#339 Summary
SUMMARY REVIEW EDITING HISTORY REFERENCES Submission
Authors Sumon Kumar Das, Diljahan Akter, Tanvir Hossain The Determinants of Environmental Disclosure Practices:
Evidence from Manufacturing Industry in Bangladesh SUMON KUMAR DAS,
Department of Business Administration, Noakhali Science and Technology University, Noakhali, Bangladesh.
Mail: skdas@nstu.edu.bd Cell: +8801726843616 DILJAHAN AKTER,
Department of Business Administration, Noakhali Science and Technology University, Noakhali, Bangladesh.
Mail: diljahan43@gmail.com Cell: +8801990555699 TANVIR HOSSAIN
Department of Business Administration, Noakhali Science and Technology University, Noakhali, Bangladesh.
Mail: tanvir.hossain.nstu@gmail.com Cell: +8801829957142
Corresponding author:
Sumon Kumar Das,
Department of Business Administration, Noakhali Science and Technology University, Noakhali, Bangladesh.
Mail: skdas@nstu.edu.bd Cell: +8801726843616 Abstract
The current study identifies the driving forces of environmental disclosure (ED) in Bangladesh. A total of 359 firm-year observations extracting from the annual report of 86 listed manufacturing companies of the Dhaka Stock Exchange (DSE) for the period of 2015 to 2019 are examined.
Multiple linear regression analysis is performed to identify the driving forces of ED practices. This study finds size, profitability, age, leverage, liquidity, foreign stockholdings, the board size, and audit committee size significantly positive with ED. However, surprisingly more representation of independent directors in the boardroom and more institutional ownership in share capital reduce the extent of ED for our sample firms.
These results provide a comprehensive understanding of the determinants of ED in an emerging country like Bangladesh and may useful for regulators, policymakers, and corporate managers and will assist the other stakeholders in making relevant decisions. However, by providing the empirical facts of the determinants of ED practices in developing countries’ manufacturing sector setting, the study provides a novel contribution to the current ED literature. To the best of the authors’
knowledge, this is the first study investigating the determinants of ED practices of the manufacturing industry based on the GRI.
Keyword: Bangladesh, Corporate Governance, Determinants, Environmental Disclosure, Firm’s characteristic.
1. INTRODUCTION:
Environmental pollution is the byproduct of the development of civilization and a price for progress. The protection of the environment has become a major issue around the globe for the well-being of the people and economic development. The understanding of the interaction between business and its environment is very crucial for a business executive for identifying opportunities and threats, building image, and meeting competition to succeed in business. The business houses should have a moral commitment and ensure a sustainable environmental structure toward the community. System oriented theories like legitimacy theory, stakeholder theory, and political economy theory describe the pivotal role of information in making the relationship with stakeholders (Fernando and Lawrence, 2014). In legitimacy theory, the organization always seeks to run within the norms and bounds of society by establishing a social contract with the society. In the case of violating the contract, the consequences may be the legal restrictions on operations, difficulty in accessing constrained resources provided, and decreasing the demand for products. To be a corporate citizen or sustainable business response, organizations need to meet the expectation of the community. Information is vital for ensuring corporate legitimacy. However, disclosures in the environmental aspect are self-laudatory showing only positive aspects rather than negative (Deegan and Gordon, 1996). Managers always seek to meet the expectation of particular (powerful) stakeholders under stakeholder theory. The voluntary information plays a pivotal role employed by corporate managers to manage stakeholders. Moreover, the supporters of this theory argued that the high level of voluntary disclosure to raise more funds at a lesser cost (Choi, 1973). Investors are also interested in social and ED before making their investments. In political- economic theory, corporate managers disclose information not only to seek support but also to mitigate pressure from particular stakeholders (Deegan, 2009).
Agency theory, resource dependency theory, and signaling theory have also been used to provide the explanation of disclosing the voluntary information. Under agency theory, the principal delegate the decision- making authority to the agent. The level of information is used by both parties to reduce the severity of the problem of information asymmetry which is one of the determinants of voluntary disclosure decision (Healy and Palepu, 2001). However, disclosure of social information is a tool for increasing the welfare of management (Ness and Mirza, 1991). Signaling theory also describes the information asymmetry problem and reducing these problems by the party by disclosing more information (Levin, 2001;
Ross, 1977). Debreceny et al. (2002) and Ettredge et al. (2002) also
argued that a firm usually tries to differentiate itself from others by signaling its specific qualities to investors. In the resource dependency theory, a company always access to critical resources from the planet. As a result, every firm has to control influential stakeholders for accessing outside resources proving disclosures (Hillman et al., 2009). Therefore, the objective of our study is to identify the determinants of ED practices in the context of the manufacturing industry in Bangladesh. However, most of the priors’ empirical studies are performed in the context of developed countries. A very few studies are focused on the voluntary disclosure practices of the developing countries (Belal, 2000; Kolk et al., 2008;
Pahuja, 2009; Saha and Akter, 2013). Especially, in Bangladesh, there are only a few studies about the ED. Prior studies mainly are descriptive, mainly concentrated on measuring the volume of disclosures identified the nature and extent of voluntary disclosures practices using content analysis (Belal, 2001; Imam 2000; Sobhani et al., 2009; Khan et al., 2009;
Azim et al., 2011). Others were focused on testing hypotheses in determining the factors on voluntary disclosure (Hossain et al., 2006;
Khan, 2010; Rouf, 2011; Saha and Akter, 2013; Das and Das, 2016;
Bhuyan, 2018; Saha, 2019). But, the social issues are the more dominance than environmental issues in the umbrella of corporate social responsibility (CSR) in developing countries (Amos, 2018). Moreover, despite the significance of the relationship, there is a paucity of clear the understanding of the motivating forces of ED. The inconsistent findings motivate us to investigate the motivating forces that drive the ED practices of the manufacturing industry in the context of Bangladesh.
Moreover, the current study has several potential contributions. First, the present study investigates both corporate governance mechanisms and a firm’s specific characteristics in a single model for identifying the driving forces of the ED. Second, most of the previous empirical studies were done on the service industry but, the current study reveals the determinant of ED of the manufacturing industry as industrial wastage is derived from a manufacturing process. Third, our paper examined annual reports of 5 years in a row but most of the previous studies either one or two years. Last but not the least, our study can be used for a practical purpose by organizations and statutory bodies to pay attention to the point out the corporate characteristics and governance mechanisms that will intensify ED since it had been shown in previous studies that environmental reporting in Bangladesh is generally low. The remainder of the study is organized as follows: Section 2 extracts the literature review and hypothesis development. Section 3 reveals the research methodology incorporating sample selection, data collection process, and model development. Section 4 explores the results and findings of our empirical study. Finally, major findings, limitations, and direction of future research are unfolded.
2. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT:
A number of empirical studies have been undertaken to investigate the gearing forces of voluntary disclosures mainly focusing firm specific characteristics. Chandok and Sing (2017) postulated size, leverage, and systematic risk having positive but profitability having a negative association with ED based on the topmost 100 firms of Bombay Stock
Exchange (BSE), India. Fahad and Nidheesh (2020) also examined BSE-500 index companies and asserted that age, size, leverage, foreign, and promoter ownership having positive association based on a period of 10 years annual reports of 2007-2016. But Rahman et al. (2011) concluded that the only firm size having significant and age, profitability and leverage were insignificant forces of 44 govt. link firms of Bursa Malaysia a period of 2005 to 2006 while Haniffa and Cooke (2005) stated firm size, profitability, multiple listing industry, profile were considered as explanatory variables for corporate social reporting (CSR) based on 139 firms extracted fromKuala Lumpur Stock Exchange, Malaysia a period of 1996 to 2002. Giannarakis (2013) analyzed 366 companies from the Fortune 500 listed in USA incorporating both financial characteristics and corporate governance mechanism, namely, CEO duality, company’s size, women on board, profitability, board’s age, industry profile, board meetings of directors, board size and financial leverage but only company’s size and board size having positive while CEO duality having negative determinants in social disclosures. Jennifer Ho and Taylor (2007) investigated 50 largest US and Japanese companies and found the extent of reporting was more firms with larger size but lower with profitability and liquidity. Matuszak et al. (2019) investigated the link between corporate governance characteristics and found foreign ownership and size statistically significant in the level of CSR disclosures examining between 2008 and 2015 of commercial banks of Poland. Chithambo (2013) examined FTSE350 United Kingdom (UK) listed companies a period of 2008-2011 and empirically found that the size of firm and capital structure were the main determinants of climate change disclosure but liquidity and profitability having no significance. Rao et al. (2012) scrutinized annual report of 2008 of the largest Australian listed companies and asserted that board size, institutional investors, independent directors, and female directors having positive relation with environmental reporting. Before the 1990s, there was no evidence of disclosing voluntary practices by the Bangladeshi firm. Later there are some studies in exploring the only nature and extent of voluntary practice using content analysis such as Imam (2000); Belal (2000); Hossain and Taylor (2007); Azim et al. (2009);
Hasan and Hossain (2015). The following table shows the summary of previous literature in determining the motivating forces of voluntary disclosure in the context of Bangladesh:
Study Samples Time
period Method Results Hossain
et al. , (2006)
150 listed non-
financial firms
2002/2003 Multiple Regression Model
Nature of the firm, presence of debt, and profitability having significantly positive
with voluntary
disclosure.
Khan
(2010) 30 listed
banks 2007-2008 Multiple
regressions Independent directors and foreign nationals in board significantly
impact on CSR reporting.
Rouf
(2011) 120 listed non-
financial firms
2007 OLS
regression analysis
Board size, board leadership, and audit
committee are
positive, while the independent
directors, ownership
structure, and
profitability were inverse association
with voluntary
disclosure.
Rouf and Al-Harun (2011)
94 listed
firms 2007 Regression
Model Institutional
ownership was
positive but,
managerial ownership was negative with voluntary disclosures.
Akhtarud din and Rouf ( 2012)
94 listed
firms 2006 Regression
Model Both board and audit committee sizes are
positive with
voluntary disclosure but independent directors in board not significant.
Khan et
al. (2013) 116
manufactu ring firms
2005 -2009 Regression
Model Public stockholdings, foreign stockholdings, and the inclusion of audit committee were
positive while
managerial ownership was negative forces for CSR disclosures in annual reports.
Saha and Akter (2012)
20 listed manufactu ring firms
2009/2010 Regression
analysis Profitability is the main driver of ED.
Muttakin and Khan (2014)
116 listed manufactu ring firms
2005-2009 Regression
Model Firm size, types of industry and export oriented sector are positive but family ownership negative with CSR disclosures.
Das and Das(2016)
141 listed
firms December
2013 to March 2014
Regression
Model Size, audit firm's international link, multinational parent, independent director
in the board, and dual leadership structure are significantly
positive with
voluntary disclosures, while profitability and leverage are negative but board size, liquidity, age, and ownership having no significant
association.
Bhuyan
(2018) 200 listed
firms 2011 to
2013 Ordinary
Least Square Audit committee, profitability and foreign ownership were positive but director ownership and CEO duality were
negative with
voluntary disclosure.
Saha
(2019) 29 listed
banks 2012 OLS
regression analysis
The profitability, age, government
ownership and Islamic compliance were the main denominators in CSR disclosures.
Table I: A summary of literature review in context of Bangladesh.
Due to inconclusive results of previous literatures, the current study empirically explores the drivers of ED practices in published annual report in context of emerging and developing economy taking into consideration of both firm specific characteristics and corporate governance mechanisms. Bangladesh is a victim of climate change due to a vulnerable economy and too much dependence on natural resources.
Bangladesh is the seventh most affected country among the 10 most affected countries and is rank the ninth fatalities all over the world as per the Climate Risk Index for 1999-2018 published by GERMAN WATCH (The Business Standard, 2020). If the world community does not take step effective role in combating climate change, then the loss can be incurred by about 2% of GDP by 2050 and about 9.4% of GDP of Bangladesh by 2100 as per the report published by ADB (Ahmed and Suphachalasai, 2014). Based on the prevailing literature, ten attributes are considered with the extent of the companies’ ED: firm size, profitability, age, leverage, liquidity, foreign ownership, institutional ownership, Audit committee, Independent directors and board size. All the determinants are considered in turn and propose the hypothesis in relation with ED.
2.1 Firm Size: Firm size is counted as one of the most important variables influencing the voluntary reporting practices of firms (Jennifer Ho and Taylor, 2007; Chandok and Sing, 2017). The primary benefit of
disclosure of the information is the lower cost of capital through reducing information asymmetry and costs are information production costs and competitive disadvantages (Elliott and Jacobson, 1994). Due to lower marginal costs, the bigger firms are more likely to disclose more information than smaller firms. Moreover, in support of agency theory and political theory, they also disclose more information because they have more agency costs and more sensitive to political cost (Jensen and Meckling, 1976) and have to ensure more accountable and viable over the long run. Therefore, larger firms with the higher reputation and societal existence may have taken more legitimacy due to high public scrutiny.
Earlier, some researchers found a significant positive relationship between firm size and EDI ( Alsaeed 2006; Rahman et al., 2011; Saha and Akter, 2013; Muttakin and Khan 2014; Islam et al., 2015; Das and Das, 2016;
Fahad and Nidheesh 2020). Despite this positive association, Roberts (1992) and Akhtaruddin and Rouf (2012) found that the size of the firm did not adequately explain a relation with voluntary disclosure. Hence, hypothesis is proposed.
H1: The size of a firm is a significant positive relation with ED.
2.2 Profitability: Profitability is one of the dominants determinants of voluntary disclosures. Managers of highly profitable firms are persuading not only to disclose more information to justify higher profit as per political costs theory but also to distinguish themselves from less profitable companies based on the signaling theory (Inchausti, 1997). Profitability is the most prerequisite feature to ensure growth and sustainability if a firm.
Profitable companies may feel motivation for disclosing information as it has favorable information resulting in the increment of the share price.
Prior studies could not construe the uniform relationship between profitability and ED. Profitability is a statistically positive significant variable in disclosing voluntary information supported by Haniffa and Cooke (2005), Hossain et al., (2006), Saha and Akter (2012). But contrast;
there is a significant inverse association between the ED and profitability (Chandok and Sing 2017; Jennifer and Taylor 2007; Das and Das, 2016).
Other studies found no significant relationship between these two variables (Alsaeed 2006; Rahman et al., 2011; Giannarakis, 2013;
Chithambo, 2013).
H2: The more profitable companies disclose more environmental information.
2.3 Age: The age is one of the pivotal variables for the improvement of the extent of disclosures (Akhtaruddin, 2005). Older firms with more expertise and resources are expected to disclose more voluntary information to intensify their reputation and image in the market while, the extent of disclosures of younger firms is lower because of a lack of experience, higher information production costs, and competitive disadvantage (Owusu-Ansah, 1998). Prior empirical studies revealed a mixed result. Chandok and Sing (2017), Saha (2019), and Fahad and Nidheesh (2020) revealed the positive association between voluntary disclosure and firm age while Das and Das (2016) and Alsaeed (2006) found no significant relation.
H3: the age of a firm is positively associated with ED.
2.4 Leverage: High levered firms experience consequential agency problems and incur higher agency costs. So, they may give importance to disclosing information on their annual report as they have more liable to the fulfillment of the debt convents and to lower the cost of raising capital. Previous studies have concluded the mixed evidence between leverage and ED. Some researchers found that the more levered firms the more disclosures (Chandok and Sing 2017; Fahad and Nidheesh, 2020) while Das and Das (2016) argued that there was a significant negative association of these two variables. But, Rahman et al. (2011) Giannarakis (2013), and Alsaeed (2006) claimed no significant relation. The hypothesis is:
H4: The high levered firm discloses more information related to ED.
2.5 Liquidity: The assessment of liquidity is also an influential variable for the user who judges the ability of the firm to meet the maturing obligation and unexpected need for cash. To mitigate these fears, companies are willing to disclose more information (Wallace and Naser, 1995). A high liquidity ratio is expected to more disclosure as it represents a good management performance (Al-Akra et al., 2010). The extent of voluntary reporting shows significant positive related to the firm's liquidity (Das, 2017). Signaling theory mainly focuses on the relationship between liquidity and disclosures. Supporters of this theory argued that firms with a higher liquidity ratio may be more encouraged to disclose information voluntarily to differentiate themselves from other facing liquidity problems. This was supported by the study of Barako et al. (2006) large firms with high leverage disclose more information. In contrast, Wallace et al. (1994) documented that companies facing liquidity problems might disclose more information to justify their liquidity position. Previous literature divulged mixed empirical results. Jennifer Ho and Taylor (2007) found a negative association between liquidity and disclosures while Chithambo (2013) and Alsaeed (2006) documented no association. We presume the hypothesis:
H5: The higher the liquidity, the higher the ED.
2.6 Institutional ownership: One view postulates that institutional investors monitor corporate disclosure practices, as they have a large ownership stake, extensive expertise, and resources. Hence, manager always try to meet the expectation of powerful stockholders through voluntary disclosure. CSR disclosure was positively significant with institutional ownership (Barako et al., 2006; Muttakin and Subramaniam 2015) and Rouf and Al-Harun (2011). Another view is that institutional owners having short term self-interest less interested in disclosures.
Having a majority of institutional investors are more likely to control, influence and even limit or restrict the decisions of management (Lakhal, 2005) and leads to not only a lack of board activism but also a lack of board independence (Bergolf and Pajuste, 2005). In this respect, a negative association was documented by Rao et al. (2012) and Qa’dan and Suwaidan (2019). Despite this, Rashid and Lodh (2008), Shah and Akter (2013) and Das and Das (2016) found that voluntary disclosure had not been significant affected by the percentage of institutional ownership.
The following is postulated:
H6: There is a significant positive association between institutional ownership and ED.
2.7 Foreign Ownership: Disclosure in the annual reports is also affected by nationality. With stakeholder theory, the company reactively reduces the pressure from powerful stakeholders like foreign owners for enlightening self-interest & brand image and generating congenial investment climate. When a company has a foreign stake, the management feels more accountable than those who have no foreign stake. Additionally, foreign shareholders have different values and expertise due to exposure to the foreign market. Similarly, under agency theory, higher agency costs may be expected for the requirement of more information foreign investors for a better understanding of the company (Mangena and Tauringana 2007; Young and Guenther 2003). Therefore, Barako et al. (2006), Haniffa and Cooke (2002), Muttakin and Subramaniam (2015), Khan et al., (2012), Bhuyan (2018), Matuszak et al.
(2019), and Fahad and Nidheesh (2020) empirically found a positive association between ED and foreign stockholdings, while, Craswell and Taylor, 1992 found no association. The hypothesis is:
H7: Foreign ownership is a significant positive impact on the ED.
2.8 Audit Committee: The audit committee is considered a monitoring tool to enhance the reliability and relevance of financial reporting (Ho and Wong, 2001).As auditors take part in making an annual report of a company; they play a significant role in the disclosure of information a firm. Ho and Wong (2001), Barako et al., (2006), and Bhuyan (2018) concluded that voluntary disclosure was higher in the case of the inclusion of an audit committee. Rouf (2011) and Khan et al. (2012) empirically revealed that the voluntary disclosures practices were positively related with the size of the audit committee. On the other hand, Akhtaruddin et al. (2009), Chithambo (2013), and Habbash (2016) revealed the insignificant association between these two variables. The hypothesis is:
H8: The size of audit committee is positive with ED.
2.9 The portion of Independent directors: The existence of independent directors on the board increases the value of the firms (Beasley, 1996), ensures the effective monitoring of management behavior, and limits managerial opportunism (Fama and Jensen, 1983).
Independent directors protect stakeholder’s interests through reducing information asymmetry (Khan et al., 2013). They also play more effective and efficient role in quality disclosures in maximizing the shareholders’
wealth. So the higher level of disclosure was forced by the higher portion of independent directors (Khan, 2010; Rouf 2011; Rao et al., 2012; Khan et al., 2012; Muttakin and Subramaniam, 2015). But, Eng and Mak (2002), Barako et al. (2006), and Qa’dan and Suwaidan, (2019) found a negative relation between the independent directors and voluntary disclosures.
Meanwhile, Ho and Wong (2001), and Saha & Akter (2013) do not found any empirical association. Hypothesis is:
H9: The higher proportion of independent directors increases ED.
2.10 Board Size: Another factor for motivating disclosure is the no. of member in the board. Board formulates the policies and strategy to run the business in the long run. With more collective experienced and expertise, information asymmetry may be minimized (Chen and Jaggi
2000) and meet the global challenges effectively and efficiently (Abeysekera, 2010). Rouf (2011), Rao et al. (2012), Akhtaruddin and Rouf (2012), Giannarakis (2013), and Esa and Mohd Ghazali (2012) empirically revealed that the level disclosure was positively influenced by board size.
But the more members in the board may be inclined to less effective communication, coordination, and decision making due to the difficulty in controlling by CEO (Jensen, 1993). So, Odoemelan and Okafor (2018), and Saha and Akter, (2013) found an inverse association between the size of the board and voluntary disclosure. But, Chithambo (2013), Das and Das (2016) and Elfeky, (2017) found no significant association. Hypothesis is:
H10: The more member in the board leads to the more ED.
3. METHODS:
3.1 Sample Selection: For the purpose of the research, samples were taken from the manufacturing firms listed in Dhaka Stock Exchange (DSE) of Bangladesh as the sectorial share of GDP of Bangladesh 19.89% by manufacturing in fiscal year 2018-2019 (BBS, 2020). We purposively selected three industries i.e Cement, Pharmaceutical & Chemical and Textiles from manufacturing sector in our study. These industries contribute the country’s 86.34% of exports earning (EPB, 2020). All listed firms of sample industries are considered in our study. We collected annual report from website from respective company and also using financial portal if not available. Despite this effort, we are unable to collect annual report of 5 textile and 4 pharmaceutical & chemical companies.
Finally, 86 companies were examined in our study.
3.2 Selection of period: To make the experiment more up to date, our study was based on annual report from 2015 to 2019. A total of 359 firm year observations are used after considering following two factors. First, due missing voluntary information in report, some firm years are excluded. Second, some sample firms do not keep their annual report of 5 year in a row from 2015 to 2019. Those missing firm years are also excluded.
3.3 Data Sources: Published annual reports are primary sources of our data. This source is chosen as annual report are readily accessible and popular means of communication to stakeholders (Belal, 2001; Khan et al., 2009). However, it is the major communication medium and public document utilized by researchers for identifying the drivers of voluntary information (Gray et al., 1995; Khan, 2010; Saha and Akter 2012; Khan et al., 2012; Das and Das, 2016). It is more reliable and widely accepted document published by companies (Shehata, 2014).
3.4 Variables definition:
3.4.1 Dependent variable: To measure the ED practices by listed manufacturing firm in Bangladesh, we construct Environmental Disclosure Index (EDI) based on the content analysis. In social and environmental study, the content analysis is widely accepted and effective tool (Guthrie and Abeysekera, 2006 and Gray et al., 2002). In preparing the list of contents of the EDI, GRI (3.1) is documented as yardstick. GRI stands for Global Reporting Initiatives is the most preferred global frame work for
‘Triple Bottom Line’ reporting incorporating the pillars of economic, social and environmental dimensions (Hohnen, 2012) and 82 % sustainability report of the top most 250 corporation of the world are based on GRI
(Haldar, 2015 and Mahmud et al., 2017). 17 core contents of environmental performance under 7 themes are considered in preparing the disclosure index. Both weighted and un-weighted techniques are available in scoring the content. However, these have made a little or no difference to the results (Coombs and Tayib, 1998). We choose the un- weighted techniques as equal importance is given to all contents. We used a dichotomous technique scoring ‘1’ if disclosure and ‘0’ for non- disclosure of the content as espoused by Wallace et al. (1994), Khan (2010), Rouf (2011), Ullah (2013), Saha & Akter (2013) and Qa’dan and Suwaidan (2019). The EDI is the ratio the total score to the maximum possible score for every firm and each year.
3.4.2 Explanatory variables and its measurement: Table II displays the all explanatory variables incorporating both firm specific variables (Size, profitability, age, leverage, and liquidity and corporate governance mechanisms (Institutional ownership, foreign ownership, independent directors, the size of audit committee, and the size of board) and its measurements.
Variable
Name Symbol Explanation References Size FSIZE The log of the total
assets Muttakin and Khan (2014);
Das and Das (2016); Qa’dan and Suwaidan (2019);
Profitability ROA Return on Assets = (net profit after tax/ total asset)
Khan (2014); Qa’dan and Suwaidan (2019); Muttakin and Saha (2019)
Age LAGE The log of the
number of years
passed since
incorporation
Muttakin and Khan (2014)
Leverage LEV Debt to total assets = total debt / total assets.
Muttakin and Khan (2014);
Qa’dan and Suwaidan (2019);
Liquidity CRATIO Current ratio (Ratio of current assets
to current
liabilities)
Barako et al., (2006); Das and Das (2016)
Institutiona l
stockholdin gs
IOWN Ratio of
institutional
stockholding to the total stockholdings
Barako et al.(2006); Qa’dan and Suwaidan (2019)
Foreign stockholdin gs
FOWN Ratio of foreign stockholding to the total stockholdings
Barako et al.(2006); Khan (2010)
Independe nt
Directors
RIND Ratio of
independent
director to total directors
Das and Das (2016); Qa’dan and Suwaidan (2019);
Size of audit
committee
SAC No. of members in
the audit
committee.
Akhtaruddin and Rouf (2012)
Board Size LSBOD The log of the total
members of board Bhuyan (2018) Table II: Independent variables and their measurement
3.4.3 Regression model: The following regression analysis is used to examine the determinants of EDI:
EDIit = β0+ β1 FSIZEit + β2 ROAit + β3 LAGEit + β4 LEVit + β5 CRATIOit + β6 IOWNit + β7 FOWNit + β8 RINDit + β9 SACit + β10 SBODit + εit.
Where,
EDI= Environmental Disclosure Index;
β0= Intercept;
β1- β10= coefficients;
ε= Error term;
i= represent each observation; and t= represent the time.
4. RESULT AND DISCUSSION
Fig. 1 depicts the EDI in percentage over the period 2015-2019. It is clear that there is a paucity of ED practices by listed manufacturing companies in Bangladesh although there is increasing trend. The growth of ED practices of cement industry is higher than textiles.
2015 2016 2017 2018 2019
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Overall EDI Textiles
Pharmaceutical & Chemical Cement
Fig. 1: Overall and industry wise EDI
Table - III represents descriptive statistics of all variables of our study. The mean score of EDI is 14.77% which indicates this average disclosure level is not satisfactory though the fact that ED is a relatively new phenomenon in our country. The maximum and minimum EDI is 41.76% and 0%
respectively. The size of the sample firms showed an average of log 9.55 is equal to Tk. 7,290 million. The minimum and maximum sizes in the sample are Tk. 129 million and Tk. 72146 million respectively. The size is scaled by the log of total assets due to a high standard deviation. The outcome of the descriptive results shows that the profitability variable scald by ROA has average 5.78% with a range from 44.21% to -21.20%.
The average age is 24 years which indicates that average firms are matured. The leverage scaled by debt to total assets indicates on an average creditor's claim on assets is 53.63%. The liquidity ratio of sample firms computed by the current ratio showed a value in the average of 2.81 and the range between the minimum and maximum is too far apart. The average institutional ownership and foreign ownership is 19.87% and 3.62% respectively. The average size of the board is 7 persons with a
range of 5 persons to 12 persons. The percentage of independent directors on the board is 26.73%. The size of board (5 to 20) and the percentage of independent directors (at least 20% of total directors) are set by regulated by Bangladesh Securities Exchange Commission in code of corporate governance (CG) applicable for all enlisted firms in Bangladesh (BSEC, 2018). The audit committee size is 4 persons with the highest number of 5 people. The CG Code is also documented the size of the audit committee is at least 3 members (BSEC, 2018).
Table - IV exhibits the pairwise correlation of all variables. FSIZE, ROA, LAGE, LEV, FOWN, SAC, and LSBOD are significantly positive while RIND is significantly negative with EDI. These matrix is utilizes for the identifying the collineratiy problem among the independent variables. Gujarati and Porter (2003) documented that collinearity problem exist when values exceeds more than +/- 0.80. The maximum positive correlation between ROA and FOWN is 0.465 and the negative correlation between LEV and CRATIO is -0.343. So, there is no multicollinearity problem. However, we also calculate the variance inflation factor (VIF) for assessing multicollinearity among the variable. Table- III states that the variance inflation factors (VIF) values were determined with the use of STATA and were found to be concurrently less than 10. These results further assure the nonexistence of collinearity among variables.
Variables Mean Std. Dev. Min Max VIF
EDI .1477064 .0731236 0 .4176
FSIZE 9.554134 .5255738 8.109487 10.85821 1.43
ROA .0578944 .0726244 -.212 .4421 1.50
LAGE 1.325968 .2244421 .4771213 1.812913 1.22
LEV .5363211 .2841629 .03 3.053416 1.43
CRATIO 2.816108 3.668854 0 24.37 1.29
IOWN .1987012 .128986 0 .7845 1.31
FOWN .0362113 .103703 0 .703 1.46
SAC 3.835655 .6414535 3 5 1.16
RIND .2673922 .0888751 .11 .6 1.16
LSBOD .8441825 .1110993 .69897 1.079181 1.34
Table III: Descriptive statistics
Table- V abridges the regression result of EDI of both firm’s specific attributes and corporate governance mechanisms. Model 1 exhibits the regression results for the gearing forces of ED and Model 2 is the extension the results of our model using dummies both industry and year to control both year and industry variation. Robust standard error is also used to control for heteroskedasticity of our model. The coefficient estimate 0.036 with RSE 0.008 of FSIZE indicates the positive impact of firm size on EDI at the 1% significance level. Hence, we can accept the first hypothesis (H1). The larger firm discloses more information due to more agency costs, higher public scrutiny, and sustainable with a reputation in long run as per agency, political, and legitimacy theory. This finding is in line with the outcome of Jennifer Ho and Taylor, 2007; Khan 2010; Rahman et al., 2011; Saha and Akter, 2013; Muttakin and Khan 2014; Islam et al., 2015; Das and Das, 2016; Fahad and Nidheesh 2020.
EDI FSIZ RO LAG LEV CRA IOW FOW SAC RIN LSB
E A E TIO N N D OD EDI 1.00
0 FSIZ
E 0.27
3**
*
1.00 0 ROA 0.20
5**
*
0.053 1.00 0 LAG
E 0.24
5*** 0.03
5 -
0.07 7
1.00 0 LEV 0.10
6** - 0.17 4***
- 0.12 8**
0.34
4*** 1.00 0 CRA
TIO 0.03
1 -
0.00 2
0.27 4*** -
0.22 0***
- 0.34 3***
1.00 00 IOW
N -
0.05 4
0.40
6*** 0.07
9 -
0.10 8**
- 0.18 2***
0.04
6 1.00
0 FOW
N 0.25
0*** 0.21
3*** 0.46
5*** 0.07
7 0.04
2 0.02
7 0.02
1 1.00
0 SAC 0.28
5*** 0.11
3** 0.21 2*** -
0.13 7***
- 0.16 4***
0.05
7 -
0.07 4
0.19
8*** 1.00 0 RIN
D -
0.15 2***
- 0.03 0
0.10 8** -
0.04 2
0.11
1** 0.15
3*** 0.02
1 0.09
4* -
0.05 3
1.00 0 LSB
OD 0.23
6*** 0.28
1*** 0.07
0 0.17
2*** 0.12 3** -
0.17 3***
0.19 7*** -
0.00 5
0.09
1* -
0.25 5***
1.00 0 Notes: * significance at 10% level; * * significance at 5% level; ***
significance at 1% level
Table IV: Pearson’s correlation of variables
Then the estimates of ROA as the measure of profitability are shown positive and significant effect with ED. So, we accept H2 and profitable firm discloses more information for justifying higher profit and distinguishing from the less profitable firms in congruence with political and signaling theory. This positive result is supported by Saha (2019). The coefficient estimate 0.072 with RSE 0.015 of LAGE indicates the positive impact of a firm’s age on EDI at the 1% significance level. Hence, we can also accept the first hypothesis (H3). Older firms disclosures more information due to favorable in the economics of scale. This association is supported by Saha (2019), and Fahad and Nidheesh (2020).
Variables Expected
sign Model 1 Model 2
Coef. RSE Coef. RSE
FSIZE + 0.037 0.007*** 0.036 0.008***
ROA + 0.129 0.054** 0.210 0.057***
LAGE + 0.068 0.015*** 0.072 0.015***
LEV + 0.041 0.010*** 0.047 0.012***
CRATIO + 0.002 0.000*** 0.002 0.000***
IOWN + -0.070 0.028** -0.063 0.027**
FOWN + 0.054 0.034 0.057 0.031*
SAC + 0.026 0.006*** 0.023 0.006***
RIND + -0.130 0.035*** -0.112 0.034***
LSBOD + 0.053 0.027** 0.059 0.027**
cons -0.436 0.083 -0.446 0.082***
Industry
dummies? No Yes
Year dummies? No Yes
R-squared 30.95% 35.90%
Adjusted R-
squared 28.97% 32.26%
Notes: RSE= Robust coefficient error; *, **, and *** denoted at 10%, 5%
and 1% significance level.
Table V: Regression result
The estimates of leverage are also shown the significant positive relationship EDI at significant at a 1% level. So, we accept the fourth hypotheses (H4) and propound that the high levered firm disclosures more for the fulfillment of debt convents and lowering the cost of capital (Chandok and Sing 2017; Fahad and Nidheesh, 2020).
The coefficient estimate 0.002 with RSE 0.000 of CRATIO indicates the positive impact of the firm’s liquidity on EDI at the 1% significance level.
Hence, we can accept the first hypothesis (H5) suggesting a significant positive relation between a firm’s liquidity and EDI. The more liquidable firms are likely to divulge more voluntary information to distinguish themselves from other companies facing liquidity problems supported.
This result is supported by signaling theory and consistent with conclusions of Wallace and Naser 1995; Al-Akra et al. 2010 and Das, 2017.
In contrary to H6, we do not accept the proposed hypothesis and shows the significant negative association between the EDI and institutional holdings. This unexpected result could be that institutional shareholders have limited control over the reporting firms as they have the lack of expertise needed to invest in the volatile market and due to some regulatory changes. These finding is in consistent with Rao et al. (2012) and Qa’dan and Suwaidan (2019).
The coefficient estimate 0.057 with RSE 0.031 of FOWN construes the significant positive impact on EDI at the 10% significance level. Hence, we can accept the seventh hypothesis (H7) and implies that foreign shareholders having different values and expertise in contextual issues
due to exposure to the foreign market are able to increase strategic decision regarding voluntary reporting. Further, companies having more foreign stake try to please ethical foreign shareholders for ensuring and attaching their investment. This finding is also supported by Haniffa and Cooke (2002), and Khan et al., (2012).
The estimates of SAC are also shown the significant positive relationship EDI at significant at a 1% level. So, we accept the eight hypotheses (H8) and suggest that the audit committee is playing a pivotal role disclosure of information related to environment. This result is also keep up with the finding of Rouf, (2011).
In contrary to H9, we cannot accept our presumed relation rather there is a significant negative relationship between EDI and the independent directors. This finding is matching with the result of Eng and Mak (2002), Barako et al. (2006), and Qa’dan and Suwaidan, (2019). Independent directors may be theoretical independent and their presence is the substitute of disclosures (Eng and Mak 2002; Barako et al. 2006; Qa’dan and Suwaidan, 2019).
Another significant determinant of ED is the size of the board. The estimates of LSBOD are also shown the significant positive relationship EDI at a significant at a 5% level. So, we accept the eight hypotheses (H10) and conclude that another significant determinant of ED is the size of the board. This finding is matching with Rouf (2011), Rao et al. (2012), Akhtaruddin and Rouf (2012), and Giannarakis (2013), Esa and Mohd Ghazali (2012). With the larger board size having more collective experienced and expertise, a firm is likely to disclose more information related to environment. In addition for the justifying the model by minimizing the endogeneity problem, our study used one year lags of all independent variables and show in table VI is as same as previous outcome except FOWN. Lagged explanatory variables are suitable responses to endogeneity issues (Bellemare et al., 2017).
Variables name Coef. Robust Std. Err. P>|t|
FSIZE 0.032 0.009 0.000***
ROA 0.145 0.064 0.025**
LAGE 0.067 0.019 0.001***
LEV 0.040 0.013 0.002***
CRATIO 0.002 0.000 0.004***
IOWN -0.060 0.035 0.089 *
FOWN 0.046 0.042 0.265
SAC 0.028 0.007 0.000***
RIND -0.126 0.042 0.003 ***
LSBOD 0.056 0.030 0.068 *
cons -0.439 0.095 0.000***
*;**;*** denoted at 10%, 5% and 1% significance level
Table VI: Regression Outcome (Lag Model) 5. CONCLUSION
The study examines the motivating forces of ED practices of listed manufacturing firms in Bangladesh using 359 firm-year observations for
the period of 2015 to 2019. Both firm’s specific characteristics and corporate governance mechanisms have been incorporated, namely, size, profitability, age, leverage, liquidity, institutional stockholdings, foreign stockholdings, independent director, audit committee, and board size.
According to the literature review, we construct EDI score based on the GRI framework. Multiple linear regression models showed that all firm- specific characteristics, namely, size, profitability, age, leverage, and liquidity are significantly positive with ED. A bigger firm with higher liquidity and profitability discloses more ED in the published annual reports. A larger firm with higher profitability and liquidity discloses more information due to more agency cost, higher public scrutiny, justifying its position, distinguishing from others, and sustainable with a reputation in long run as per agency, political, signaling, and legitimacy theory. In addition, the more levered firm discloses more ED for not only the fulfillment of debt convents but also the attraction of creditors to raise funds at a lower cost.
Under governance tools, the size of board, foreign holdings, and the size of audit committee are significantly positive with ED. A firm with more members on board and audit committee discloses more ED due to the inclusion of more diversified knowledge and expertise in the boardroom.
Foreign shareholders having different values and cultures in contextual issues due to exposure to the foreign market are able to increase strategic decision regarding voluntary reporting. However, surprisingly more representation of independent directors in the boardroom and more institutional ownership in share capital reduce the ED for our sample firms.
The current studies have several potential implications. This is the first study examining the driving forces of ED practices of listed manufacturing industry over a period of 5 years incorporating both firm’s specific characteristics and governance mechanisms in a single model based on the GRI. These results give a comprehensive understanding of the determinants of ED in an emerging country like Bangladesh and may useful for regulators, policymakers, and corporate managers and will assist the others stakeholders in making relevant decisions. Particularly, this study may help the regulator of corporate sectors in framing policies regarding corporate governance. However, by providing the empirical facts of the determinants of ED practices in developing countries’
manufacturing sector settings, the study provides a novel contribution to the current ED literature.
Despite its contribution, this study has some limitations. First, we examined the public annual report in constructing ED, although several other mass communication systems are used by management. Second, this study followed only the quantity of ED rather than quality of it. Third, we extracted on a sample from the listed manufacturing industry. These results may not extend to all other industries in Bangladesh.
The current study has been only investigated for Bangladeshi manufacturing firms and can be extended further to have a cross-country analysis comparing among the developed and developing economic world.
In the future, we can also work with this study by ensuring the quality of the disclosure context.
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Appendices
Appendix No. 1
Contents of Environmental disclosure extracted from GRI 3.1
Sl no. Aspects Contents
1. Materials Materials used by weight or volume
Percentage of materials used that are recycled input materials.
2. Energy Direct energy consumption by primary energy source.
Indirect energy consumption by primary source 3. Water Total water withdrawal by source.
4. Biodiversi
ty Location and size of land owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas.
Description of significant impacts of activities, products, and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas.
5. Emission
s,Effluents, And Waste
Total direct and indirect greenhouse gas emissions by weight.
Other relevant indirect greenhouse gas emissions by weight.
Emissions of ozone-depleting substances by weight.
NO, SO, and other significant air emissions by type and weight.
Total water discharge by quality and destination Total weight of waste by type and disposal method Total number and volume of significant spills.
6. Products
And Services
Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation.
Percentage of products sold and their packaging materials that are reclaimed by category.
7. Complian
ce Monetary value of significant fines and total number of non-monetary sanctions for non- compliance with environmental laws and regulations
Appendix No. 02 List of sample firms Seri
al No.
Name of the company Seri al No.
Name of the company
01 Aman Cotton Fibrous Limited 44 Shepherd Industries Limited 02 Alltex Industries Ltd. 45 Square Textile Ltd.
03 Al-Haj Textile Mills Limited ) 46 Sonargaon Textiles Ltd.
04 Anlimayarn Dyeing Ltd. 47 Stylecraft Limited 05 Apex Spinning & Knitting
Mills Limited 48 Tosrifa Industries Limited 06 Argon Denims Limited ) 49 VFS Thread Dyeing Limited 07 C & A Textiles Limited ) 50 Zaheen Spinning Limited 08 The Dacca Dyeing &
Manufacturing Co.Ltd. 51 Zahintex Industries Limited
