GHG Emissions, GHG Disclosure and Firm Value : Disentangling the Mandatory and Voluntary Components of Disclosure

The relationship between GHG emissions, GHG disclosure and firm value is neither theoretically nor empirically clear, due to competing theories, self-selection bias, and endogeneity. This paper uses a two-stage design to examine the relationship between GHG emissions and GHG disclosure in the first stage and the relationship between GHG disclosure and firm value in the second stage. Our sample comprises firms listed in the FTSE 350 index and covers the period 2013–2017. All firms in our sample are subject to the UK GHG reporting mandate, known as the Companies Act 2006 Regulations 2013, which specifies precisely the information that companies are required to provide, allowing us to split GHG disclosure into a mandatory and a voluntary component by means of content analysis. Our first-stage results reveal a positive relationship between the level of GHG emissions and the voluntary component of GHG disclosure, in line with legitimacy theory. We found no significant relationship between GHG emissions and the mandatory component of GHG disclosure. This suggests that the UK reporting mandate decouples the GHG disclosure-decision from GHG emissions. Our second-stage results indicate a negative relationship between the voluntary component of GHG disclosure and firm value. This indicates that investors can recognize legitimacy-driven disclosure. The relationship between the mandatory component and firm value is positive and significant, which indicates that capital markets positively value mandated information. These results are robust to various model specifications and other proxies of firm value; namely, expected future cash flows and implied cost of capital