Academic journal article International Journal of Business Studies

Determinants of Environmental Reporting in Malaysia

Academic journal article International Journal of Business Studies

Determinants of Environmental Reporting in Malaysia

Article excerpt

This study empirically examines the incentives that motivate Malaysian listed companies to disclose environmental information in their annual reports. The study attempts to explain the occurrence of the environmental information with reference to some company specific characteristics from the contracting and political cost perspectives. Six variables are hypothesised to influence companies' decision to voluntarily disclose environmental issues in their annual reports. The results reveal that only two out of the four hypotheses are supported; that is, the voluntary disclosure of environmental information in the annual reports is negatively related to firms' financial leverage and that their accounts were audited by Big-5 firms. Explanations are proffered for these findings.

Keywords: Environmental reporting, ' contracting theory, political cost theory, Malaysia.


This study attempts to examine firm-wide factors that motivate Malaysian listed companies to voluntarily disclose environmental information in their annual reports. The disclosure of environmental information attracts attention as the information itself involves the living quality despite the fact that such reporting is voluntary in nature. The current study attempts to explain the occurrence of the environmental information with reference to some company-specific characteristics. Environmental information in annual report is defined as a subset of the corporate social responsibility, which includes information regarding waste management, recycling programs and environment control. Voluntary reporting in corporate annual reports is believed to be costly and therefore it is of interest to examine the motivation of companies' to present such non-mandated information. The said costs include compilation costs as the environmental information is usually not readily available in the financial records.

The suggested motivations for companies to voluntarily disclose environmental information are varied. One of such explanations is in the concept of organisational legitimacy as developed by Lindblom (1984), who stated four reasons for such disclosure. The first reason is to reduce the "legitimacy gap" caused by the failure of performance on the part of the organisation by informing its "relevant publics" about changes in respect to how the organisation has performed due to environmental changes. For instance, a major oil spill in one financial year may result in disclosures concerning increasing environmental concern and safety.

The second reason is to change the perception of itself, but not necessarily its actual behaviour; for example, a company may have an undesirable waste disposal practice but may show imagery of clean working environment. The third reason is to deflect attention from public concerns by using emotive imagery; for example, a company that pollutes the environment through its production processes may disclose information regarding a recycling program. The final reason for the voluntary disclosure of environmental information is to alter outside expectation of its performance when it feels its "relevant publics" have unrealistic expectations of its social and environmental performance.

Apart from the reasons above, findings from prior studies have revealed other reasons for environmental reporting which will be discussed in a later section. The motivation behind the current study not only lies in explaining the reasons for voluntary disclosure but also to evaluate the issue, based on empirical evidence, from a contracting and political cost perspective. The remainder of this paper is organised as follow: Next is a section that discusses issues relating to environmental reporting, followed by a review of selected prior studies. The development of research hypotheses are later deliberated, and then followed by the research methodology. Finally, the paper presents the results and its implications, and some concluding remarks.


The environmental reporting or sometimes known as "green reporting" is one of the facets of voluntary social reporting included in the financial statements. Other forms of voluntary social reporting include value added statements, corporate social responsibility and accountability disclosures. The focus towards traditional economic thinking, such as cash flows, profits and prices, in financial reporting has forced the issue of social and environmental reporting out of accountants' concern (Parker, 1995). Moreover, ecological issues such as quality of air, usage of sea and the pollution of rivers are intangible matters, making environmental concerns more easily overlooked and susceptible to neglect. Therefore, organisations' and accountants' views of social and environmental accountability become one of the unfamiliar concerns.

Nevertheless, in recent times societies and governments have been demanding companies to emphasize greater attention to the social and environmental impacts. This was initiated by the high profile development of Valdez Principle (Sanyal and Neves, 1991) when a massive oil spill occurred in Alaska in 1989, which was caused by the sea vessel Exxon Valdez. Pressures from environmentalists and other social interest groups due to the case triggered the issuance of a voluntary code of conduct that guide and evaluate companies' execution of their environmental responsibilities. This is apparent from the evidence that after the tragic event, firms in the petroleum industry have, on average, significantly increased their environmental disclosures (Patten, 1992).

At the supranational level, the United Nations Centre on Transnational Corporations (UNCTC) has recommended companies to disclose the measures undertaken in promoting cleaner environment and reducing risks of harm on the environment. The guidelines prepared by the UN strongly recommend risk assessments and environmental audits. Despite these guidelines, the existing requirements for the matter are still very minimal and even if the disclosure was made, it tends to be rather descriptive in nature (Gary and Roberts, 1994).

In Malaysia, there is no specific standard or requirement either issued by the MASB (Malaysian Accounting Standard Board) or outlined in the 9th Schedule of the Companies Act, 1967 that requires companies to disclose such information of interest to the current study. Nevertheless, companies must take cognisant of Paragraph 9 of MASB No. 1 which requires the provision and disclosure of any other relevant, even though not mandated, information to users (MASB, 1999). Arguably, information pertaining to firm's environmental performance is considered useful and thus relevant. In fact, Paragraph 10 of MASB No. 1 makes explicit reference to "environmental reports and value added statements" (MASB, 1999). Further, in 2002 the Malaysian branch of the ACCA (Association of Certified Chartered Accountants), supported by the Department of Environment (DOE), chose deserving companies for the Malaysian Environmental Reporting Award (MERA). The objective of the award scheme is to encourage voluntary environmental reporting practices among organizations in Malaysia. Although there is a move towards environmental reporting in Malaysia, it is a rather recent phenomenon (ACCA, 2002). However, in countries like UK, Australia, the USA and the European region, environmental reporting is more widespread (ACCA, 2003). Apart from the preceding, the Malaysian Code on Corporate Governance suggests that directors, and presumable also other stakeholders, look "at other performance factors such as ... environmental performance ..." (FCCG, 2000 p. 11). Thus, it can be deduced that in the absence of statutory requirement, there are pressures for companies to voluntarily engage in environmental reporting in some forms and structures.


Matthews (2000) notes that there are two major strands of research in environmental reporting: Empirical studies, and normative statements. For the purpose of this study, only studies in the former strand that are directly related (namely, studies examining the determinants of voluntary disclosure of environmental information) will be reviewed. The studies considered are: Deegan (1996), Deegan and Gordon (1996), Deegan and Rankin (1996), Halme and Huse (1997), Walden and Schwartz (1997), Brown and Deegan (1998), Cormier and Magnan (1999), and Deegan et al., (2000).

Deegan (1996) conducted a study on the incentives of Australian firms in providing environmental information within their annual reports voluntarily. A discussion is given of how environmental lobby groups may impose wealth transfers on the firm, and of how environmental disclosures within annual reports may serve as means of reducing political costs. Using a political cost framework, hypotheses were developed which link the extent of environmental disclosures with a measure of the firm's perceived effects on the environment. A sample of 197 firms was obtained from Australian Graduate School of Management (AGSM) annual reports file for the year 1991. The results indicate that firms operating in industries that are perceived as environmental damaging are significantly more likely to provide positive environmental information within their annual reports than are other firms.

Deegan and Gordon (1996) extended the earlier study in three ways. First, by reviewing the annual reports of a sample companies for the 1991 financial year. second, by determining the change in corporate disclosure practices for the period 1980-1991. Third, by investigating the role of environmental lobby groups. On the third point, they found that environmental lobby groups appeared to have an effect because there was a positive correlation between environmental sensitivity and the level of disclosure, and in some sensitive industries between environmental disclosure levels and firm size.

An extension of the preceding studies was undertaken by Deegan and Rankin (1996). They analysed environmental disclosures made by firms that had been successfully prosecuted by the Australian Environmental Protection Agency (EPA). Using legitimacy theory as their theoretical basis, they examined a sample of annual reports to determine whether there was any difference in the disclosure patterns of firms which had been prosecuted by the EPA, compared to those which had not been prosecuted. It was found that where there were no regulations or requirements to the contrary, Australian companies willingly provide information favourable to their image, even after prosecution.

A study conducted by Halme and Huse (1997) investigated the relationship between corporate environmental reporting in annual reports and corporate governance, industry and country variables. The authors sampled annual reports for the year 1992 of 140 largest corporations from Scandinavian countries (Sweden, Finland, Spain, and Norway). The results suggested that corporate environmental reporting was highly correlated with industry variables. However, no significant relationship was found between environmental reporting and company's size, and between environmental reporting and the number of board members. From corporate governance perspective, the factors that were considered important were (1) ownership structure, (2) the board of directors, and (3) industry and country factors. Even though larger firms tended to disclose more than smaller firms, the quality was no better.

Walden and Schwartz (1997) investigated the changes in the level of environmental disclosures following the 1989 Exxon Valdez oil spill. Environmental disclosures of 53 companies in four industries for 1988, 1989, 1990 and 1991 were examined for both quantity and quality of information. The results showed significant positive differences in the levels of environmental disclosures from 1988 to 1989 and from 1990 to 1991. This evidence suggested that environmental disclosures in these industries were time and event specific, and made in the self-interest of the firm, following perceived public policy pressure. This finding was consistent with the ones reported by Deegan et al. (2000) that examined the manner in which major Australian companies reacted through their annual report disclosures to five major social incidents.

In 1998 Brown and Deegan examined the public disclosure of environmental performance in terms of media agenda setting theory and legitimacy theory. It was argued that the media could drive community's concern about the environmental performance of particular organizations, leading to increased disclosure of environmental information within the annual reports. The findings of the study suggested that higher levels of media attention were significantly associated with higher levels of environmental disclosures in annual reports in the major of industries examined.

In another study by Cormier and Magnan (1999), the determinants of corporate environmental reporting by Canadian firms subject to water pollution compliance regulations during the period 1986-1993 were investigated. Based on a sample of 212 firm-year observations, from 1986-1993, all firms with publicly traded securities were selected. Thirty-three firms were identified from three industrial sectors: (1) pulp and paper; (2) oil refining and petrochemicals; and (3) steel, metals and mines. It is evidenced that (1) there were systematic patterns in environmental reporting, (2) firm's risk, reliance on capital market, and trading volume were positively related to the extent of its environmental disclosure, while concentrated ownership was associated with less environmental disclosure, (3) firms in good financial condition chose to disclose more, (4) firm's environmental performance positively influenced its environmental disclosures, and (5) pulp and paper firms were found to be disclosing more environmental information. Firms with more modern fixed assets and large firms were found to disclose more environmental information. On the other hand, firms subjected to Securities Commissions (SEC) regulations disclosed less.

The literature reviewed has highlighted a number of relevant observations underpinning the voluntary disclosure of environmental information. Firms in environmentally damaging industries were found to be more motivated to disclose environmental information (Deegan, 1996; Deegan and Gordon, 1996). Although Cormier and Magnan (1999) determined that firms' environmental performance positively influenced its environmental disclosure, favourable environmental disclosure was also found in annual reports of companies prosecuted by environmental protection agency (Deegan and Rankin, 1996). Not only that media attention could be associated with higher levels of environmental disclosures (Brown and Deegan, 1998), the perceived public policy pressure was also observed to have the same effect, resulting in time and event specific environmental disclosures (Walden and Schwatz, 1997; Deegan et al., 2000). Other factors that could explain the voluntary "green reporting" include firm size (Deegan and Gordon, 1996), ownership (Halme and Huse, 1997; Cormier and Magnan, 1999), firms' risk, reliance on capital market, trading volume and financial condition (Cormier and Magnan, 1999).

Based on the selected prior research, it is noted that these determinant studies regarding environmental reporting resorted to competing hypotheses. Prior studies also tended to focus on relatively larger firms in the industry or a certain environmental sensitive industries even though environmental reporting is very much applicable to all companies industry-wide. There were also a number of companies' specific characteristics that were overlooked by these studies that could be incorporated in the present study, such as firm size, financial leverage, and effective tax rates. It is also noteworthy that there is currently no published study on the factors influencing voluntary environmental reporting in Malaysia. Prior research regarding voluntary disclosure also results in contradictory findings, as discussed in the succeeding section. Thus, it is believed that a study that investigates these factors would be beneficial for better understanding of motivation behind such voluntary disclosure in the context of environmental information in a dynamic developing economy like Malaysia.


The theory of the firm suggests that a firm may be viewed as a 'nexus of contract' (Fama, 1980) such that the firm may be seen as an operation involving numerous individuals and groups all contracting with each other. According to Holthausen (1990), the efficient contracting ex-ante perspective, with respect to accounting choice, implies that accounting methods will be selected (in this study, voluntary disclosure of environmental issue) to minimize agency and / or political costs amongst various parties of the firm. This study uses this efficient contracting perspective as the general premise underlying the incentives that motivate managers to disclose environmental issue voluntarily. The other alternative plausible perspectives are opportunistic behaviour and information perspective (Holthausen, 1990). It is believed that these latter perspectives are not applicable for the purpose of the present study because: (1) Voluntary reporting of environmental information is not an income increasing accounting policy; and (2) Environmental information, especially the qualitative nature of information, does not affect the underlying cash flow of a firm, and consequently does not explicitly reveal manager's expectation of future cash flows.

This study employs a number of variables to explain the voluntary presentation of environmental information. Based on the extant literature, six variables have been identified as plausible independent variables that motivate the voluntary disclosure of environmental information. The following discussion relates to the construction of the six testable alternate-form hypotheses.

Company Size

Trotman and Bradley (1981) found a positive association between size and voluntary social responsibility disclosures. There are numerous explanations for such association; for example, Firth (1979) suggests that firms, which are more visible in the "public eyes", are likely to voluntarily disclose information to enhance their corporate reputation. Watts and Zimmerman (1986) suggest that larger firms would have higher political costs because the firms are more politically visible and may attract more resentment due to their perceived market power. Letfwich, Watts and Zimmerman (1981) maintain that firm size is a comprehensive variable, which can proxy a number of corporate attributes, such as competitive advantage, information production costs, and political costs.

Publicly listed companies and more so for those companies listed in multiple exchanges, might increase their social responsibility disclosures to demonstrate good citizenship (Watts and Zimmerman, 1978). Cahan (1992) used political visibility in explaining positive relationship between firm size and voluntary disclosure. He argued that managers of politically vulnerable firms are likely to voluntarily choose accounting and disclosure policies that reduce reported earnings, and thereby reduce political cost (such as higher taxation). Based on the studies above, it is expected that disclosure choice is likely to be related to the company's size. Consequently, the first hypothesis is:

H1 Larger firms are more likely to voluntarily disclose environmental information in the annual reports than smaller firms.

Financial Leverage

Jensen and Meckling (1976) and Myers (1977) assert that in a principal-agent setting, potential transfers of wealth from bondholders to shareholders can take place in highly leveraged firms. Agency theory predicts that restrictive covenants may be written into debt contracts to protect firms' economic interests. Management may also voluntarily disclose information in financial reports for monitoring purposes. Thus, agency theory predicts that the level of voluntary disclosure increases as the firm's leverage grows. In support, Letfwich et al. (1981) suggest that the proportion of outside capital tends to be higher for larger firms as the potential benefits of voluntary disclosure increase with shareholder - debt holder - manager conflicts. Moreover, companies with high leverage may disclose more information to satisfy the needs of long-term creditors (Malone, Fries and Jones, 1993) and to remove suspicions of debt holders regarding wealth transfer (Myers, 1977).

The empirical evidence on this hypothesis is, however, contradictory. Even though a positive association has been found between financial leverage and extent of voluntary social responsibility disclosures (Trotman and Bradley, 1981) and voluntary current cost accounts, Wong (1988), Chow and Wong-Boren (1987), and Ahmed and Nicholls (1994) found no statistical relation between financial leverage and voluntary disclosure. The inconclusive findings may lie in the fact that the extensively used leverage variable is a relatively poor proxy for closeness to covenants (Dichev and Skinner, 2002). It is argued here that firms with lower leverage (vis-à-vis lower financial risk) are more likely to engage environmental reporting as a precautionary measure to ensure proper assessment of its financial risk level. It is hoped that the prevailing risk level is maintained or even lowered by market participants. Therefore, the second hypothesis to test the relationship between the voluntary disclosure of environmental information and financial leverage is formulated as:

H2 Firms with lower level of financial leverage are more likely to voluntarily disclose environmental information in the annual reports than firms with higher level financial leverage.


There are two different conceptions regarding a firm's profitability and the tendency to disclose voluntary information. First, more profitable firms are more likely to disclose more while less profitable firms tend to be more secretive. Profitable firms may be more inclined to disclose more information in order to screen themselves from less profitable firms (Akerlof, 1970). A well-run company has the incentives to distinguish themselves from less profitable company in order to raise capital on the best available term. Inchausti (1997) also argues that managers of very profitable companies would use external information in order to obtain personal advantages such as continuance of their positions and compensation arrangements, which provides some agency notion in this variable.

However, Lang and Lundhlom (1993) suggest that there is a certain ambiguity in theoretical and empirical studies regarding the sign of profitability in relation to disclosure and therefore the relationship between disclosure and profitability is nonmonotonic. This is because less profitable firms may disclose more information to explain the reasons for the negative performance and reassure the market about future growth. Companies also disclose bad news at an early opportunity in order to mitigate the risk of legal liability, severe devaluation of share capital and loss of reputation (Skinner, 1994). Nevertheless, the third hypothesis is:

H3 Firms with higher level of profitability are more likely to voluntarily disclose environmental information in the annual reports than firms with lower level of profitability.

Effective Tax Rates

Another measure of political visibility is the effective tax rates (Salamon and Dhaliwal, 1980). The taxation system provides the most direct means by which wealth transfers can be made from companies to the government. Income tax can be viewed as one of the components of political costs borne by a company (Watts and Zimmerman, 1986). This suggests that a company that is liable to pay relatively higher levels of taxation may be seen to be presently subject to high levels of the political costs. A company, which is subjected to high taxation burden, may be motivated to employ techniques that reduce these costs (Deegan and Carroll, 1993). One way to achieve this is by disclosing environmental related activities performed by the company. Moreover, it has been shown in the literature that companies with higher effective tax rates are more likely to disclose more voluntary information than companies with lower effective tax rates as an effort to reduce political costs (Deegan and Hallam, 1991). Hence, the related hypothesis is:

H4 Firms with higher level of effective tax rates are more likely to voluntarily disclose environmental information in the annual reports than firms with lower effective tax rates.

Sensitive Industry Membership

Each industry has different characteristics from each other, which may relate to competition, growth and risks, and specific culture related to historical factors. These may provide scope of differential disclosures policy as suggested by Dye and Sridhar (1995). Holthausen and Leftwich (1983) argue that imitation and tradition can ensure that new entrants to an industry are likely to follow accounting methods used by industry leaders. Moreover, different industries have different proprietary costs, which give incentives for companies belonging to the same industry to disclose more, or less information than companies belonging to another industry (Verrechia, 1983). In environmental reporting setting, it has been found that firms considered to be environmentally sensitive are more likely to disclose more environmental information in their annual reports than firms considered not to be environmentally sensitive. Thus, there is a high probability that Malaysian companies in the environmentally sensitive sectors to disclose more voluntary information as compared to other sectors due to the reasons stated above. Consequently, the fifth hypothesis for the study is formulated as:

H5 Firms in environmentally sensitive industries are more likely to voluntarily disclose environmental information in the annual reports than firms in nonenvironmentally sensitive industries.

Auditor Type

Jensen and Meckling (1976), Watts (1977) and Watts and Zimmerman (1986 & 1990) consider that auditors play a major role in limiting opportunistic behaviour by agents, thereby reducing the agency costs borne by principals and agents. Watts and Zimmerman (1986) argue that auditors incur costs from entering contracts with audit clients, and so will influence clients to disclose as much information as possible in their annual reports. Auditors with high reputation such as the Big Five are less likely to be associated with clients that disclose low levels of information in their published annual reports. Nevertheless, empirical studies that examine the relation between the size of audit firms and the extent of voluntary disclosure by companies are contradictory. Craswell and Taylor (1992) found a positive relationship between auditor and voluntary reserve disclosure in the Australian oil and gas industry, while Malone et al. (1993) found no significant statistical relation between auditor and voluntary reserve disclosure in the United States oil and gas industry. A study done by Tan, Kidman and Cheong (1990) also found no support that audit firms influence disclosure strategies of companies in Malaysia. In order to test the relationship between disclosure choice and audit firm, the sixth hypothesis is therefore formulated as below:

H6 Firms whose accounts are audited by a member of the Big-5 are more likely to voluntarily disclose environmental information in the annual reports than firms whose accounts are not audited by a member of the Big-5.


The population for this study consists of all listed companies on the Kuala Lumpur Stock Exchange (KLSE) for the period between 1st January 1999 and 31st December 1999. For the purpose of the study, 299 companies (out of a total of over 700 companies listed during that period) were randomly selected to form the sample for the analysis of the study. The companies listed on KLSE are classified into the following industry classifications; Industrial Product, Consumer Product, Trading and Services, Construction, Infrastructure, Finance, Technology, hotels, Properties, Plantation, and Mining sectors.

The data needed for the study were collected from the sample companies' annual reports. This is based on the presumption that the annual report is an important, if not the most important, mechanism through which the company disseminates information to interested parties such as shareholders and prospective investors (Hossain, Tan and Adam, 1994). This presumption is supported by the evidence in the literature that indicate that the annual reports are perceived by the users, most notably the sophisticated users, as an important and adequate source of information for investment decisions (Streuly, 1994; Vergossen, 1993). The companies may use other medium to channel the information, such as the media and interim financial statements. However, such forms of information disclosure are not in the scope of this study.

Research Design

The research design used is one of a cross-sectional analysis. Univariate and multivariate methods were employed to test the relationship between the independent variables and the likelihood of voluntarily reporting environmental issue. The univariate test is the non-parametric Mann Whitney U-test for the interval-scaled variables (LgCSIZE, FLEV, PROFIT, and ETR) and Chi-square test for the ordinalscaled variables (AUDFM and INDMEM). The focus, however, is on the multivariate analysis. This is based on the arguments forwarded by Bazley (1985), Scott (1991), and Tabachnik and Fidel (1996) that multivariate analysis is appropriate if it is suspected that there might have been some inter-dependence amongst the independent variable. According to Scott (1991), political, contracting, and agency costs are likely to be present in varying degrees and opposite influence on management across firms.


Environmental Disclosure

Table 2 reports the composition and industry membership of the 299 sample companies for the year 1999. For the purpose of the study, the definition of an environmental disclosure / information (EI) is: any sentence in the annual report that discusses or mentions any aspect of the natural environment and / or its relationship with the organisation, inclusive of any environment-related awards won or standards obtained. In this regard, the sample companies are classified into the discloser group with 39 companies, and the non-discloser group with 260 companies. It is apparent that only 13% of the sample companies have made some form of environmental disclosure in the annual reports in 1999.

For the purpose of analysing the content of environmental information disclosed by the sample companies, frequency analyses were performed on the details of the disclosure. Table 3 summarises the amount of disclosures by the 39-discloser companies. The companies were further classified as environmentally sensitive and non-environmentally sensitive based on the main activities of the entity. Environmentally sensitive companies are those companies involved in industrial product, construction, infrastructure, mining, plantation, and property development activities. This classification is similar and consistent with the one made by Wilmhurst and Frost (2000).

A closer examination of Table 3 indicates that majority of environment disclosures are reported by environmentally sensitive companies (59%); consistent with expectation. Overall, there are 152 environmentally sensitive companies in the sample and only 23 companies (15%) are found to have disclosed environmental information. This is an appalling finding considering the importance of emphasising the environmental effects of such industries.

A word count was done on the information reported and it was determined that 56.5% of the environmentally sensitive companies disclose extensive environmental information, using more than 500 words; even though a sizeable proportion (34.8%) disclose such information very moderately (21-50 words). A majority of companies includes the environmental information in the operations review segment of the annual reports. Corporate social reports segment comes second in the choice of environmental disclosure. It is also discovered that the environmental disclosure is reported in the notes to the accounts only in the existence of related legal liability. Disclosure of specific amount spent on environmental concerns is non-existent in the notes to the accounts. The use of imagery and monetary reporting for environmental information is still rather low for all the sample companies.

In terms of the information disclosed, the content can be considered as general statement and specific disclosure. An environment report is classified as general statement unless the "what" and "how" information is reported, which is classified as specific disclosure. It is observed that, for environmentally sensitive companies, slightly more companies disclose specific statements (56.5%) as compared to general statements. These companies include those multinationals such as Shell Refining Co., UMW Holdings, and Esso Malaysia Berhad. As for the non-environmentally sensitive companies, the specific disclosure is lesser, only about 31.2%. Specific disclosures of environmental information might also serve as a good reflection of the company and that might be the reason why such disclosure is more prevalent if compared with imagery and monetary disclosures.

In order to identify distinctive characteristics of the sample companies, certain inferential tests were performed though the results are not reported here. The Mann Whitney U-test was used to test the significant difference in the amount of disclosure between the environmentally sensitive and non-environmentally sensitive companies. The cross tabulations (Chi-square) were undertaken to determine any significant relationship between the companies being classified as environmentally sensitive or otherwise with the placement, nature and type of information and the imagery used. The results of such tests show no significant difference in the amount of disclosure between the two categories and there is no relationship between the elements of environmental disclosures and the sensitivity classification of the companies. Despite the preceding analysis, on an overall basis, the practice of environmental reporting by Malaysian listed companies is considered very low in terms of quantity and quality.

Descriptive Statistics and Diagnostics

The descriptive statistics and the results of the univariate analyses are reported in Table 4. An examination of this table suggests that disclosers of environmental information are significantly larger, have low rates of financial leverage than the nondisclosers, and have Big-5 firms as their auditors. In addition, though not statistically significant, disclosers have higher level of profitability and effective tax burden; nevertheless, consistent with the hypothesised expectation. There is no evidence to suggest that disclosers and non-disclosers of environmental information are generally categorised in the environmentally sensitive and non-environmentally sensitive industries respectively.

Multivariate Results

Prior to performing the multivariate analysis, a multicollineary was performed to examine the interrelation between the independent variables. If the variables are too highly correlated, multicollinearity may be present. Tabachnik and Fidel (1996) caution that multicollinearity yields singular variables that may contain redundant information and therefore not all variables are needed in the same analysis. Multicollinearity is considered to be present when the bivariate correlation score is above 0.90.

Table 5 reports the Spearman correlation analysis among the independent variables to detect the multicollinearity among the independent variables. The present sample exhibits a number of significant bivariate correlations: for example, between FLEV and PROFIT, PROFIT and ETR, AUDITOR and LgCSIZE, and between INDMEM and PROFIT. It is also noted that none of the variable's bivariate correlation is higher than 0.30. The findings indicate some interdependence amongst the independent variable, and thus, giving support to the appropriateness of multivariate analysis, specifically the logistic regression (Bazley, 1985; Tabachnik and Fidel, 1996). However, none of the bivariate correlation is above 0.90. It appears that serious multicollinearity among the independent variables is absent.

Logistic Regression Result

Results of the logistic regression appear in Table 6. The model has a modest explanatory power (model c^sup 2^ = 13.918; d.f. = 6; p = 0.031). The reported pseudo- R2 , namely the Cox & Snell R2 and Nagelkerke R2 are 0.045 and 0.084 respectively; with a classification accuracy rate of 87%. These results suggest the model as a significant logistic regression model and hence suitable for further examination. Further examination of the regression results indicates that the coefficients of all independent variables of interest are in the hypothesized direction. However, only FLEV and AUDFM are statistically significant at p < 0.05 and p < 0.10 level respectively. This result seems consistent with the finding from the earlier reported univariate analysis and presents as evidence to support for hypotheses H2 and H5.


The objective of this study was to examine the factors that motivate Malaysian listed companies to engage in voluntary disclosure of environmental concerns in their annual reports. It was hypothesized that the decision to disclose environmental issues in the annual reports is a strategy to mitigate the political and contracting costs potentially associated with the firms. Specifically, it was hypothesised that the firm's size, financial leverage, profitability, effective tax burden, auditor, and sensitive industry membership influenced the said voluntary disclosure. The results reveal that only hypotheses H2 and H5 are supported; that is, the voluntary disclosure of environmental information in the annual reports is negatively related to firms' financial leverage and that their accounts were audited by Big-5 firms.

It is duly noted that only two out of the six testable hypotheses are supported by the findings from the current study. Further, the result suggests a modest model to explain the phenomenon examined. The results thus far suggest lack of strong support for the general hypothesis that firms voluntarily disclose environmental information to mitigate the contracting and political costs. This could be attributed to the argument that the commonly held theoretical framework of principal-agent relationship may not hold in the Malaysian context (Hassan, Christopher and Evans, forthcoming; Dogun and Smyth, 2002; Claessens, Djankov and Lang, 1999; Khan, 1999; Thillainathan, 1999).

Even though efforts have been made in ensuring the thoroughness and accuracy of the study, inherent limitations are found in the study. This study is an example of positive accounting research, thus, it suffers limitations that have been well documented by Holthausen and Leftwich (1983), Holthausen (1990), and Watts and Zimmerman (1990). One such limitation is the misspecification of the right-hand side of the equation. This study did not examine other variables that are perhaps important. These variables include types of firms, corporate governance characteristics, event/time factor, incidence of prosecution for non-compliance with the environmental legislation, and public pressure.

Research regarding the motivation behind the voluntary disclosure of environmental information could be extended over a longer period of time by using a longitudinal approach instead of a cross-sectional one as adopted in this study. A longer time frame is believed to provide better understanding of environmental disclosure motivations. Alternatively, comparative study among different countries is also believed to provide more insights on the issue in question. Such studies will help to validate the conclusions of this study and overcome the possibility that a small, single-period data set may bias the results.



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[Author Affiliation]

Zauwiyah Ahmad*, Salleh Hassan** and Junaini Mohammad***

[Author Affiliation]

* Multimedia University

** University of Nottingham

*** Multimedia University

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