The Influence of Firms’ Emissions Management Strategy on the Value-Relevance of Greenhouse Gas Emission Disclosures

• In Event: 2.02 Investor Reactions to Management Disclosures

Abstract

Recent accounting research indicates that capital markets price firms’ greenhouse gas (GHG) emissions and that disclosed emission levels are negatively associated with firms’ market values (Matsumura et al. 2014; Griffin et al. 2017). The departure point for this project is to investigate whether investors value firms differently based on the strategies firms use to mitigate GHG emissions. These strategies include making operational changes, which reduces emissions attributable to the firm, and purchasing offsets, which reduces emissions unattributable to the firm. Using an experiment, we hold constant a firm’s financial performance, investment in emissions mitigation, and net emissions, and find evidence that non-professional investors perceive the firm is more valuable when it primarily uses an operational change strategy compared to an offsets strategy. However, this only occurs when the firm’s prior sustainability performance is below the industry average but not when it is above the industry average. This difference in firm value is consistent with the notion that non-professional investors price firms’ GHG emission differently based on the firm’s emissions management strategy. Supplemental tests reveal that these results are mediated by investors’ perception that the societal benefits are higher when an operational change strategy is used compared to an offsets strategy. Implications for our findings on theory and practice are discussed.

Authors

• Joseph Johnson, University of Central Florida

• Jochen C. Theis, Universität Duisburg-Essen

• Adam Vitalis, University of Waterloo

• Donald R Young, Indiana University