World Economic Policy Uncertainty and carbon dioxide emission reporting and performance
Carbon dioxide emission reporting and performance as a climate change management tool play a significant role in modern stakeholder relations (Velte et al. 2020). Carbon dioxide emission reporting discloses historic and prospective carbon dioxide emission performance to investors as well as other climate-related information (Pitrakkos and Maroun, 2020). Carbon dioxide emission performance is the outcome of managerial activity that pertains to carbon dioxide emissions (Busch and Lewandowski 2018).
To our knowledge, there is no previous evidence of how the policy induced uncertainty index developed by Ahir et al. (2018) influences carbon dioxide reporting. However, there is scant evidence exploring the effects of subtypes of policy-induced uncertainty, like environmental uncertainty, on carbon dioxide emission reporting. Lin and Ho (2011) conclude that green practice adoption is negatively and significantly influenced by environmental uncertainty. Pondeville et al. (2013) claim that firms with high environmental uncertainty would adopt an aggressive ecological and environmental strategy. Abu-Rahma and Jaleel (2013) reveal that environmental uncertainty affects business in an organization, affecting environmental information in decision-making. Another strand of literature shows that incorporating difference-in-difference estimation to account for uncertainty has a positive effect on a firm’s environmental disclosure (Phan et al. 2020). In detail, they point out that firms have incentives to reduce the transparency of carbon dioxide emission information disclosure when the level of uncertainty is high.
In addition, quite a few studies explore the impact of macroeconomic factors such as the presence of an emission trading scheme, the level of economic development, the legal system, regulatory governance, and national culture on carbon dioxide emission reporting (Akhiroh and Kiswanto 2016; Kilic and Kuzey 2019; He et al. 2019). On the microeconomic level, there are various papers that examine the influence of institutionalization, corporate governance, firm performance, and firm size on carbon dioxide emission disclosure (Akhiroh and Kiswanto 2016; Kalu et al. 2016; Kilic and Kuzey 2019; Hermawan et al. 2016; Alfani and Diyanty 2020). Information asymmetry is another factor that directly influences corporate carbon emissions. Hahn et al. (2015) provide evidence that information disclosure weakens information asymmetries between a firm and its potential investors, which in turn lowers transaction costs. In addition, Kothari et al. (2009) suggest that disclosing information creates uncertainties, which in turn enhance asymmetric information. Therefore, regarding the effects of information asymmetry on carbon dioxide emissions, previous evidence shows that disclosure of environmental risks is associated with lower asymmetric information for firms implementing the EU Emissions Trading Scheme (Schiemann and Sakhel, 2019). Another strand of literature investigates the inverse effect of carbon emission disclosure on information asymmetry. Borghei et al. (2018) and Adhikari and Zhou (2021) show that voluntary disclosure of carbon dioxide emissions is negatively correlated with information asymmetry. In detail, they illustrated that firms choose to report carbon dioxide emission data in favor of minimizing information asymmetry between the stakeholders and management, allotting efficient resources.
In periods of high levels of world policy-induced uncertainty, countries feature higher information asymmetries (Ha et al., 2021). Furthermore, Nagar et al. (2019) conclude that there is a positive association between economic policy uncertainty and bid-ask spreads, which triggers managers to respond by increasing their voluntary disclosures to mitigate this bid-ask spread increase. Jin et al. (2019) state that if economic policy uncertainty affects crash risk, the managers of firms with higher information asymmetry are more likely to conceal bad news because it is harder for investors to obtain information from firms with higher information asymmetry in an uncertain environment.
According to the above analysis, information asymmetry increases in an uncertain environment, and carbon emission disclosure increases during periods of high information asymmetry in order to minimize the negative effects of these information asymmetries. Therefore, this paper enhances the results of previous literature (e.g., Abu-Rahma and Jaleel 2013; Pan et al. 2020) by providing evidence of how important events related to uncertainty worldwide influence the carbon dioxide emission reporting. It is expected that under high economic policy uncertainty, firms will increase information related to carbon emissions in order to minimize uncertainty and enhance firm trust. Thus, we forward the following first hypothesis:
Hypothesis 1
Word economic policy uncertainty has a positive impact on carbon dioxide emission reporting.
The nexus between carbon emission reporting and emissions performance is ambiguous. Hughes et al. (2001) illustrate that firms with the worst environmental performance disclose the most. According to Freedman and Jaggi (2011), higher polluters are more inclined to provide more information about their emissions. In the same vein, Luo (2019) gives evidence that there is carbon dioxide emission disclosure and carbon emission intensity is negatively correlated, which is consistent with legitimacy theory and suggests that carbon emission reporting may be undertaken for the sake of legitimation. However, Sutantoputra et al. (2012) report that there is no correlation between carbon dioxide emission reporting and emission performance. Furthermore, Luo and Tang's (2014) research demonstrates a correlation between better environmental performance and greater levels of carbon disclosure. Similar to this, Qian and Schaltegger (2017) assert that carbon disclosure is favorably correlated with carbon performance, which inspires businesses and produces an "outside-in" driven impact for subsequently changing carbon performance.
According to the legitimacy hypothesis, which maintains that environmental disclosure is a consequence of investor pressure, corporations may publish information to mislead investors in order to obtain their acceptance and support since maintaining a company's image is usually simpler than committing to sustainability performance (Lyon and Maxwell 2011). Based on legitimacy theory and the results of Cho and Patten (2007), there is a negative association between environmental reporting and emission performance. It indicates that in order to retain their reputation as poor environmental performers, they are found to produce substantially more detailed disclosures. In contrast, proponents of the legitimacy theory do not assume that performance would be reflected in or affected by transparency. However, there is evidence that if environmental reporting alleviates the consequences of emission performance on a firm’s reputation (Patten 2015), it will diminish the motivation of the firm to manage ecological practices and ameliorate ecological performance.
Although there is no previous study that examines the effect of world-induced economic policy uncertainty developed by Ahir et al. (2018) on carbon emission performance, in recent years, there has been a scant amount of controversial literature examining how economic policy uncertainty, as a subtype of world-induced policy uncertainty, influences carbon dioxide emissions (e.g., Cai et al. 2018; Zhou et al. 2018; Dietz and Venmans 2019; Jiang et al. 2019; Pirgaip 2020; Yu et al. 2021; Wei et al. 2022). Hepburn et al. (2019), Adedoyin and Zakari (2020), and Huang et al. (2020) show that economic policy does not affect emissions. Zhou et al. (2018) find that considering the effect of quality uncertainty on carbon emissions can effectively increase profit and reduce total carbon emissions for firms. According to Jiang et al. (2019), when the increase of carbon emissions is in a greater or lower growth phase, economic policy uncertainty has an impact on those emissions of carbon dioxide. Dietz and Venmans (2019), Pirgaip and Dincergok (2020), and Yu et al. (2021) show that economic policy uncertainty imposes a significantly positive impact on firms' carbon emission intensity because of the increase in energy consumption using coal and fossil energy. Wei et al. (2022) found that a rise in universal crude oil price uncertainty can constrain the firm’s carbon dioxide emissions due to a shift in the use of energy from oil to renewable energy sources.
In addition, few papers examine the fluctuations of carbon dioxide emission intensity during different levels of the business cycle. However, there is no consensus about this relationship. Alege et al. (2017) note that carbon dioxide emissions rise during expansions and decline during recessions. They also result that carbon emission intensity reduces during periods of economic expansion or growth. Shahiduzzaman and Layton (2015) and Blazquez et al. (2017) find that emissions intensity declines much faster in contractions than it rises in expansions. On contrary, Khan et al. (2019) and Skare et al. (2021) suggest that there is high synchronicity between carbon dioxide emissions intensity and economic shocks.
In respect to the aforementioned papers, there is ambiguity as to how changes in carbon emission performance may be influenced by disclosure changes. Given that improving reporting is seen as a strategy to boost sustainable images, it is anticipated, in accordance with the legitimacy hypothesis, that the disclosure of carbon emission performance will have little to no negative impact. (Milne et al. 2009). Furthermore, there is no consensus among the results of previous literature examining the change of carbon emission performance under periods of uncertainty. Previous literature mainly examined how economic growth and energy consumption are influenced in periods of economic growth and recession and how these effects are related to carbon emission intensity. Cowan et al. (2014) and Chen et al. (2019) indicate that there are mixed effects of the business cycle on energy consumption and therefore on carbon emission performance. In this case, this paper aspires to enhance previous literature by investigating how important events related to world economic policy uncertainty influence carbon dioxide emission performance. It is expected that pressures to increase environmental disclosure quality during periods of uncertainty could improve social and environmental performance (Schaltegger and Csutora 2012), which would lure managers to follow valuable and constructive changes in strategic thinking and convert data into action (Topping 2012; Vesty et al. 2015), leading to lower carbon dioxide emissions. Therefore, the following second hypothesis is proposed:
Hypothesis 2
Word economic policy uncertainty has a negative impact on carbon dioxide emission performance.
The moderating role of institutional ownership
Previous empirical research implies that various degrees of ownership suggest different motivations to monitor and oversee a firm's management (Shleifer and Vishny 1986; Morck et al. 1988). Jensen and Meckling (1976) concluded that managerial choices must be closely followed in order to provide accurate and comprehensive financial reporting and the protection of shareholders' interests. The empirical findings of previous papers imply that the association between the relationship between corporate reporting and ownership structure is contradictory (Abu Qa’dan and Suwaidan 2019). For example, institutional ownership encourages more optimal management supervision to impede opportunistic manager behavior (Widyaningsih et al. 2017). As a result, institutional ownership and corporate transparency have a strong and favorable correlation (Lin et al. 2018; Nurleni et al. 2018). Furthermore, previous literature shows that there is a mixed association between corporate disclosure and ownership concentration. It also confirms that ownership concentration may have a negative impact on information disclosure because stakeholders have internal authority for obtaining information (Pongsaporamat 2020). However, Jiang et al. (2011) demonstrate that the level of disclosure and ownership concentration have no significant relationship. On the contrary, Khan et al. (2013) and Laksmi and Kamila (2018) demonstrate that state ownership has significant positive effects on CSR disclosure.
Especially regarding the effect of ownership structure on carbon dioxide emission reporting, previous literature illustrates that corporations with greater ownership concentration should report more ecological information, strengthen their investment confidence, and improve investors’ interests (Hermawan et al. 2016; Solikhah et al. 2021). In contrast to the results of Ho and Tower (2011), Cotter and Najah (2012), and Chang and Zhang (2015), who find that firms with greater foreign and institutional ownership have a significant and positive correlation with climate change disclosures, Akhiroh and Kiswanto (2016) and Hermawan et al. (2016) find no correlation. Alhazaimeh et al. (2014), on the other hand, discover a negative and substantial connection between institutional ownership and voluntary environmental disclosure. Kim et al. (2021) state that foreign investors are likely to demand voluntary reporting of carbon dioxide in order to enhance the firms’ transparent accounting environment. Solikhah et al. (2021) indicate that institutional ownership has a positive impact on carbon emissions disclosure, while managerial ownership and carbon dioxide emission performance do not affect the reporting of carbon dioxide emissions.
In a similar way, carbon dioxide emission performance is another new area that may be influenced by ownership structure. Even though the government is more likely to have kept ownership in high-polluting industries, Earnhart and Lizal (2006) come to the conclusion that more state ownership results in better environmental performance in comparison to all other ownership types. Wang and Jin (2007) show that state ownership in China has better ecological performances in water pollution discharges than privately owned, suggesting that community ownership may internalize environmental externalities. Walls et al. (2012) and Kock and Min (2016) indicate that firm governance mode, e.g., ownership structure, is linked with environmental management. According to Calza et al. (2016), there is a significant correlation between ownership structure and a company's environmental responsiveness. They specifically demonstrate that companies with larger levels of state ownership exhibit stronger green proactivity, and that proactive environmental strategy appears to be inversely correlated with ownership concentration. According to Liu et al. (2019), the ownership structure's impact on corporate environmental management is largely favorable. According to Yu et al. (2021), family businesses with ownership, operational, and strategic control can provide better environmental results in a province with stricter environmental laws.
There is little evidence that ownership structures shift during uncertain times. Filatotchev and Nakajima (2010) argue that ownership is an essential dimension of corporate governance that has a prominent effect on firm performance. According to Akhiroh and Kiswanto (2016), the greater the institutional ownership, the greater the institutional encouragement to supervise the management of the firm so as to optimize firm performance. According to Doan et al. (2020), domestically held enterprises are less able to buffer the negative effects of their performance than foreign-owned ones, which is why increasing induced policy uncertainty is linked to worse performance levels for state-owned firms. Devos et al. (2013) also found that institutional ownership rose before the financial crisis, considerably decreased during the time of market stress, and then climbed again after.
Based on the predictions of the above mentioned arguments, it is essential for regulators to interpret how the structure ownership is associated with the new world economic policy uncertainty developed by Ahir et al. (2018) which thus may influence carbon dioxide emission reporting and performance. Therefore, first, we extend previous literature that analyzed the effects of institutional ownership on carbon dioxide emission reporting and performance and then we explore the limited evidence about the interrelationship of word economic policy uncertainty and institutional ownership on carbon dioxide emission reporting and performance. We expect that institutional ownership is positively associated with carbon dioxide emission reporting and performance. In addition, due to the lack of previous evidence about the moderating role of institutional ownership on uncertainty-carbon dioxide emission reporting and performance nexus, we formulate the following third and fourth hypotheses with their sub-hypotheses.
Hypothesis 3
Institutional ownership significantly improves the reporting of carbon dioxide emissions.
Hypothesis
a. Institutionally held businesses report more carbon dioxide emissions when there is more uncertainty about global economic policy.
Hypothesis 4
Institutional ownership has a sizable detrimental impact on the performance of carbon dioxide emissions.
Hypothesis
a. Institutionally held businesses do worse on carbon dioxide emissions when there is more policy-induced uncertainty.
The moderating role of industry affiliation
Firms are more feasible to report information in accordance with the characteristics of their industry. The industry is regarded a proxy for legitimacy theory in a lot of greenhouse gas emission disclosure research articles. In other words, businesses in highly polluting industries are more likely to publicly reveal information on carbon dioxide emission levels (Faisal et al., 2018; Saraswati et al., 2021). According to Luo et al. (2012) and Faisal et al. (2018), businesses in environmentally exposed industries have substantial incentives to respond to societal and political pressure proactively and swiftly as well as voluntarily disclose more environmental information in order to retain their credibility. Liu and Anbumozhi (2009) demonstrate a positive impact of environmentally sensitive industries on environmental disclosure. Prado-Lorenzo et al. (2009) show that all industries except for the aerospace and defence industries are positively associated with environmental reporting practices. Rankin et al. (2011) find that firms belonging to the mining and energy sectors provide more credible and consistent greenhouse gas emission information. According to Matsumura et al. (2014), a corporation is more likely to disclose the same information if peer companies in an sector are increasingly disclosing their greenhouse gas emissions. Saraswati et al. (2021) indicate that the high-profile industry has a positive effect on the disclosure of carbon dioxide emissions due to pressure from stakeholders.
Regarding the effects of industry on carbon dioxide emission performance, previous literature is limited. The secondary sector is energy-intensive, increasing carbon emissions and carbon intensity, as shown by Tian et al. (2014) and Dong et al. (2018). Specifically, Tian et al. (2014) claim that changes in industry affiliation involving a shift from mining, agriculture, and light manufacturing to resource-related heavy manufacturing led to a quick rise in carbon dioxide emissions. The tertiary sector is also thought to have lower emissions and carbon intensity due to its reduced energy use. Liu et al. (2015) find that chemicals, iron and steel, metal and machinery, and cement and ceramics sub-sectors contribute the most to the decline in energy intensity. In contrast, they find that the impacts from the pulp and paper industry, other industries, fuel processing, and textile sub-sectors on the change in energy intensity are relatively minor.
In addition, previous literature gives evidence that corporate and social responsibility news have significant impacts on the stock market value of firms in diversified industries (Pérez and López-Gutiérrez 2020). However, they also do not confirm that high-profile industries have a stronger impact of CSR information on stock market returns than low-profile industries. Perez et al. (2020) show that although high-profile industries suffer from severe social pressures derived from their political risk, visibility, and intense competition, investors increase their pressure over the firms in these industries to incorporate CSR considerations into their business activities. In the same vein, Solikhah (2016) suggests that high-profile industries disclose more corporate and social reporting related to carbon emissions than low-profile industries because they have a higher sensitivity to social and environmental problems that may arise. In periods of uncertainty, firms enhance corporate social responsibility in order to strengthen stakeholders trust and increase firm value (Rjiba et al. 2020). Ongsakul et al. (2021) demonstrate that in times of economic uncertainty, firms with larger managerial ownership invest more in corporate social responsibility, which offers insurance-like protection against these adverse events. In the same notion, Yuan et al. (2022) give support to previous evidence that firms tend to adopt more corporate social responsibility engagement during periods of higher uncertainty, as it is a positive signal to their stakeholders. These effects are more prominent for firms in more sensitive industries that are characterised by high sensitivity to the environmental and social environment, which further validates the sending signal mechanism.
In line with the aforementioned papers, we enhance previous literature by examining how high- and low-profile industries affect carbon dioxide emission reporting and performance. In order to increase investor confidence in the caliber of the information provided, we anticipate that companies engaged in emissions-intensive industries will disclose carbon dioxide emissions at a higher rate. On the contrary, it is expected that high-profile industries will lower carbon dioxide emissions due to enhanced corporate social responsibility in order to protect and strengthen customer loyalty and promote brand image. Furthermore, due to the lack of previous evidence about how high-low profile industries are influenced in periods of uncertainty, it is expected that the impact of the world uncertainty index will be more prominent on the high profile industries-carbon emission reporting and performance nexus because firms that belong to high profile industries are characterised by high sensitivity to the environmental and social environment (Ongsakul et al. 2021). Therefore, we formulate the following fifth and sixth hypotheses with their sub-hypotheses:
Hypothesis 5
Higher profile industries are positively associated with carbon dioxide emission reporting.
Hypothesis
5a. High profile industries report more carbon dioxide emissions than low profile industries, which is related to an increase in policy-induced uncertainty.
Hypothesis 6
Higher profile industries are negatively associated with carbon dioxide emission performance.
Hypothesis
6b. Compared with low profile industry, a rise in policy generated uncertainty is related with worse carbon dioxide emission performance for high profile industry.