Consequences of corporate sustainability reporting: evidence from an emerging market

Abstract

Purpose

The purpose of this paper is to discover whether corporate sustainability disclosure has a potential impact on the market value and earnings quality of firms in an emerging market.

Design/methodology/approach

The data were collected from 220 companies listed in the Colombo Stock Exchange (CSE) in Sri Lanka during the period 2012-2016. Firm value proxies by Tobin’s Q, while earnings quality proxies by discretionary accruals (DAC). The study is premised on value-enhancing theory for firm value and transparent financial reporting perspective for earnings quality. Regression analyses are executed on the panel data to achieve the study objectives.

Findings

The results reveal a positive relationship between sustainability reporting (SR) and firm market value, accepting the value-enhancing theory while rejecting the value-destroying theory. This finding suggests that investors pay a premium in the financial markets for firms that perform in an environmentally and socially responsible manner, compared to firms that do not perform in a similar manner. In the same vein, the results reveal that sustainability disclosure and DAC are negatively and significantly associated, resulting in high-quality earnings. The result is consistent with the transparent financial reporting hypothesis, which is also in line with the managers’ integrity motivation.

Originality/value

This is the first study investigating the consequences of SR that is specific to the Sri Lankan context. Owing to the sparse studies on consequences of SR, this study contributes significantly to the extant literature by broadening the geographical coverage to include a developing country setting.

Citation

Swarnapali, R. (2020), "Consequences of corporate sustainability reporting: evidence from an emerging market", International Journal of Law and Management, Vol. 62 No. 3, pp. 243-265. https://doi.org/10.1108/IJLMA-12-2017-0294