Industry Norm, Legitimacy Threats, and Managerial Decision-Making: An Experimental Investigation of Environmental Capital Expenditure Projections

We investigate a phenomenon documented in Patten (2005) and Chen et al. (2014) regarding the overstatement of projections of future environmental capital expenditures (ECE) by firms operating in environmentally sensitive industries. Given that overstatement of ECE seems to be a common practice within these industries, we use an experimental design to examine whether two factors – an overstatement industry norm and/or a legitimacy threat – impact the likelihood of managers making higher ECE projections. Our results show participants are more likely to choose higher ECE projections in the presence relative to the absence of an overstatement industry norm.  However, in contrast to expectations, the presence of a legitimacy threat was not significantly associated with higher projected spending. These findings provide additional understanding of what may drive managers’ behavior regarding environmental disclosure decisions.