Spillover effects in mandatory environmental reporting

Abstract

This paper examines the spillover effects of mandatory standardized environmental reporting, which requires designated heavily polluting firms (HPFs) to include their pollution information in their financial reports. The list of HPFs is already publicly available elsewhere, which allows us to isolate and estimate the incremental spillover effects of including this information in financial reports. Exploiting the variation between industries in exposure to HPF designation, we document that the inclusion of pollution information in the HPFs’ financial reports encourages peer firms to release their environmental reporting voluntarily and to improve the quality of these disclosures. These positive spillover effects are more pronounced among peer firms with strong ex ante environmental performance. Evidence from stock-market reactions suggests that increased investor and stakeholder awareness of environmental risk in the same industry is a likely explanation for the observed spillover effects.