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Corporate Social Responsibility and Environmental Management

Corp. Soc. Responsib. Environ. Mgmt. 22, 112 2015


Published online 26 February 2013 in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/csr.1321

Market Responses to Firms Voluntary Climate Change


Information Disclosure and Carbon Communication
Su-Yol Lee,1* Yun-Seon Park1 and Robert D. Klassen2
1
Chonnam National University - College of Business Administration, Gwangju, Korea, Republic of
2
The University of Western Ontario - Ivey School of Business, London, Ontario Canada

ABSTRACT
Despite the importance of the Carbon Disclosure Project (CDP), the question of how rms
voluntary carbon disclosure inuences capital markets and shareholder value remains
unanswered. Using the event study methodology with a sample of rms from the CDP Korea
2008 and 2009, this paper investigates market responses to rms voluntary carbon
information disclosure. The results suggest that the market is likely to respond negatively
to rms carbon disclosure, implying that investors tend to perceive carbon disclosure as
bad news and thus are concerned about potential costs facing rms for addressing global
warming. In addition, the study examines the moderating effect of frequent carbon commu-
nication on the relationship between carbon disclosure and shareholder value. The results
suggest that a rm can mitigate negative market shocks from its carbon disclosure by
releasing its carbon news periodically through the media in advance of its carbon disclosure.
Copyright 2013 John Wiley & Sons, Ltd and ERP Environment.

Received 7 July 2012; revised 6 November 2012; accepted 23 November 2012


Keywords: climate change; voluntary disclosure; capital market; Carbon Disclosure Project; stakeholder management; event study

Introduction

F
IRMS HAVE STARTED TO CONSIDER THE ISSUE OF GLOBAL WARMING AS PART OF THEIR STRATEGIC MANAGEMENT SINCE
climate change emerged as one of the most important business concerns in the past decade (Lash
and Wellington, 2007; Kolk and Pinkse, 2005). The Kyoto Protocol, adopted in 1997 and entered into
force in 2005, has served as a main driver of changes in corporate responses to global warming.
Recently, rms have been increasingly asked to provide more information on their climate change strategies
and plans for managing and reducing carbon emissions. For instance, since 2002, the Carbon Disclosure
Project (CDP), a consortium of over 300 institutional investors with $41 trillion in assets, has asked the
worlds 500 largest rms every year to disclose their greenhouse gas (GHG) emissions, risks, opportunities,
and management strategies. The equity market has started to recognize the magnitude of the impact that
the transition to a low-carbon global economy is expected to have on rms competitiveness and long-term
valuation (Goldman Sachs Sustain, 2009).

*Correspondence to: Su-Yol Lee, Chonnam National University - College of Business Administration, 300 Yongbong-dong, Buk-gu, Gwangju
Metropolitan City 500-757, Republic of Korea. E-mail: leesuyol@chonnam.ac.kr

Copyright 2013 John Wiley & Sons, Ltd and ERP Environment
2 S.-Y. Lee et al.

An increasing number of rms have allocated resources to the communication of information on their carbon
footprints to interested parties, particularly nancial institutions. However, despite the importance of the CDP,
the question of whether such voluntary carbon information disclosure is material, that is, how carbon disclosure
inuences shareholder value, remains unanswered (Kim and Lyon, 2011). Recently, a few studies have attempted
to provide a better understanding of rms carbon information disclosure and its impact on shareholder value
(Hsu and Wang, 2012; Kim and Lyon, 2011; Beatty and Shimshack, 2010). However, previous studies of this topic
have generally been limited.
First, management research on the effects of a rms carbon information disclosure on its shareholder value is
still a relatively new endeavor. Although there have been a number of studies examining the relationships between
green information, environment-related liabilities, and shareholder value, very few studies have considered the re-
lationship between climate change and rm value (Kim and Lyon, 2011; Matsumura et al., 2011; Grifn and Sun,
2012). Second, previous studies of market responses to rms carbon disclosure have typically focused on Western
contexts. For instance, Matsumura et al. (2011), Grifn and Sun (2012), and Hsu and Wang (2012) focused on the
US stock market, and Kim and Lyon (2011) considered FT 500 rms. Very few have addressed carbon information
disclosure by rms in developing countries, particularly those in Asian countries. Third, previous studies have pro-
duced mixed results for the effects of voluntary carbon disclosure on shareholder value. For example, Grifn and
Sun (2012) reported that shareholders respond positively to a rms voluntary green disclosure, whereas Kim and
Lyon (2011) found no relationship between carbon disclosure and rm value. Because research on this topic is still
in its initial stages, there are few practical implications for managers endeavoring to voluntarily disclose their carbon
information but not wanting to detract from their rms value at the same time.
Motivated by these gaps in the literature, the present study examines how the stock market reacts to rms
voluntary carbon information disclosure in the Korean context and investigates the differences in market responses
depending on the level of rms carbon communication. The study contributes to the literature in three distinct and
important ways. The study is the rst to examine the relationship between carbon information disclosure and share-
holder value in the context of developing and advanced developing countries. China and Korea, the worlds largest
and seventh-largest GHG emitters as of 2010, respectively, refused to join the post-Kyoto agreement as a member of
obligatory reduction countries, but at the same time, these countries announced their own voluntary medium-term
mitigation goals to reduce carbon intensity by 40% to 45% below 2005 levels and GHG emissions by 30% below the
business-as-usual level by 2020, respectively (Lee, 2013). This study examines whether investors recognize these
highly uncertain future liabilities and how they interpret them. Second, the study contributes to the literature by
examining whether shareholders benet or lose when rms make the decision to disclose carbon information vol-
untarily. Third, the study provides managers with meaningful implications in terms of making disclosure decisions
in the best interests of shareholders as well as other stakeholders such as governments and the public.
The rest of this paper proceeds as follows: The next section provides a brief review of previous studies on infor-
mation disclosure about corporate social responsibility and climate change. This is followed by the hypotheses about
the relationship between voluntary carbon information disclosure and rm value. Section 4 describes the research
method. We then present the results of the empirical analysis. Finally, we discuss this studys implications and
limitations and provides some interesting avenues for future research.

Literature Review
Corporate Social Responsibility and Information Disclosure
In this research area where social responsibility and business practices are considered together, several terms,
including corporate sustainable development (Bansal, 2005), triple bottom line (Elkington, 1998), corporate social
responsibility (CSR: Carroll, 1991), corporate citizenship (Marsden and Androf, 1998), and business ethics (Kilcullen
and Kooistra, 1999) are commonly used. Although these concepts often have slightly different meanings and contexts,
nowadays many consider corporate sustainability and CSR to be synonymous (Marrewijk, 2003). Therefore, CSR is
understood as a corporate commitment to meet the discretionary responsibilities expected by a diverse range of

Copyright 2013 John Wiley & Sons, Ltd and ERP Environment Corp. Soc. Responsib. Environ. Mgmt. 22, 112 (2015)
DOI: 10.1002/csr
Firms Voluntary Carbon Disclosure and Communication 3

stakeholders by pursuing environmental integrity, social equity, and economic prosperity at the same time (Carroll,
1991; Elkington, 1998; Bansal, 2005). The main areas of CSR appear to be leadership, vision and values, stakeholder
engagement, and specic activities encompassing marketplace, human resources, supply chains, local communities,
and the environment (Bloweld and Murray, 2008).
Research into CSR often employs stakeholder theory, which emphasizes the inuences of various stakeholders,
including customers, governments, communities, and employees as well as shareholders, on corporate decision-
making (Freeman, 1984). In actuality, rms are experiencing increasing pressure to envision a new way of operating
their business (Setthasakko, 2007). For example, governments are considered one of the most important inuential
stakeholders, as their regulatory power has forced economy-driven corporate strategies to evolve into strategies that
consider both the environment and society, in both Western countries (Warhurst, 2005; Dobers and Halme, 2009)
and Asian countries (Baughn et al., 2007; Setthasakko, 2007; Naeem and Welford, 2009). Customers are often rec-
ognized as the most powerful stakeholders, even in terms of CSR. The intensity of non-governmental organizations
(NGOs) and media pressure tends to increase steadily. Local communities have emerged as another critical source
of external pressure. Quite often, managers nd it more difcult to satisfy the demands of the local community than
to comply with the government (Lee and Rhee, 2005). Finally, shareholders should be considered a powerful source
of CSR pressure. As more shareholders, particularly long-term investors and institutional investors, begin to realize
that protecting reputation and brand is central to protecting their investment and eventually making them more
money, they put more CSR pressures onto the companies in which they invest (Welford and Frost, 2006).
With the emergency of CSR as a legitimate business concern, there has been a growing need for companies to
communicate their CSR initiatives through regular mandatory and non-mandatory reporting to be positively per-
ceived by their stakeholders (Birch, 2003). This is because CSR efforts are not going to make any impact on its busi-
ness unless the company makes an effort and chooses the right means to communicate them to its stakeholders
(Amaladoss and Manohar, 2011). Such a stakeholder perspective stresses the need to create long-term CSR value in
the interest to all stakeholders by encompassing social and environmental outcomes in the disclosure (Sun et al.,
2010). As suggested by Gray et al. (1995), information disclosure to stakeholders might be regarded as a legitimate
social contribution made by the organization. Therefore, stakeholders usually view social responsibility information
disclosure to them as one of the criteria for measuring an organizations reliability and legitimacy (Kuo et al., 2012).
Historically, environmental reporting developed from involuntary disclosers in response to regulations, media
exposure, and legal liability investigations to voluntary disclosures (Glachant, 1994) used to provide information
relevant to stakeholders (Marshall and Brown, 2003). Non-nancial CSR reporting is usually prepared on a voluntary
basis. However, some developed countries provide a wide range of incentives to disclose non-nancial information
through the due process of law, change in the regulatory regime, and awards (Noronha et al., 2012). There is
an increasing trend that the number of Asian companies to disclose their CSR information continues to grow
(Chatterjee and Mir, 2008). However, CSR reporting in the Asian countries is still at a preliminary and explorative
stage (Kuo et al., 2012; Noronha et al., 2012).

Carbon Disclosure Project (CDP)


Financial institutions can play an essential role in encouraging CSR reporting and other initiatives since there is
growing political and economic prominence in terms of climate change and the commitment to a lower-carbon
future (Kuo et al., 2012; Noronha et al., 2012). The largest effort of institutional investors has been the CDP, which
was launched in 2000 to achieve two objectives: to inform managers about investors concerns about climate change
and to provide investors with information about rms risks associated with climate change (Stanny and Ely, 2008).
In 2003, 71% of the FT Global 500 rms participated in the rst cycle of the CDP and 45% answered the questionnaire
in full. Since then, rms have increasingly responded to requests from institutional investors for carbon information.
The response rate increased to 91% by the fourth cycle; 72% of the FT Global 500 rms answered the questionnaires
in full (Kim and Lyon, 2011).
Korean rms started participating in the CDP in 2006 (CDP4) as the CDP Asia-ex Japan. In 2008, the CDP Korea was
established and became independent from the CDP Asia-ex Japan. The CDP Korea selected rms listed on the Korea
Exchange (KRX) Index and requested them to disclose their carbon information. Since then, sample sizes and partici-
pants have continued to increase. In 2008, a total of 16 rms out of 50 that were requested to disclosed carbon

Copyright 2013 John Wiley & Sons, Ltd and ERP Environment Corp. Soc. Responsib. Environ. Mgmt. 22, 112 (2015)
DOI: 10.1002/csr
4 S.-Y. Lee et al.

information (a 32% response rate) by participating in the CDP Korea 2008. In 2009, the CDP Korea selected all 100
rms from the KRX 100 Index and received 50 responses (a 50% response rate). As of July 1, 2009, the market capital-
ization of these 100 rms accounted for 80.8% of the Korean stock market (CDP Korea, 2009).

Hypothesis Development
Carbon Disclosure and Market Responses
The present study builds on a stream of research on the effects of general environmental information on share-
holder value. A growing number of studies have investigated the relationship between rms environmental infor-
mation disclosure and their rm value. These studies have generally suggested that this disclosure can have positive
effects on stock prices and provided consistent evidence that stock prices decline in response to negative environ-
mental news reports and increase in response to positive ones (Beatty and Shimshack, 2010). These ndings clear
illustrate that capital markets increasingly incorporate environmental disclosure and/or liability information into
their assessment of how well rms manage their exposure to environmental risk (Blacconiere and Northcut, 1997).
Bae and Sami (2005) reported that potential environmental liabilities disclosed as accounting information can
induce noise in corporate earnings and thus that investors are likely to recognize a rms negative environmental
information as an increase in the rms future regulatory cost.
However, empirical studies have provided little support for voluntary disclosure theory in the context of climate
change. This may be because managers face a myriad of additional challenges and uncertainties in making optimal
climate change disclosure (Grifn and Sun, 2012). For example, Kim and Lyon (2011) found no systematic evidence
of increased rm value from carbon disclosure, whereas Grifn and Sun (2012) showed that capital markets react
positively to rms voluntary disclosure of GHG emissions. Noteworthy is that Beatty and Shimshack (2010) found
that the capital market responds to rms negative carbon information but not to their positive news.
Although the relationship between a rms carbon information disclosure and its stock value remains unclear, it
is expected to be consistent with the argument in Beatty and Shimshack (2010). That is, the stock market may react
negatively to rms voluntary carbon disclosure for the following reasons: First, carbon information disclosure or
participation in the CDP can be considered as a form of quasi-regulation that forces rms to voluntarily reduce
and manage their GHG emissions to maintain their reputation and face the governments stringent scrutiny
(Wegener, 2010). The CDP sends questionnaires to large rms such as S&P 500 rms, whose environmental
impacts are known to be immense. Therefore, investors are likely to recognize those rms being requested to par-
ticipate in the CDP as heavy polluters that have to invest resources to reduce their GHG emissions as well as address
global warming in the near future. In general, carbon emissions have been found to have negative effects on rm
value (Matsumura et al., 2011) because of the high expected cost of complying with the increasing regulatory and
other stakeholder requirements related to carbon emissions (PriceWaterhouseCooper, 2009).
Second, disclosed carbon information is not believed to be benecial to investors. Kolk et al. (2008) pointed out
that CDP information is too complex and not comparable enough to be useful for investors in assessing rms po-
tential risks and opportunities regarding climate change. Firms that join the CDP need to disclose their current
GHG emission levels, their reduction goals, their plans/strategies for achieving those goals, and any possible risks
and opportunities regarding global warming. Any plans and actions pertaining to the achievement of reduction
goals are closely related to costs. For example, any investment in green technologies that reduce GHG emissions
represents an additional expenditure that is not required if the rm chooses to take no action (Wegener, 2010).
In a market where investors are not able to differentiate good performers from bad ones by using CDP information,
such cost- and/or risk-related news is likely to receive more attention from investors than good news about potential
benets of climate change.
Third, investors tend to be less favorable to environmental protection. The argument that a rms proactive action
to reduce GHG emissions means additional costs for the rm and limits the industrys competitive advantage has
contributed to a deadlock in negotiations over an international climate treaty (Hsu and Wang, 2012). Palmer et al.
(1995) asserted that combating climate change reduces shareholders wealth because a rms commitment to

Copyright 2013 John Wiley & Sons, Ltd and ERP Environment Corp. Soc. Responsib. Environ. Mgmt. 22, 112 (2015)
DOI: 10.1002/csr
Firms Voluntary Carbon Disclosure and Communication 5

mitigating climate change can crowd out more productive investment opportunities, detract the rm from the earn-
ing power of its physical assets, and thus put the rm at an economic disadvantage. Some recent empirical studies
have provided evidence supporting these arguments. For example, Hsu and Wang (2012) found that rms with
more negative news reports on climate change show signicant positive wealth effects. Some studies have argued
that actively ghting off climate change enhances rm value (Stern, 2007). However, investors remain likely to
be concerned that the cost of combating global warming can outweigh its benets.
These arguments lead to the following hypothesis:

Hypothesis 1. Stock markets are likely to respond negatively to rms voluntary carbon disclosure.

Moderating Effect of Preliminary Carbon Communication


If a rms carbon disclosure has a negative effect on rm value, then what factors can mitigate this effect? To
address this question, this study focuses on the effects of a rms carbon communication, which can be measured
as the extent to which the rm releases carbon news to the public through the media before its annual ofcial carbon
disclosure. Here frequent carbon communication may offset the negative effect of carbon disclosure on rm value.
Previous studies of information availability have suggested that stock price responses vary according to the avail-
ability of public information (Yohn, 1998). Stock prices are likely to be more responsive in an information environ-
ment with less frequent disclosure from fewer sources. By contrast, news reports that are known already through
the other channels can elicit a limited market response (Grifn and Sun, 2012). Environmental accidents or new
environmental regulations generally induce negative stock market responses because these are expected to increase
rms future compliance costs. However, the more frequent and extensive disclosure of environmental information
before accidents and regulations has been found to mitigate negative market responses. Blacconiere and Patten
(1994) suggested that chemical rms that released more extensive environmental information in their nancial
reports before the Superfund Amendments and Reauthorization Act of 1986 were less likely to face negative market
responses to the regulation. Freedman and Patten (2004) reported that rms that disclose environmental
information less frequently and extensively than before are more likely to face negative responses to unexpected
announcements about regulations. These ndings imply that rms can reduce or neutralize the risk of negative
market responses to their carbon information disclosure through preliminary and frequent carbon communication.
Frequent or periodic releases of carbon-related news about their efforts to address global warming can be an
effective means for carbon communication.
Based on these arguments, we propose the following hypothesis:

Hypothesis 2. Preliminary and frequent carbon communication can mitigate negative market responses to rms
voluntary carbon disclosure.

Research Methodology
Event Study
We employed the event study method to test the hypotheses. The event study is a well-established methodology that
focuses on isolating the stock markets responses to a particular event of interest (MacKinlay, 1997). The basic idea
is that under an efcient market condition, the effect of an event is immediately reected in stock prices. Therefore,
the observation of stock prices over a short period of time enables the measurement of the effect of an event on the
value of a rm. In this study, we employed a market model to compute abnormal returns and thus to abstract away
from general market inuences.

Copyright 2013 John Wiley & Sons, Ltd and ERP Environment Corp. Soc. Responsib. Environ. Mgmt. 22, 112 (2015)
DOI: 10.1002/csr
6 S.-Y. Lee et al.

This studys market model relates individual rms returns to the markets returns. In the model (Equation (1)),
individual securities daily returns are rst regressed on the markets daily returns as a whole:
Rit ai bi Rmt eit ; (1)

where Rit = return on security i on day t,


Rmt = return on market portfolio on day t,
E (eit) = 0, Var(eit) = s2ei.

In Equation (1), ai, bi, and s2ei are estimated rst by using data from the period preceding the event, that is, data
not inuenced by the event (estimated window). Then the parameters are used to calculate abnormal returns during
the event window. Here abnormal returns are calculated by subtracting normal returns from actual ex post returns
of a security over the event window as follows:
ARit Rit  ai bi Rmt ; (2)

where ARit = abnormal return on security i at date t.

The estimation window is 120 trading days from the 14th day before the event. In the present study, the event of
interest is carbon disclosure through the CDP Korea. For an examination of the effect of an event, abnormal returns
for each period are aggregated over multiple periods. Here multiple event windows, including both pre- and post-
event periods, are used. This allows for the possibility of information leakage and absorption during pre-event
periods and adjustment periods following the event. In addition, mean cumulative abnormal returns (CARs) are
calculated for period T by assuming no serial correlation and independence across securities:
 1X N X T
CARt1 ; ; tT ARit : (3)
N i1 t1

To verify the hypothesis that an event inuences stock prices, event studies typically show that mean CARs are
signicantly different from zero in one direction for a sustained period after the date of the event (Hamilton,
1995). Carbon information of the CDP participant was collected and made public by the Korea CDP. The Korea
CDP 2008 and 2009 were announced on October 16, 2008, and October 28, 2009, respectively. For the analysis,
we compared the differences in market responses to CDP participants and nonparticipants. We excluded seven
rms (six participants and one nonparticipant) because their daily return series were not accessible as a result of
their M&A activity. Therefore, we employed a total of 61 events for the analysis.

Carbon Communication
We conducted a content analysis to measure the frequency of carbon communication. In particular, we focused on
data drawn from Korean newspapers. We examined a number of articles from 22 daily newspapers for one year
before the events from October 16, 2007, to October 15, 2008, and from October 28, 2008, to October 27, 2009,
respectively by using the name of each participant with the following keywords/phrases: climate change and business,
greenhouse gases, low carbon, green growth, green management, environmental management, and carbon manage-
ment. The process yielded a total of 541 articles containing at least one of these keywords/phrases as well as the name
of the participant. Each article contained information on the carbon management activity of a specic rm released to
the public through the media before its annual ofcial carbon disclosure. We then sorted the articles according to
the rm name and excluded duplicate articles. The nal data set contained 61 participants and a total of 375 news
articles. The average and median numbers of news releases for each rm were 6.1 and 1, respectively. For the analysis,
we re-categorized the CDP participants into two groups based on the median: high- and low-carbon communicators.
Finally, we identied 30 and 31 CDP participants as high- and low-carbon communicators, respectively.
Table 1 provides a summary of CDP participants and the frequency of carbon communication.

Copyright 2013 John Wiley & Sons, Ltd and ERP Environment Corp. Soc. Responsib. Environ. Mgmt. 22, 112 (2015)
DOI: 10.1002/csr
Firms Voluntary Carbon Disclosure and Communication 7

Industry CDP Korea 2008 CDP Korea 2009 Total

No. of Inquiries 50 100 150


No. of Respondents 16 50 66
Response Rate (%) 32.0% 50.0% 44.0%

Table 1. Summary of respondents

Results and Discussion


Figure 1 illustrates that CDP participants cumulative abnormal returns (CARs) declined after the event when CDP
participants disclosed their carbon information through the CDP. For example, the decreases in CARs of CDP partici-
pants were 2.4%, 3.9%, 4.4%, 5.7%, and 7.1% on the event date (t = 0) and the following rst (t = 1), second (t = 2), third
(t = 3), and fourth date (t = 4), respectively. These signicant decreases in CARs of CDP participants were higher than
those of CDP nonparticipants, which were 0.9%, 2.5%, 3.5%, 3.9%, and 4.5%, respectively on the same dates.
Table 2 presents the CAR results for varying event window lengths. Consistent with the results of the graphical analysis
(Figure 1), capital market responses had a signicant negative relationship with voluntary carbon information disclosure.
CDP disclosure had a systematic effect on stock prices. For all event windows, the decline in CDP participants CARs

0.000
t=0 t=1 t=2 t=3 t=4 t=5 t=6 t=7 t=8 t=9 t=10 t=11 t=12 t=13 t=14 t=15
-0.009
-0.010

-0.020
-0.025 -0.024
-0.021 -0.027 -0.026 -0.027 -0.028
-0.030 -0.030
-0.031
-0.035 -0.033 -0.034
-0.036
CAR

-0.039 -0.039
-0.040
-0.039
-0.045
-0.044 -0.043
-0.050
-0.049
-0.051
-0.054 -0.054
-0.060 -0.055 -0.055 -0.056
-0.057 -0.057
-0.059

-0.070
-0.071
-0.073
-0.080
Day after the event

CDP participants CDP nonparticipants

Figure 1. Shareholder response to voluntary carbon disclosure

Participants Non-participants

No. of Firms 61 82
Event Window
(-5, 5) -0.068** -0.041
(-2, 2) -0.044** -0.039
(-1, 1) -0.046** -0.028
-1 -0.010** -0.003
0 -0.021** -0.009
(0, 1) -0.039** -0.025
(0, 2) -0.044** -0.035
(0, 5) -0.057** -0.027

Table 2. Mean Cumulative Abnormal Return (CAR) of CDP participants and non-participants for different windows
Note: We excluded seven rms because a lack of data on those rms as a result of their M&A activity.
**p < 0.01.

Copyright 2013 John Wiley & Sons, Ltd and ERP Environment Corp. Soc. Responsib. Environ. Mgmt. 22, 112 (2015)
DOI: 10.1002/csr
8 S.-Y. Lee et al.

ranged from 0.010 to 0.068. For example, the decrease in CARs was approximately 4.6% around the announcement date
(days -1 to 1). This was signicantly different from zero (with a cutoff of 0.01). In addition, as shown in Figure 1, these
signicant decreases in CARs continued to expand and persist into the following week. By contrast, market responses
to CDP nonparticipants were not signicant. These results provide support for Hypothesis 2, indicating that voluntary
carbon disclosure through the CDP had a signicant negative effect on stock prices.
Figure 2 clearly illustrates the difference in stock price shocks between high- and low-carbon communicators.
Both high- and low-carbon communicators are a CDP participant. Consistent with Hypothesis 1, high- and low-carbon
communicators both experienced negative stock price shocks when voluntarily disclosing carbon information through
the CDP. However, high-carbon communicators were less likely to experience them than low-carbon ones. For example,
the decreases in CARs of high-carbon communicators were 1.8%, 3.0%, 3.4%, 4.9%, and 6.1% on the event date (t = 0)
and the following rst (t = 1), second (t = 2), third (t = 3), and fourth date (t = 4), respectively. These declines in CARs of
high-carbon communicators were lower than those of low-carbon communicators, which were 2.3%, 4.4%, 4.9%,
6.1%, and 7.5%, respectively, on the same dates.
Table 3 shows that high-carbon communication had a signicant positive effect on CARs of CDP participants. On
average, shareholders responded negatively to carbon disclosure by high-carbon communicators. That is, the decline
in high-carbon communicators CARs was 4.1% over the three-day windows (-1, 1), which was lower than that for
shareholders responses to carbon disclosure by low-carbon communicators (5.1%). These results provide support
for Hypothesis 2, indicating that frequent carbon communication mitigated the negative effect of carbon disclosure
on stock value. CDP participants that frequently released their carbon-related news through the media before their
annual ofcial carbon disclosure tended to be perceived more favorably than those communicating less frequently.
The results of the statistical analysis provide some meaningful implications for practitioners. First, the results are
highly consistent with the ndings of previous research based on voluntary disclosure theory, suggesting that rms
should make disclosure decisions in the best interests of shareholders (Diamond and Verrecchia, 1991; Lambert et al.,
2007). The objectives of carbon information disclosure are related to broader considerations such as environmental
and social goals and thus go beyond prots. However, the intended consequences of meeting such goals can ulti-
mately improve shareholders expectations of rms performance and future cash ow (Grifn and Sun, 2012). There-
fore, managers should consider diverse aspects of carbon information disclosure, particularly how it inuences
shareholders perceptions and thus stock prices, before joining the CDP and disclosing the carbon information. To
date, market responses to carbon disclosure have not been favorable to investors, and therefore they are likely to
perceive rms carbon disclosure as a risk than an opportunity. The results suggest that managers should condi-
tion their disclosure decision on various attributes of the capital market environment by considering the extent of
investors awareness of climate change and attitudes toward global warming.
Second, the results suggest a strategy that managers can employ when they nd it difcult to ignore or avoid
carbon information disclosure: frequent carbon communication. Firms have faced increasing demands for the

0.000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
-0.010
-0.018

-0.020 -0.028
-0.030
-0.023 -0.032
-0.030 -0.034
-0.038
-0.041
-0.044 -0.043 -0.043 -0.043
-0.040 -0.045
CAR

-0.049 -0.047

-0.050 -0.044
-0.057
-0.049 -0.051
-0.061
-0.053
-0.060 -0.055
-0.058
-0.061 -0.060 -0.061
-0.070 -0.066 -0.064
-0.070 -0.071
-0.080 -0.075

-0.082
-0.090
Day after the event

High-carbon communicators Low-carbon communicators

Figure 2. Shareholder responses to carbon disclosure by high- and low-carbon communicators

Copyright 2013 John Wiley & Sons, Ltd and ERP Environment Corp. Soc. Responsib. Environ. Mgmt. 22, 112 (2015)
DOI: 10.1002/csr
Firms Voluntary Carbon Disclosure and Communication 9

Carbon Communication

Low High

No. of Firms 31 30
Event Window
(-5, 5) -0.069** -0.068**
(-2, 2) -0.050** -0.038**
(-1, 1) -0.051** -0.041**
-1 -0.007* -0.008**
0 -0.023** -0.020**
(0, 1) -0.044** -0.033**
(0, 2) -0.049** -0.038**
(0, 5) -0.066** -0.049**

Table 3. Mean Cumulative Abnormal Return (CAR) of low- and high-carbon communicators for different windows
*p <.05, **p < .01.

disclosure of their carbon information and strategies for mitigating global warming. Carbon disclosure remains vol-
untary, but it is believed to become a de facto regulation in the near future not only because of an increasing number
of stakeholders demanding rms to be more transparent in their carbon emissions but also because of peer effects
(i.e. rms stimulating each other to participate in carbon disclosure). In the context of the mandated disclosure of climate
change, rms should have a clear understanding of how they can condition their disclosure decisions to minimize the
negative effect of carbon disclosure on shareholder value. Firm should allow for increased public access to their carbon
information by engaging in frequent carbon communication through the media. These results are consistent with the
ndings of previous studies based on disclosure theory, which posits that news elicits limited price shocks because much
is already known through other information channels (Yohn, 1998; Grifn and Sun, 2012).
This research has some implications for public policy. Non-nancial CSR or carbon reporting is usually prepared on a
voluntary basis. However, if the stock market responds negatively to rms carbon disclosure, rms are likely to hesitate
to voluntarily disclose their carbon information. In this situation, public policy must provide the means to facilitate and
encourage rms to address climate change as well as to disclose their carbon information. The policies can set precise
standards for corporate carbon reporting including the lists of metrics, formats for reporting, and frequency of reporting.
Government agencies can provide incentives such as awards, certication, and support for verication. Furthermore,
governments can also mandate sanctions for non-disclosure and for failure to report accurate carbon data (Noronha
et al., 2012). For example, the new directive on greenhouse gas management of South Korea (the GHG directive), which
entered into force in 2010, is expected to initiate the turning of Korean rms attention to climate change and carbon
disclosure because the GHG initiative demanded 1570 heavy polluting sites to report the current levels of their GHG
emissions, goals of emissions reduction, and plans to how to achieve the goals in the near future.

Conclusion

Climate change has emerged one of the most important environmental issues in business circles in the past decade.
However, there has been an ongoing debate about the opportunities and risks of climate change from a business
perspective. Some scholars have taken a negative view of proactive corporate responses to climate change, suggest-
ing that such efforts represent the misuse of rms limited resources (Palmer et al., 1995), whereas others have
taken a positive view, highlighting benets such as risk reductions, a good reputation, and customer loyalty (Jacobs
et al., 2010). Therefore, it remains unclear how the capital market perceives rms responses to climate change and
their carbon information disclosure.
This study contributes to the literature by examining whether shareholders benet when rms make decisions to
voluntarily disclose carbon information and how preliminary carbon communication moderates the relationship

Copyright 2013 John Wiley & Sons, Ltd and ERP Environment Corp. Soc. Responsib. Environ. Mgmt. 22, 112 (2015)
DOI: 10.1002/csr
10 S.-Y. Lee et al.

between carbon disclosure and stock price shocks. The results of the content analysis and the event study indicate
that rms disclosure of carbon information through the CDP had a signicant negative effect on capital market returns
and that this effect was immediate. This suggests that investors recognize carbon information disclosure as bad news and
thus are concerned that the cost of coping with global warming would outweigh any benets (Hsu and Wang, 2012). In
addition, the results suggest that frequent carbon communication by exposing carbon management efforts and perfor-
mance through the media can mitigate the negative effects of carbon disclosure on shareholder value.
In sum, market responses to voluntary carbon disclosure have not been favorable to investors. Firms, however,
need to understand that carbon disclosure quickly becomes a de facto regulation so that they will nd it difcult
to ignore or avoid it in the near future. Therefore, rms should condition their disclosure decisions and strategies
by periodically releasing carbon information through various communication channels such as media, their web-
site, CSR or sustainability reports (Stanny and Ely, 2008; Tagesson et al., 2009) because this communication strategy
can mitigate negative stock price shocks caused by voluntary carbon information disclosure through the CDP.
This study has some limitations. First, it cannot be considered as complete and consistent in its current form. To
the authors knowledge, this study is the rst to examine market responses to rms voluntary carbon information
disclosure in the context of developing or advanced developing countries. In addition, this studys relatively small
sample might have been grounds for some bias. Although carbon disclosure in these countries is in its initial stages,
an increasing number of rms in China, India, Korea, and other emerging Asian countries have participated in the
CDP. Therefore, future research should verify this studys results by considering a wider range of countries. Second,
we analyzed two years of the CDP Korea CDP (2008 and 2009). However, changes in social concerns about climate
change may induce the capital market to respond differently. Therefore, future research should provide a longitudi-
nal analysis with the same sample to investigate the long-term effects of voluntary carbon disclosure on the capital
market. In addition, there is a need for an analysis of the effects of repetitive carbon disclosure on rm value.
Third, we did not consider the quality of carbon disclosure. Because voluntary disclosure practices are subject to
self-selection bias, many of the CDP participants disclosed only some portions of requested information (Hsu
and Wang, 2012). In this regard, future research should investigate the effects of the quality of disclosed informa-
tion on market responses to voluntary carbon disclosure. For this, the carbon disclosure leadership index may be a
good measure of the level of carbon disclosure quality.

Acknowledgements
This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government MEST,
Basic Research Promotion Fund (NRF-2011-013-B00039).

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