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15/11/2023
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Nguyen, H. T., Tran, P. T., Rickards, R. C., & Chu, L. M. (2023). Corporate environmental disclosures and financial distress: evidence from an emerging market. Journal of International Economics and Management, 23(3), 23-43. https://doi.org/10.38203/jiem.023.3.0072
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Corporate environmental disclosures and financial distress: evidence from an emerging market
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Abstract
This study examines the effect of corporate environmental disclosures on financial distress in Vietnam. From sustainability reports and annual reports of firms listed on the Ho Chi Minh Stock Exchange, we manually collected a dataset on environmental information disclosures about seven management standards, including the utilization of raw materials, energy usage, water consumption, conservation of land and soil, gas emissions, wastewater and solid waste, and compliance with environmental protection laws. We measure the level of environmental information disclosures based on the counts of these standards that a firm has disclosed and employed both Altman’s Z-score and Ohlson’s O-score as proxies for financial distress. The research sample includes 269 firms from 2015 to 2020. The findings indicate that firms with better corporate environmental disclosures tend to have lower financial distress levels. The results are robust with respect to different measures of environmental information disclosures and financial distress, and have implications for investors, creditors, and policymakers. We contribute to the literature by providing evidence from a frontier market with weak legal institutions, where various environmental issues and regulations about disclosing environmental information have just gone into effect.
Article Details
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Keywords
Environment, Financial distress, Information disclosure, Vietnam
References
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Attig, N., El Ghoul, S., Guedhami, O. and Suh, J. (2013), “Corporate social responsibility and credit ratings”, Journal of Business Ethics, Vol. 117, pp. 679 - 694.
Brooks, C. and Oikonomou, I. (2018), “The effects of environmental, social and governance disclosures and performance on firm value: a review of the literature in accounting and finance”, The British Accounting Review, Vol. 50 No. 1, pp. 1 - 15.
Cai, L., Cui, J. and Jo, H. (2016), “Corporate environmental responsibility and firm risk”, Journal of Business Ethics, Vol. 139, pp. 563 - 594.
Campbell, J.Y., Hilscher, J. and Szilagyi, J. (2008), “In search of distress risk”, The Journal of Finance, Vol. 63 No. 6, pp. 2899 - 2939.
Cheng, B., Ioannou, I. and Serafeim, G. (2014), “Corporate social responsibility and access to finance”, Strategic Management Journal, Vol. 35 No. 1, pp. 1 - 23.
Clarkson, P.M., Li, Y., Richardson, G.D. and Vasvari, F.P. (2008), “Revisiting the relation between environmental performance and environmental disclosure: an empirical analysis”, Accounting, Organizations and Society, Vol. 33 No. 4-5, pp. 303 - 327.
da Silva, M., Maria, S. and Aibar-Guzman, B. (2010), “Determinants of environmental disclosure in the annual reports of large companies operating in Portugal”, Corporate Social Responsibility and Environmental Management, Vol. 17 No. 4, pp. 185 - 204.
Darrat, A.F., Gray, S., Park, J.C. and Wu, Y. (2016), “Corporate governance and bankruptcy risk”, Journal of Accounting, Auditing & Finance, Vol. 31 No. 2, pp. 163 - 202.
Deng, X. and Wang, Z. (2006), “Ownership structure and financial distress: evidence from public-listed companies in China”, International Journal of Management, Vol. 23 No. 3, pp. 486 - 502.
Dichev, I.D. (1998), “Is the risk of bankruptcy a systematic risk?”, Journal of Finance, Vol. 53 No. 3, pp. 1131 - 1147.
El Ghoul, S., Guedhami, O., Kwok, C.C.Y. and Mishra, D.R. (2011), “Does corporate social responsibility affect the cost of capital?”, Journal of Banking & Finance, Vol. 35 No. 9, pp. 2388 - 2406.
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Godfrey, P.C., Merrill, C.B. and Hansen, J.M. (2009), “The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis”, Strategic Management Journal, Vol. 30 No. 4, pp. 425 - 445.
Gonzalez-Benito, J. and Gonzalez-Benito, O. (2005), “Environmental proactivity and business performance: an empirical analysis”, Omega, Vol. 33 No. 1, pp. 1 - 15.
Griffin, J.M. and Lemmon, M.L. (2002), “Book-to-market equity, distress risk, and stock returns”, The Journal of Finance, Vol. 57 No. 5, pp. 2317 - 2336.
Guotai, C., Khalil, H. and Erraja, C. (2023), “Corporate social responsibility rating, corporate governance, and financial distress: evidence from China”, Asia-Pacific Journal of Financial Studies, Vol. 52 No. 1, pp. 6 - 34.
Heyman, D., Deloof, M. and Ooghe, H. (2008), “The financial structure of private held Belgian firms”, Small Business Economics, Vol. 30, pp. 301 - 313.
Huang, C.-L. and Kung, F.-H. (2010), “Drivers of environmental disclosure and stakeholder expectation: evidence from Taiwan”, Journal of Business Ethics, Vol. 96 No. 3, pp. 435 - 451.
Ioannou, I. and Serafeim, G. (2017), “The consequences of mandatory corporate sustainability reporting”, Research Working Paper No. 11-100, Harvard Business School, Boston.
Jia, J. and Li, Z. (2022), “Corporate environmental performance and financial distress: evidence from Australia”, Australian Accounting Review, Vol. 32 No. 2, pp. 188 - 200.
Kane, G.D., Velury, U. and Ruf, B.M. (2005), “Employee relations and the likelihood of occurrence of corporate financial distress”, Journal of Business Finance & Accounting, Vol. 32 No. 5-6, pp. 1083 - 1105.
Kim, Y., Li, H. and Li, S. (2014), “Corporate social responsibility and stock price crash risk”, Journal of Banking & Finance, Vol. 43, pp. 1 - 13.
Malik, M. (2015), “Value-enhancing capabilities of CSR: a brief review of contemporary literature”, Journal of Business Ethics, Vol. 127, pp. 419 - 438.
Minor, M. and Morgan, J. (2011), “CSR as reputation insurance: primum non nocere”, California Management Review, Vol. 53 No. 3, pp. 40 - 59.
Neu, D., Warsame, H. and Pedwell, K. (1998), “Managing public impressions: environmental disclosures in annual reports”, Accounting, Organizations and Society, Vol. 23 No. 3, pp. 265 - 282.
Nguyen, S.L., Pham, C.D. and Nguyen, A.H. (2020), “Impact of corporate social responsibility disclosures on bankruptcy risk of Vietnamese firms”, The Journal of Asian Finance, Economics and Business, Vol. 7 No. 5, pp. 81 - 90.
Ohlson, J.A. (1980), “Financial ratios and the probabilistic prediction of bankruptcy”, Journal of Accounting Research, Vol. 18 No. 1, pp. 109 - 131.
Pindado, J., Rodrigues, L. and De la Torre, C. (2008), “Estimating financial distress likelihood”, Journal of Business Research, Vol. 61 No. 9, pp. 995 - 1003.
Platt, H. and Platt, M. (2012), “Corporate board attributes and bankruptcy”, Journal of Business Research, Vol. 65 No. 8, pp. 1139 - 1143.
Roy, A. and Mukherjee, P. (2022), “Does national culture influence corporate ESG disclosures? Evidence from cross-country study”, Vision: The Journal of Business Perspective, Online First.
Shahab, Y., Ntim, C.G., Chengang, Y., Ullah, F. and Fosu, S. (2018), “Environmental policy, environmental performance, and financial distress in China: do top management team characteristics matter?”, Business Strategy and the Environment, Vol. 27 No. 8, pp. 1635 - 1652.
Shahab, Y., Ntim, C.G. and Ullah, F. (2019), “The brighter side of being socially responsible: CSR ratings and financial distress among Chinese state and non-state owned firms”, Applied Economics Letters, Vol. 26 No. 3, pp. 180 - 186.
Sharfman, M.P. and Fernando, C.S. (2008), “Environmental risk management and the cost of capital”, Strategic Management Journal, Vol. 29 No. 6, pp. 569 - 592.
Thuy, C.T.M., Khuong, N.V. and Liem, N.T. (2021), “Corporate social responsibility disclosure and its effect on firm risk: an empirical research on Vietnamese firms”, Sustainability, Vol. 13 No. 22, 12933.
Tzouvanas, P., Kizys, R., Chatziantoniou, I. and Sagitova, R. (2020), “Environmental disclosure and idiosyncratic risk in the European manufacturing sector”, Energy Economics, Vol. 87, 104715.
Verwijmeren, P. and Derwall, J. (2010), “Employee well-being, firm leverage, and bankruptcy risk”, Journal of Banking & Finance, Vol. 34 No. 5, pp. 956 - 964.
Al-Hadi, A., Chatterjee, B., Yaftian, A., Taylor, G. and Hasan, M.M. (2019), “Corporate social responsibility performance, financial distress and firm life cycle: evidence from Australia”, Accounting & Finance, Vol. 59 No. 2, pp. 961 - 989.
Al-Tuwaijri, S.A., Christensen, T.E. and Hughes II, K.E. (2004), “The relations among environmental disclosure, environmental performance, and economic performance: a simultaneous equations approach”, Accounting, Organizations and Society, Vol. 29 No. 5-6, pp. 447 - 471.
Altman, E.I. (1968), “Financial ratios, discriminant analysis and the prediction of corporate bankruptcy”, The Journal of Finance, Vol. 23 No. 4, pp. 589 - 609.
Altman, E.I. (2013), “Predicting financial distress of companies: revisiting the Z-Score and ZETA® models”, in Bell, A.R., Brooks, C. and Prokopczuk, M. (Eds.), Handbook of Research Methods and Applications in Empirical Finance, Edward Elgar Publishing, Massachusetts, pp. 428 - 456.
Altman, E.I., Iwanicz-Drozdowska, M., Laitinen, E.K. and Suvas, A. (2017), “Financial distress prediction in an international context: a review and empirical analysis of Altman’s Z-score model”, Journal of International Financial Management & Accounting, Vol. 28 No. 2, pp. 131 - 171.
Attig, N., El Ghoul, S., Guedhami, O. and Suh, J. (2013), “Corporate social responsibility and credit ratings”, Journal of Business Ethics, Vol. 117, pp. 679 - 694.
Brooks, C. and Oikonomou, I. (2018), “The effects of environmental, social and governance disclosures and performance on firm value: a review of the literature in accounting and finance”, The British Accounting Review, Vol. 50 No. 1, pp. 1 - 15.
Cai, L., Cui, J. and Jo, H. (2016), “Corporate environmental responsibility and firm risk”, Journal of Business Ethics, Vol. 139, pp. 563 - 594.
Campbell, J.Y., Hilscher, J. and Szilagyi, J. (2008), “In search of distress risk”, The Journal of Finance, Vol. 63 No. 6, pp. 2899 - 2939.
Cheng, B., Ioannou, I. and Serafeim, G. (2014), “Corporate social responsibility and access to finance”, Strategic Management Journal, Vol. 35 No. 1, pp. 1 - 23.
Clarkson, P.M., Li, Y., Richardson, G.D. and Vasvari, F.P. (2008), “Revisiting the relation between environmental performance and environmental disclosure: an empirical analysis”, Accounting, Organizations and Society, Vol. 33 No. 4-5, pp. 303 - 327.
da Silva, M., Maria, S. and Aibar-Guzman, B. (2010), “Determinants of environmental disclosure in the annual reports of large companies operating in Portugal”, Corporate Social Responsibility and Environmental Management, Vol. 17 No. 4, pp. 185 - 204.
Darrat, A.F., Gray, S., Park, J.C. and Wu, Y. (2016), “Corporate governance and bankruptcy risk”, Journal of Accounting, Auditing & Finance, Vol. 31 No. 2, pp. 163 - 202.
Deng, X. and Wang, Z. (2006), “Ownership structure and financial distress: evidence from public-listed companies in China”, International Journal of Management, Vol. 23 No. 3, pp. 486 - 502.
Dichev, I.D. (1998), “Is the risk of bankruptcy a systematic risk?”, Journal of Finance, Vol. 53 No. 3, pp. 1131 - 1147.
El Ghoul, S., Guedhami, O., Kwok, C.C.Y. and Mishra, D.R. (2011), “Does corporate social responsibility affect the cost of capital?”, Journal of Banking & Finance, Vol. 35 No. 9, pp. 2388 - 2406.
ElBannan, M.A. (2021), “On the prediction of financial distress in emerging markets: what matters more? Empirical evidence from Arab spring countries”, Emerging Markets Review, Vol. 47, 100806.
Elloumi, F. and Gueyiee, J.P. (2001), “Financial distress and corporate governance: an empirical analysis”, Corporate Governance, Vol. 1 No. 1, pp. 15 - 23.
Fich, E.M. and Slezak, S.L. (2008), “Can corporate governance save distressed firms from bankruptcy? An empirical analysis”, Review of Quantitative Finance and Accounting, Vol. 30, pp. 225 - 251.
Ghoul, S.E., Guedhami, O. and Kim, Y. (2017), “Country-level institutions, firm value, and the role of corporate social responsibility initiatives”, Journal of International Business Studies, Vol. 48, pp. 360 - 385.
Godfrey, P.C., Merrill, C.B. and Hansen, J.M. (2009), “The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis”, Strategic Management Journal, Vol. 30 No. 4, pp. 425 - 445.
Gonzalez-Benito, J. and Gonzalez-Benito, O. (2005), “Environmental proactivity and business performance: an empirical analysis”, Omega, Vol. 33 No. 1, pp. 1 - 15.
Griffin, J.M. and Lemmon, M.L. (2002), “Book-to-market equity, distress risk, and stock returns”, The Journal of Finance, Vol. 57 No. 5, pp. 2317 - 2336.
Guotai, C., Khalil, H. and Erraja, C. (2023), “Corporate social responsibility rating, corporate governance, and financial distress: evidence from China”, Asia-Pacific Journal of Financial Studies, Vol. 52 No. 1, pp. 6 - 34.
Heyman, D., Deloof, M. and Ooghe, H. (2008), “The financial structure of private held Belgian firms”, Small Business Economics, Vol. 30, pp. 301 - 313.
Huang, C.-L. and Kung, F.-H. (2010), “Drivers of environmental disclosure and stakeholder expectation: evidence from Taiwan”, Journal of Business Ethics, Vol. 96 No. 3, pp. 435 - 451.
Ioannou, I. and Serafeim, G. (2017), “The consequences of mandatory corporate sustainability reporting”, Research Working Paper No. 11-100, Harvard Business School, Boston.
Jia, J. and Li, Z. (2022), “Corporate environmental performance and financial distress: evidence from Australia”, Australian Accounting Review, Vol. 32 No. 2, pp. 188 - 200.
Kane, G.D., Velury, U. and Ruf, B.M. (2005), “Employee relations and the likelihood of occurrence of corporate financial distress”, Journal of Business Finance & Accounting, Vol. 32 No. 5-6, pp. 1083 - 1105.
Kim, Y., Li, H. and Li, S. (2014), “Corporate social responsibility and stock price crash risk”, Journal of Banking & Finance, Vol. 43, pp. 1 - 13.
Malik, M. (2015), “Value-enhancing capabilities of CSR: a brief review of contemporary literature”, Journal of Business Ethics, Vol. 127, pp. 419 - 438.
Minor, M. and Morgan, J. (2011), “CSR as reputation insurance: primum non nocere”, California Management Review, Vol. 53 No. 3, pp. 40 - 59.
Neu, D., Warsame, H. and Pedwell, K. (1998), “Managing public impressions: environmental disclosures in annual reports”, Accounting, Organizations and Society, Vol. 23 No. 3, pp. 265 - 282.
Nguyen, S.L., Pham, C.D. and Nguyen, A.H. (2020), “Impact of corporate social responsibility disclosures on bankruptcy risk of Vietnamese firms”, The Journal of Asian Finance, Economics and Business, Vol. 7 No. 5, pp. 81 - 90.
Ohlson, J.A. (1980), “Financial ratios and the probabilistic prediction of bankruptcy”, Journal of Accounting Research, Vol. 18 No. 1, pp. 109 - 131.
Pindado, J., Rodrigues, L. and De la Torre, C. (2008), “Estimating financial distress likelihood”, Journal of Business Research, Vol. 61 No. 9, pp. 995 - 1003.
Platt, H. and Platt, M. (2012), “Corporate board attributes and bankruptcy”, Journal of Business Research, Vol. 65 No. 8, pp. 1139 - 1143.
Roy, A. and Mukherjee, P. (2022), “Does national culture influence corporate ESG disclosures? Evidence from cross-country study”, Vision: The Journal of Business Perspective, Online First.
Shahab, Y., Ntim, C.G., Chengang, Y., Ullah, F. and Fosu, S. (2018), “Environmental policy, environmental performance, and financial distress in China: do top management team characteristics matter?”, Business Strategy and the Environment, Vol. 27 No. 8, pp. 1635 - 1652.
Shahab, Y., Ntim, C.G. and Ullah, F. (2019), “The brighter side of being socially responsible: CSR ratings and financial distress among Chinese state and non-state owned firms”, Applied Economics Letters, Vol. 26 No. 3, pp. 180 - 186.
Sharfman, M.P. and Fernando, C.S. (2008), “Environmental risk management and the cost of capital”, Strategic Management Journal, Vol. 29 No. 6, pp. 569 - 592.
Thuy, C.T.M., Khuong, N.V. and Liem, N.T. (2021), “Corporate social responsibility disclosure and its effect on firm risk: an empirical research on Vietnamese firms”, Sustainability, Vol. 13 No. 22, 12933.
Tzouvanas, P., Kizys, R., Chatziantoniou, I. and Sagitova, R. (2020), “Environmental disclosure and idiosyncratic risk in the European manufacturing sector”, Energy Economics, Vol. 87, 104715.
Verwijmeren, P. and Derwall, J. (2010), “Employee well-being, firm leverage, and bankruptcy risk”, Journal of Banking & Finance, Vol. 34 No. 5, pp. 956 - 964.