Academic journal article Economic Inquiry

Information Disclosure Policies: Evidence from the Electricity Industry

Academic journal article Economic Inquiry

Information Disclosure Policies: Evidence from the Electricity Industry

Article excerpt

I. INTRODUCTION

Developed nations' environmental policies have evolved substantially in the past several decades. Early pollution control programs involved command and control approaches. Policies then frequently included pollution charges, tradable permits, and other market-based instruments. Most recently, a "third wave" of environmental policy has emerged that emphasizes information provision as an integral part of the risk mitigation strategy. Here, government regulation is replaced or augmented by publicly provided information presumed to assist more cost-effective private market and legal forces. Common examples include the toxics release inventory, lead paint disclosures, drinking water quality notices, and eco-labels. The empirical effects of such programs, however, remain largely undetermined. This paper examines the impact of a prominent mandatory disclosure program on the fuel mix percentages of large electric utility corporations.

The prominence of mandatory information policies is not restricted to environmental arenas. For example, developed countries' equity markets generally require firm-level financial information provision. In many countries, agricultural goods require country of origin and other health labels. Domestic colleges and universities are required by law to inform current and prospective students of crime statistics, equity data, and performance metrics. Even significant medical errors must now be disclosed to the community.

There are several potential advantages of information provision policies, and theory suggests that disclosure programs may effectively achieve their goals. Healy and Palepu (2001) provided a survey of the evidence in capital markets. Brouhle and Khanna (2007) demonstrated that information provision can improve product quality. In the environmental area, Kennedy, Laplante, and Maxwell (1994), Arora and Gangopadhyay (1995), Maxwell, Lyon, and Hackett (2000), Kirchhoff (2000), and Khanna (2001) showed that the provision of information about pollution may correct a market failure, improve performance, and enhance welfare.

Despite the literature's theoretical findings, the empirical effects of disclosure programs remain inconclusive. Early studies of securities regulation found mixed results. (See Stigler (1964), Robbins and Werner (1964), and Benston (1973)). A more recent literature suggested that disclosure programs in financial markets can achieve their desired effects; La Porta and Lopez-de-Silanes (2006) and Greenstone, Oyer, and Vissing-Jorensen (2006) found that both market size and market returns were positively influenced by mandatory disclosure programs. In product quality settings, Chipty and Witte (1998) established that resource and referral agencies significantly influenced childcare prices, but had no impact on the quality of care. In contrast, Jin and Leslie (2003) found that mandatory hygiene grade cards positively affected restaurant quality and health outcomes.

Studies of environmental performance yielded similarly mixed results. Desvousges, Smith, and Rink (1992) found that information-based programs influenced attitudes favorable to radon testing, but testing itself only increased when mass media dissemination was coupled with community-based implementation programs. Konar and Cohen (1997) and Khanna, Quimio, and Bojilova (1998) found that stock movements associated with toxics release inventory (TRI) announcements led to increased abatement and reduced emissions. However, Bui (2005) found that the declines in emissions after TRI reporting events may have been attributable to regulation rather than investor pressure. Bennear and Olmstead (2006) found that drinking water quality notices lowered violations for some systems, but not others.

This paper is the first empirical economic study of the impacts of mandatory information provision in the electric utility industry. The disclosure programs considered here differ significantly from the TRI information programs examined previously. …

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