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Corporate Environmental Responsibility, Accounting and Corporate Finance in the EU

A Quantitative Analysis Approach

Authors: Dr. Panagiotis Dimitropoulos, Prof. Konstantinos Koronios

Publisher: Springer International Publishing

Book Series : CSR, Sustainability, Ethics & Governance

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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About this book

The purpose of this book is to study the association of corporate environmental responsibility (CER) with financial performance, capital structure, innovative activities, corporate risk, working capital management and accounting quality. Undoubtedly, CER has been developed into a crucial corporate issue around the world. CER has been incorporated within various sectors, countries and includes many types of activities and dimensions. A fundamental issue that is addressed in this book, is how corporate finance and accounting are affected by CER activities and how it impacts company performance. In order to analyse this interrelation, the authors focus on a sample of firms from 28 EU member countries. The purpose of this book is to study the association of CER with financial performance, capital structure, innovative activities, corporate risk, working capital management and accounting quality. The book also intends to provide useful policy recommendations as well as to offer constructive impulses for future research.

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Table of Contents

Frontmatter

Chapter 1. Introduction to Corporate Environmental Responsibility, Accounting and Finance

Abstract

The present chapter includes a brief theoretical background on CER performance and activities and the main regulatory interventions that have been made from international and European institutions over the last two decades. These interventions and the increased public awareness on the issue of environmental responsibility created a wave of socially and environmentally responsible investments. It is even more comprehensible today than ever before that environmental responsibility does not lead to a waste of scarce corporate resources but on the contrary it can create value for both shareholders and stakeholders, leading to a win-win situation for all related parties. Moreover, the chapter discusses the implications of CER for research in corporate accounting and finance and presents the main research questions that will be addressed in the following chapters of the book.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 2. Corporate Environmental Responsibility in the EU

Abstract

The goal of this chapter is to examine the main regulatory interventions made by the EU officials over the course of the previous decades which shaped the current framework of corporate environmental responsibility (CER). We analyzed how from the Paris 1972 convention, where environmental protection was first raised, the issue evolved into specific principles set by the European community in terms of environmental protection. Later on, EU officials moved into more concrete regulations on environmental responsibility. These regulations were targeting key issues such as climate changes, water management, air pollution, resource allocation, chemical reduction and even sustainable production and consumption. The results of these efforts was that European corporations have steadily abided to these regulations and the overall shift of behavior into a more responsible and liable corporate activity is evidence in the majority of EU countries. Surely there are observed differences between various economic sectors (with some of them leading while others lagging behind) nevertheless the overall trend is promising and seems that EU firms are starting to invest significant resources on CER.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 3. Literature Review on Corporate Environmental Responsibility

Abstract

The scope of the current chapter is to provide a contemporary literature review on corporate environmental responsibility (CER) by offering a comprehensive theoretical framework and a timeline on its development within the corporate world. Also, the chapter will present a brief discussion on the motivation for firms to adopt CER activities via environmental management tools (EMTs). The final section of the chapter is devoted on discussing the main empirical findings on the literature regarding the association of CER with accounting and financial issues relating to financial performance, innovation, capital structure decisions, firm risk, cash holdings, payout policies and the quality of published accounting information (value relevance, earnings management, and accounting conservatism).

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 4. Firm-Specific Determinants of Corporate Environmental Responsibility

Abstract

The scope of this chapter is to examine the financial, size and governance determinants of CER activities of 7313 listed corporations originating from 24 EU countries over the period 2003–2018. Empirical analysis suggested that profitability, leverage, size and growth opportunities impact positively on the CER and its components, while CEO duality had a negative impact on CER performance. Moreover, the level of CER performance (devotion and engagement) is associated with the existence of a CSR committee within the firm which provides strategic direction and focus on corporate activities. Finally, the separation of the sample firms between code law and common law firms indicated that the aforementioned associations are more significant for code law firms suggesting that countries’ legal system has an impact on corporate decisions regarding CER.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 5. Corporate Environmental Responsibility and Financial Performance

Abstract

The scope of this chapter is to examine the impact of CER related activities on their financial performance taking into consideration potential endogeneity between the examined factors and their bidirectional association, evidenced by previous studies on the field. We respond to the call for more research on the topic by covering a large multi-country sample of listed and unlisted European firms over a long period of time and also by considering the bidirectional association between CER and CFP. Empirical analysis suggested that CER generates competitive resources leading to competitive advantages and enhanced financial performance. Also, the specification of our empirical design verifies the bidirectional association between CER and CFP.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 6. Corporate Environmental Responsibility and Innovative Activities

Abstract

The scope of this chapter is to examine the impact of R&D investments (capitalized R&D) on the CER-CFP association as argued by previous studies on the field, while taking into consideration potential endogeneity between the examined factors. We respond to the call for more research on the topic by covering a large multi-country sample of developed economies, and of listed and unlisted European firms over a long period of time and also by considering the bidirectional association between CER and CFP while controlling for R&D capitalization instead of R&D expenses utilized in previous studies. Empirical analysis suggested that more profitable firms are associated with more CER related performance. However, the R&D and its interaction with ROE yield insignificant coefficients in both model estimations leading us to accept the substitution hypothesis. This result corroborates arguments in the literature that less innovative firms resort to increased CER activities in order to gain market differentiation (or competitive advantages) and enhance their financial performance.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 7. Corporate Environmental Responsibility and Capital Structure

Abstract

The aim of this chapter is to examine the impact of CER related performance on firm capital structure decisions, by distinguishing between short-term debt, long term debt and common equity capital and taking into consideration potential endogeneity between the examined factors and their bidirectional association, evidenced by previous studies on the field. Empirical analysis suggested that CER performance is negatively impacting long term debt but positively on short term debt and shareholders’ equity indicating a differential impact of CER on capital structure decisions. Practically, we can argue the CER performing firms rely more on their own shareholders’ equity and short term debt to finance their activities, and less on long term debt.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 8. Corporate Environmental Responsibility and Corporate Risk

Abstract

The scope of this chapter is to examine the impact of CER related performance on firms’ systematic risk, by controlling for potential endogeneity between CER and systematic risk and by distinguishing sample firms between common law and code law countries, evidenced as significant factors for the inconsistency of empirical results by previous studies. Empirical results indicated that CER performance provides a negative and significant impact on firm systematic risk (beta) verifying existing evidence on the literature that CER investments reduce the firm’s systematic risk, so leading us to accept the risk reduction hypothesis. In addition, firms with more stakeholder oriented CER activities are associated with more risk aversion and ethical behavior, especially towards its employees and the environment, thus perceived as having less uncertainty and risk, so investors require a smaller risk premium to invest in such corporations. Moreover, after separating sample firms based on their country’s legal origin we found that CER performing firms in common law countries are associated with higher systematic risk.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 9. Corporate Environmental Responsibility, Cash Holding and Dividend Policy Decisions

Abstract

The scope of this chapter is to examine the impact of CER related performance on firm dividend and cash holding decisions, by taking into consideration potential endogeneity between the examined factors, evidenced by previous literature on that issue. Empirical analysis suggested that CER performance is positively and significantly impacting on cash holdings, supporting evidence provided on the literature that CER performance lead firms to hold more cash, suggesting that managers of high CER performing firms focus more on maximizing stakeholder value leading to enhanced cash holdings to achieve such goals. Furthermore, we found firms with higher emission and resource use scores are significantly associated with higher cash holdings. Additionally, all environmental performance scores (except for the emission score) proved to have a positive and significant impact on dividends payments. Practically, 1 percentage point increase in CER performance score is associated with 0.2 per cent of dividend to asset ratio, ceteris paribus.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 10. Corporate Environmental Responsibility and Earnings Value Relevance

Abstract

The scope of this chapter is to examine the impact of CER related performance on firms’ financial reporting quality, proxied through the value relevance of accounting numbers (earnings and book values of equity), earnings persistence and predictability. The chapter extends previous evidence on earnings’ value relevance and persistence by utilizing a multi-country sample within the EU and by considering the indirect (moderating) effect of CER on the value relevance of accounting information. Empirical analysis suggested that CER performance alone does not have a significant impact on stock prices, something that contradicts several studies in other countries, but CER exerts a moderating impact on the value relevance of accounting numbers. Specifically, we found that high CER performing firms have earnings which are more persistent 1 year ahead, are more predictable (show less variability) and report profits and common equity figures which are positively impacting stock prices.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 11. Corporate Environmental Responsibility and Earnings Management

Abstract

The scope of this chapter is to shed further light on the impact of CER performance and its components on the EM behavior by utilizing a multi-country research setting and incorporating various sub-categories of environmental performance and earnings management metrics including accrual earnings manipulation, real activities manipulation and income smoothing, thus providing more thorough evidence in the existing literature regarding the impact of CER on the quality of accounting numbers. The empirical results verified evidence and arguments in the literature that CER performance improves the quality of published accounting information by mitigating earnings management behavior via accruals and real activities manipulation. This argument is corroborated after performing several sensitivity tests relating to the estimation of discretionary accruals, the functional form of the models and other robustness tests.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 12. Corporate Environmental Responsibility and Accounting Conservatism

Abstract

The scope of this chapter is to shed further light on the impact of CER performance and its components on the level of conservative financial reporting by utilizing a multi-country research setting and incorporating various sub-categories of environmental performance and conservatism metrics including the verification of negative earnings, negative cash flows and a firm-specific measure of conservatism (the C-score proposed by Khan and Watts (J Account Econ 48:132–150, 2009)), thus providing more thorough evidence in the existing literature regarding the impact of CER on the conservatism of accounting numbers with the EU. The empirical analysis in this chapter corroborates previous arguments in the literature on the negative association between CER and conservatism.

Panagiotis Dimitropoulos, Konstantinos Koronios

Chapter 13. Conclusions and Implications

Abstract

As has been documented in the previous chapters, Corporate Environmental Responsibility (CER) has been on the forefront of the academic and business community for over two decades, especially because of the importance of environmental awareness for the functioning and operation of the organizations. Despite the increased interest of CER on various business sectors the concept has recently entered the accounting and finance disciplines, since many corporations have evolved as a growing economic force within the national and international markets, and are more intensively engaging in socially and environmentally responsible activities. The last chapter of the book is devoted in providing some CER related issues faced by modern corporations, along with emerging issues that have been put forth by international organizations. Finally, the chapter offers practical policy implications as well as directions for future research.

Panagiotis Dimitropoulos, Konstantinos Koronios

Title: Corporate Environmental Responsibility, Accounting and Corporate Finance in the EU
Authors: Dr. Panagiotis Dimitropoulos
Prof. Konstantinos Koronios
Copyright Year: 2021
Publisher: Springer International Publishing
Electronic ISBN: 978-3-030-72773-4
Print ISBN: 978-3-030-72772-7
DOI: https://doi.org/10.1007/978-3-030-72773-4