The Effect of Ultimate Ownership on the Disclosure of Environmental Information Peng Wang, Xi'an International Studies University Fangjun Wang, Xian Jiaotong University Nan Hu, Xi'an Jiaotong University This study empirically examines whether environmental information disclosure (EID) is influenced by the characteristics of a firm's ultimate owners. Based on the EID of publicly listed firms in China, we qualitatively measure the quality of EID of each firm and link those quality scores to firm characteristics to understand the determinants of EID. We further link the EID scores to market valuation of the firm through the Ohlson valuation model to understand whether the market appreciates EID. Our results show that EID is more likely for government-controlled firms, firms with less hierarchy in their ultimate ownership and firms with more discrepancy between voting rights and cash flow rights. Our results also indicate that the stock market appreciates environmental issues and that EID itself, as well as disclosure quality. is associated with a higher market valuation. Our results still hold with the endogeneity issue controlled. ulfilling a broader range of stakeholders expecta tions has become increasingly important for com- China has become increasingly important for the global economy, and is now one of the largest countries panies to achieve success. Therefore, corporate . . for energy consumption. Therefore, the determinants, as social responsibility (CSR) has gained the attention of "- well as the value implications, of disclosing environment the public. Stakeholders, such as investors, the public, tal information of publicly listed companies is not a local and government have begun to focus on the implementissue in China, but in fact, a critical global issue. The tation of CSR and the disclosure of environmental in-Chinese Securities Regulatory Commission has started formation. The environmental component of CSR is a . to encourage public companies to disclose relevant vitally important, but controversial, topic. The existing . environmental information using the disclosure frame- literature has focused on issues related to environmental " work implemented by the related government agency. protection and the effect of environmental information For example, the Shanghai Stock Exchange mandates disclosure (EID) on firm behaviour, with few consistent that companies enrolled into the Corporate Governance conclusions reached so far. Fundamentally, there are two Index disclose environmental information. Unlike in controversial views: one stream of literature supports voluntary EID, with supporters arguing that the disclo- other countries, the government plays an important role in corporate behaviour and information disclosure in sure of environmental information reduces information China. Therefore, it is essential to investigate whether the asymmetry and lowers agency costs, hence, conveying a capital market reacts to the disclosure of environment positive signal to the capital market; the other stream information positively and what factors determine infor- of literature opposes the disclosure of such informa- mation disclosure given the Chinese institutional back- tion, with opponents arguing that it is costly to prepare ground. Further, complex ownership structures (e.g., and disclose environmental information. For example, pyramid structure) exist in China and the majority of Ioannou and Serafeim (2014) argue that analysts and publicly listed companies are controlled by government. investors perceive CSR merely as a transfer payment. Hence, we seek to understand, first, the impact of They interpret CSR as meeting the expectations of non- a public firm's ownership structures on its EID policy. shareholding stakeholders and, in the process, destroy- ing shareholder wealth. Hence, there is still no consistent conclusion about whether and how to disclose environ- mental information in CSR reports, both in theory and Correspondence: Fangjun Wang. Management School, Xian practice. Jiaotong University. Xian, Shaanal, China. Tel: +861 8991289939, email wangfangjun@mad.xjtu.edu.cn Accepted for publication 26 August 2016.Model 2 Model 3 Coefficients Coefficients (Constant) 0.413 1 526 0,000 0.000 0.41 1 0.080 1.466 earn 0.444 1 530 0. 109 0.000 1613 0.434 1462 9,640 0.080 1.007 9.448 0.1 17 1.615 0.020 0.51 1 1.630 0.1207 0.025 0.022 0.471 0.072- -0.120 1.630 Govown 0 024 EID 1. 109 0.073 1.717 0.000 1 240 1.105 GOVOwn EID EIDScore D.053 1283 GovOwn* EIDScore 0.068 0.040 1.035 0.012 Ad R 0.02 7 1 012 D 266 F-test 60.009 0.279 Number 1301 59.774 1301 This table presents the market valuation of EID by listed companies. The definitions of variables in this table are explained in Table 3. p - 0 10. "p . gos. a to.g. Table 6 Robustness check Environment information disclosure and market valuation with endogeneity issue interaction between GovOwn dummy and EID dummy controlled GovOwn EID is positive and significant (8 - 0.010; p-value - 0.100), indicating that govern ment-controlled Coefficients firms that disclose environmental information enjoy an (Constant) 0.394 0.000 even higher market valuation. 1 540 1451 earn 0.518 0.070 1 699 rd 10.667 0.05 1 006 Robustness check: Endogencity issue SO 0.019 0.553 1 641 ag -0.115" 0 032 1 733 Since firms might selectively decide whether to adopt GovOwn 0.058' 0.013 1 380 Probability 0 087 0.098 1 192 EID, rather than capturing the relationship between EID GovOwn" probability 0.236 0.001 1417 and market valuation, what we documented above might Adjusted R? 0.257 represent other unobservable variables. To account for F value 7.290" such an endogencity issue, we take a standard two-step approach by first estimating the probability of a firm dis- This table presents the robustness check results on the relationship between EID and market valuation to avoid the endogeneity issue closing EID. We then replace the original EID variable by The definitions of vanables in this table are explained in Table 3. this predicted probability and re-estimate our valuation "p - 0.10 "p