactive press releases. The differential results with regard to the association of reactive versus proactive press releases and media legitimacy is consistent with Hypothesis 3 that predicts a stronger association for reactive environmental press releases relative to proactive ones. Relatedly, the interactive effect of corporate environmental communication and environmentallysensitive industries (predicted in Hypothesis 2) can only be demonstrated for the economic-based segments of annual report environmental disclo-
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21
Table 8 3SLS regressions on the determinants of environmental legitimacy, environmental news exposure and environmental press releases
Legitimacy Press releases Press releases Environmentallysensitive industries Environmentallysensitive industries Environmental performance Lag legitimacy Size Press releases Lag Legitimacy Environmentallysensitive industries Leverage Return on Assets Environmental news exposure Inverse mills ratio Environmental performance Canada
Predicted sign
Proactive press releases
+
0.009 0.010
0.029** 0.001
±
0.017
0.011
0.006***
0.006***
+ ±
0.165*** 0.019
0.165*** 0.032
Legitimacy
Environmental press releases
Environmental news exposure
Legitimacy
Environmental press releases
+
0.617** 0.038
0.600*** 0.124
± + +
0.076 2.118 0.819***
1.205 0.466 0.546***
± ±
0.139 0.001
1.887* 0.007
±
0.482
0.355
Environmental news exposure Return on assets + Foreign listing + Firm size + Environmental + performance Canada ± R-square F-statistic p-value N
Reactive press releases
28.6% 0.000 158
13.8% 0.000 158
Environmental news exposure
0.906 0.392*** 0.393*** 0.008**
0.905 0.405*** 0.366*** 0.008**
0.295
0.320*
33.3% 0.000 158
30.1% 0.000 158
22.5% 0.000 158
33.5% 0.000 158
One-tailed if there is a predicted sign, two-tailed otherwise. Coefficients for industry-specific dummies not reported. * p < 0.10. ** p < 0.05. *** p < 0.01.
sures. This suggests that industry-level legitimacy functions as a constraining a priori impression for annual report economic-based disclosures and diminishes the legitimation effectiveness of these communication efforts, but not so of reactive press releases. Although not explicitly hypothesized, our results shed some light on the complementary roles
of annual report environmental disclosures and environmental press releases as they suggest that proactive press releases do not interfere with the effectiveness of annual report environmental disclosures, while the opposite is true for reactive press releases. Moreover, in concert with the main theme of the strategic legitimacy perspective on environmental reporting, our results suggest that
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Table 9 3SLS regressions on the determinants of environmental legitimacy, environmental press releases, and economic-based environmental disclosure Predicted sign
Proactive press releases Legitimacy
Legitimacy Disclosure Press releases Lag legitimacy Environmentallysensitive industries Environmental performance Size Press releases Lag Legitimacy Environmentallysensitive industries Leverage Return on Assets Environmental news exposure Inverse mills ratio Environmental performance Canada
+ + + ±
±
Environmental press releases
Legitimacy
0.006** 0.048 0.176*** 0.193*
0.001 0.035** 0.166*** 0.022
0.007***
0.006***
0.035
0.035
Environmental press releases
+
0.629** 0.059
0.598*** 0.121
± + +
0.155 1.900 0.629***
1.199 0.440 0.567***
± ±
0.133 0.003
1.885* 0.009
±
0.529
0.202
Environmental disclosure Lag legitimacy Environmentally+ sensitive industries Leverage ± Return on assets + Lag environmental + news exposure Inverse mills ratio ± Environmental performance Canada R-square F-statistic p-value N
Reactive press releases Environmental disclosure
28.4% 0.000 158
14.6% 0.000 158
Environmental disclosure
5.836 36.984***
6.312 37.150***
6.247 27.299 10.572***
8.094 29.128 10.638***
13.035 0.226
12.013 0.226
24.132***
24.494***
29.1% 0.000 158
29.9% 0.000 158
22.5% 0.015 158
29.1% 0.000 158
One-tailed if there is a predicted sign, two-tailed otherwise. Coefficients for industry-specific dummies not reported. * p < 0.10. ** p < 0.05. *** p < 0.01.
negative media legitimacy is a significant driver of environmental press releases. This is, however, not the case for annual report environmental disclo-
sures. Finally, environmental news exposure is associated with both annual report environmental disclosures and environmental press releases.
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The present research especially highlights the role of economic-based environmental information in annual reports and of reactive press releases as perception management tools. The more subjective social-based environmental disclosure in annual reports does not affect media legitimacy, whereas the more objective, harder part of annual report environmental disclosure does. Moreover, reactive environmental press releases, through a mixture of verbal remedial tactics, are found to be effective in transforming events that seem at first to be image-threatening into messages that ultimately protect and even enhance a firm’s environmental media legitimacy. This is in line with previous impression management research that suggested that different forms of verbal accounts affect legitimacy by attenuating organizational responsibility for controversial events and by accentuating the positive aspects of such events. In particular, accounts with references to widely institutionalized structures, programs and procedures (such as formal company policies, budgetary constraints) are taken to be effective in protecting legitimacy, because they improve the adequacy of the verbal claims by providing evidence to bolster the verbal accounts (Elsbach, 1994; Elsbach & Elofson, 2000). Future research might look into the composition of (different sets and sequences of) verbal remedial tactics, their form and content to identify the most effective patterns. The lack of impact of proactive press releases and of the more subjective, social-based annual report environmental disclosures on media legitimacy suggests that public media seem to discount transparent self-promotional behavior, recognizing that firms tend to exaggerate their specific merits in the environmental management domain. It may be another occurrence of the ‘‘self-promoter’s paradox”: as actors increase claims of competence, audiences become more sceptical as competent actors often downplay their successes (Jones & Pittman, 1982). Alternatively, the lack of significant association between the use of proactive press releases and media legitimacy may also be explained by the assertion that narcissistic behavior is only what is generally expected of firms and, as such, does not add to the assignment of
23
credit. This result is also consistent with the fact that the softer part of annual report environmental disclosures is not associated with enhanced media legitimacy, whereas higher-quality economicbased environmental disclosures do affect media legitimacy, except when complemented by reactive press releases. Finally, the observation that mainly the extent and not the evaluative propensity of public media environmental exposure is associated with the level and quality of annual report environmental disclosure corroborates our initial assertion that annual report environmental disclosures are mainly driven by longer-term, strategic motives. Annual report environmental disclosure does not directly respond to the relatively current and temporary legitimacy perceptions that transpire through the public media. On the other hand, the value as a legitimation device of environmental press releases is most evident in times of crisis or controversy when environmental legitimacy is challenged or threatened. Our results suggest that in these circumstances both proactive and reactive press releases are actively triggered, with only reactive press releases being capable of significantly mitigating legitimacy perceptions, while in those circumstances the effect of annual report environmental disclosures vanishes. These observations suggest that future research in corporate environmental reporting might fruitfully distinguish between more enduring reputational effects and relatively short-lived legitimacy effects based on specific perceptions of environmental issues (Elsbach, 2003) and of environmental communication devices. Substantiating such differential effects would add to the corporate environmental reporting literature. Our measure of legitimacy might raise questions about the generalizability of our findings since it largely depends on the extent of comprehensiveness of the media coverage database and the reliability of measurements for that coverage. Editorial bias that is systematically related to the independent variables of our models might also affect our results. Despite these limitations, it is encouraging to find that with the difficulty in measuring data, we are able to document direct legitimation effects of environmental communication practices.
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Acknowledgements The authors acknowledge the financial support of the Social Sciences and Humanities Research Council of Canada, the Fonds que´be´cois de la
recherche sur la socie´te´ et la culture (FQRSC), the National Bank of Belgium and the Autorite´ des Marche´s Financiers (Que´bec) and the Corporate Reporting Chair (UQAM).
Appendix 1 Environmental Disclosure Grid Expenditures and risks Investments Operation costs Future investments
Sustainable development Natural resource conservation Recycling Life cycle information
Future operating costs Financing for investments Environmental debts Risk provisions Risk litigation Provision for future expenditures
Land remediation and contamination Sites Remediation efforts Potential liability-remediation Implicit liability Spills (number, nature, reduction efforts )
Compliance with laws and regulations Litigation, actual and potential Fines Orders to comply Corrective action Incidents Future legislation and regulations
Environmental management Environmental policies or company concern for the environment Environmental management system Environmental auditing Goals and targets Awards Department, group, service assigned to the environment
Pollution abatement Emission of pollutants Discharges
ISO 14000 Involvement of the firm to develop environmental standards Involvement of environmental organizations (industry committees, etc.) Joint environmental management projects with other firms
Waste management Installation and process controls Compliance status of facilities Noise and odours
Rating scale: 3: Item described in monetary or quantitative terms; 2: Item described specifically; 1: Item discussed in general.
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