Environmental Performance and Corporate Disclosure

Disclosure of the social consequences of firms' behavior has been proposed in the professional literature (e.g., see Bauer and Fenn [1972], Bauer, Cauthorn and Warner [1975], and Estes [1972]) under the assumption that reliable social responsibility disclosures would prove useful to external users. Recent studies, however, cast doubt concerning the demand for social disclosures (e.g., Buzby and Falk [1979], Opinion Research Corporation [1974], and Duff and Phelps [1976]). These results could reflect either a lack of disclosure quality or the nonrelevance of social disclosures to external users' decision models. This study centers on the first possibility by examining the relationship between measures of firm's environmental performances and the environmental disclosures contained in the firms' annual reports. In the present institutional environment, most social responsibility disclosures are voluntary and unaudited. Few efforts have been made to monitor firms' social activities or to validate their disclosures so that motivation may exist for management to distort voluntary disclosures, to the extent that these disclosures reflect aspects of managements' relative performances. For the disclosures to be useful, there should be a correspondence between the disclosures and actual events. If external users do not perceive this correspondence, they might discount the social responsibility disclosures, which would be consistent with the negative findings cited above. Disclosure quality may be gauged by assessing the relationship between (1) what firms identify as their accomplishments and objectives and (2)