Practice non-financial reporting in accordance with the recommendations of the global reporting initiative

Evaluation of the potential relationship between the degree of transparency of the companies and their financial indicators. The impact of regulatory information disclosure on the business on his financial well-being. Financial Performance link.

Рубрика Финансы, деньги и налоги
Вид дипломная работа
Язык английский
Дата добавления 28.08.2016
Размер файла 479,0 K

Отправить свою хорошую работу в базу знаний просто. Используйте форму, расположенную ниже

Студенты, аспиранты, молодые ученые, использующие базу знаний в своей учебе и работе, будут вам очень благодарны.

Размещено на http://www.allbest.ru/

Размещено на http://www.allbest.ru/

Contents

Introduction

1. Theoretical background

1.1 Sustainability reporting

1.2 Social responsibility - Financial Performance link

1.2.1. Older studies

1.2.2 Newer studies

2. Research approach

3. Methodology and data

4. Results

5. Further analysis

Conclusion

References

Introduction

According to the theories of many well-known sociologists, such as M. Castells, L. Sklar, L. Weiss, today we live in the era of globalization. Globalization as multilateral integration process that is taking place in almost all spheres of life: social, political, cultural, economic. Creation of transnational corporations, rapid development of information and communication technologies that facilitate instantaneous continuous exchange of information, formation of political and economic unions, gradual transition to the so-called “global” culture - all these phenomena are both signs and consequences of globalization. Due to the advent of international and multinational companies that conduct their business in various countries around the world, as a rule have many investors and support cooperation with a number of foreign companies, private or public, the need for some harmonization and standardization of forms and types of interaction between companies and other economic agents gradually began to emerge. In particular, this trend has concerned the practice of disclosure of corporate performance.

While regular publication of financial statements in accordance with officially accepted standards is mandatory for certain forms of organizations and has long been attempted by companies around the world, the practice of non-financial indicators disclosure has become a completely new form of informing economic markets participants on firm performance (Willis, 2003). At the beginning of 2000-ies, at the dawn of this practice, when there were no strict rules of conducting non-financial reporting, the number of companies disclosing non-financial indicators was fairly limited; however, in the last 15 years, the awareness of benefits and favorable consequences of conducting non-financial reporting has increased significantly. This led to the increase in the number of publishing companies and the development of more stringent standards.

In this work we will concentrate on the practice of non-financial reports preparation according to recommendations of Global Reporting Initiative. By analyzing the first published non-financial reports of 202 companies operating on markets of Group of Seven, we will assess the potential relationship between the degree of companies' transparency and their financial performance. Moreover, the comparison of financial results of these companies during the following years after the first non-financial report publication (all of these companies continued to publish reports annually) with financial performance of their non-publishing peers will allows us to examine the effect of regular information disclosure on business financial health.

transparency financial business

1. Theoretical background

1.1 Sustainability reporting

Non-financial reporting is also referred to as sustainability reporting. However, before giving the formal definition of “sustainability reporting”, it is necessary to analyze the meaning of the term “sustainable development” in general.

By talking about “sustainable development”, scientific literature refers to society development that meets the needs of present generations without compromising the opportunities left as a legacy for future generations to meet their own needs. In the context of firms and corporations functioning, sustainable development means economic growth without damaging natural, biological and productive resources.

However, sustainable development should not be considered exclusively within the sphere of ecology. On the contrary, all issues related to sustainable development of companies are traditionally considered in three aspects - economic, social and environmental - shaping a so-called “three pillars” of sustainable development (Aras, Crowther, 2009).

The economic aspect of sustainable development indicates the need for equitable and efficient distribution of production resources in order to maintain a balance between short-term and long-term economic growth. The social aspect involves company's awareness of moral responsibility for the consequences of its activities, in varying degrees associated with problems of social well-being of both private and global scale. Finally, the environmental dimension of sustainable development implies the reduction of negative impact of company's activities on the environment in general and on non-renewable natural resources in particular, and the adoption of measures for the transition to environmentally sound production (Aras, Crowther, 2009).

Thus, the term “sustainability reporting” could be characterized as the practice of measurement and disclosure of information for needs of internal and external stakeholders, the interest of which is the organization's performance in respect to the goal of sustainable development, that is to the appropriate economic, social and environmental benchmarks.

Next, it is the time to have a deeper insight in the causes, goals and objectives of reporting in the field of sustainable development, and in the impact of non-financial information disclosure on companies' activities.

Among the most common motives for the disclosure of companies' non-financial results the following factors can be identified: external pressure in the form of relevant legislative requirements (if any), demands of investors, shareholders, customers and other stakeholders, the competitive environment; internal pressure due to the policy of a company, the interest of the governing bodies and staff (Searcy, Buslovich, 2014). While investors and shareholders of the company are aimed at reducing asymmetry of information existing between them and control structures, managers use non-financial indicators to conduct internal and external benchmarking. Other employees are usually interested in the results of company's operations as a whole, their impact on the environment and the situation on the market.

The main reasons for the spread and development of the practice of non-financial information disclosure include a few critical factors. First, in light of currently gaining popularity “green consumption”, companies need to meet demands and needs of modern society to maintain their positions in the markets. By publishing non-financial reports, firms seek to convey to consumers information about the impact of their activities on ecology and environment to strengthen consumers' confidence (Hess, 2008).

Secondly, the development of information and communication technologies greatly promotes the practice of non-financial results disclosure. As mentioned above, the increase of speed and volume of information flow leads to enhanced awareness among investors, consumers and other external agents on company's activities as a whole and, consequently, tightened quality requirements for the information received from the company from their part. As a result, agents, willing to deal with a competitive company which is actively working towards sustainable development, seek to reduce information asymmetry and obtain the maximum amount of reliable data on firm performance, in particular in the form of non-financial reports.

While the motive discussed above can be attributed to the so-called “involuntary” reasons for the disclosure of non-financial information, publication of non-financial reports for the purpose of “signaling” about their situation through the media is companies' pure initiative (Willis, 2003). Due to the fact that interests of such media as television and radio broadcasting, Internet, print media and press, cover a wide range of activities of the society, the information about firms' states and positions is distributed in a large degree through information agents. Thus, by publishing non-financial reports, companies seek to convey desired information to end-users and to signal about their activities in the field of sustainable development through an intermediary in the face of media.

The next motive for the disclosure of non-financial information is the company's desire to evaluate the results of its work using matching and comparison - benchmarking (Hess, 2008). Benchmarking is a process of analysis and assessment of company's performance through comparison with the results of the strongest economic entities in the relevant industry, as well as possible standards of performance in the market. The purpose of benchmarking application is gaining an understanding of the company's position in the industry relative to its competitors, its strengths, areas of production that require increased attention, and development of strategies for improvement of company's competitiveness. Accounting for and analysis of non-financial performance of firms for benchmarking purposes is becoming more and more popular because it allows to estimate indirectly the external agents' perception of the company and its chances to successfully operate in the global market in light of increasingly popular environmentally friendly production.

A research conducted by “Ernst & Young” company (EY) together with Carroll School of Management Center for Corporate Citizenship in 2013 analyzed the opinion of business bodies in respect to the practice of sustainability reporting and its benefits to a company.

Figure 1. Benefits of sustainability reporting.

Source: EY and Carroll School of Management Center for Corporate Citizenship research, 2013.

The study examined the attitude of 579 employees in managerial positions to the non-financial reporting. According to the respondents (Figure 1), sustainability reporting indeed contributes to the increase in business credibility, and the most appreciable benefits of such practice are the increase in company's reputation, rise in consumer and employee valuation of the business, and discovered fields for strategy improvement. Moreover, the research analyzed the opinions of managers working in business sustainability development fields about the disclosure of adverse effects of companies' activities. It was found that, despite the possible risks to company's reputation in the short run, long run benefits in terms of lower expenses due to deeper analysis of company's operations, increased loyalty of interested stakeholders, and reduced risks achieved by improvement of business operation effectiveness significantly outweigh mentioned costs.

Reporting companies effectively detect and control operational and business risks (Orlitzky, 2008). The process of non-financial report preparation consists of a number of pervasive stages implying obtainment of a comprehensive and deep understanding of company's functioning. Such knowledge, in turn, allows management to identify problematic sides of company's work, which may cause concerns of the interested parties; deal with problems of resource deficit, imperfections in control environment; find out potential fields for development and innovation application.

In times of unstable economic situation, consumer and employee confidence in companies becomes an important component of business stability for the latters (Schreck, 2011). By increasing their transparency, companies strengthen public trust in reliability of corporate brand. Moreover, the work towards sustainable development implies a better compliance with external demands.

Thus, all of the factors mentioned above somehow lead to the fact that companies wishing to progress successfully in their industries understand and accept the emergence of new laws of conducting business and begin to follow the current trends in economic activities. Publishing reports in the area of sustainable development annually, firms seek to preserve and enhance market positions, gain and strengthen the trust of customers, occupy a niche in the industry and commit to maintaining the competitiveness of goods and services produced.

1.2 Social responsibility - Financial Performance link

1.2.1 Older studies

Sustainability reporting has become an essential integral part of a corporate social responsibility (SR) concept, which assumes a behavior of companies that greatly consider its effect on the interests of external parties. Of course, socially responsible behavior assumes accountability for companies' actions.

In scientific and business literature, there is an ongoing controversy about the nature of potential link between SR and the corporate financial performance (FP). For a long time, representatives of various fields of professional activity have been analyzing whether socially responsible behavior of companies can indeed have an impact on their financial state, either short-term or long-term one. The results of conducted research are controversial as well: while some studies indicate strong positive relation between SR and FP, others find negative dependence or no link at all.

As for the nature of the link between SR and FP in general, the potential relationship between social valuation of a business and its reputation, and company's financial results was assumed and tested.

Reverse relation?

Figure 2. Nature o SR - FP link.

Source: Schreck, 2011 and author's research.

Figure 2 depicts possible causal mechanisms underlying SR-FP link. Studies indicating positive relation between SR and FP suggest that several mediators connect them. According to these research, companies' socially responsible behavior in relation to environment, consumer and employee expectations, resources allocation, and robustness of business conduction allows it to: satisfy existing employees and attract new skilled workers; increase company's relevance in front of customers and investors; reduce operating and financial inefficiencies by wining through better suppliers', debtors' and creditors' relations; improve its reputation and ease assess to markets of financial instruments. These causal effects, in turn, directly contribute to decrease in company's costs, rise in revenues (due to increase in volume of sales or (and) possibility to charge higher prices), and, thus, increase in returns to its investors, strengthening of its market valuation and improvement of performance ratios.

However, there were studies calling in to question the possibility of SR-FP link.

Table 1. Past researches on SR - FP link.

Date

Author(s)

Link between SR and FP

1991

Arlow and Ackelsberg

Non-significant

1991

Freeman and Stagliano

Positive

1993

Hamilton et al.

Non-significant

1993

Herremans et al.

Positive

1994

Blacconiere and Patten

Positive

1996

Hart and Ahuja

Positive

1996

Klassen and McLaughlin

Positive

1996

Pava and Krausz

Positive

1997

Boyle

Negative

1997

Guerard

Non-significant

1997

Preston and O'bannon

Positive

1997

Russo and Fouts

Positive

1997

Waddock and Graves

Positive

1998

Balabanis et al.

Non-significant

1998

Brown

Positive

1998

Judge and Douglas

Positive

1998

Stаnwick and Stanwick

Positive

1999

Graves and Waddock

Positive

2000

Carter et al.

Positive

2000

Dowell et al.

Positive

2000

McWilliams and Siegel

Non-significant

2001

Moore

Non-significant

2001

Ruf et al.

Positive

2002

Kumar et al.

Positive

2003

Seifert et al.

Non-significant

2004

Goll and Rasheed

Positive

2004

Seifert et al.

Non-significant

2005

Schnietz and Epstein

Positive

2005

Van de Velde et al.

Non-significant

2006

Barnett and Salomon

Positive

2006

Brammer et al.

Negative

2006

Luo and Bhattacharya

Positive

2006

Peinado-Vara

Positive

2007

He et al.

Positive

Source: Beurden and Gцssling, 2008.

As can be seen from the Table 1, the majority of studies conducted before 2008 found positive relation between SR and FP. Negative relation was found only by two authors, while nine works indicated no significant link between SR and FP. The main concern during the determination of link direction was the inclusion of various control variables. Studies mentioned in the table used mainly the following control variables: company's expenses on research and development (R&D), its size, and industry in which it operates.

For works that obtained insignificant relation between SR and FP, exactly these variables appeared to be confounding for relation under examination. While McWilliams and Siеgеl (2010) discovered significant influence of R&D on FP, Seifert et al. (2003 and 2004), Moore (2001), Balabanis et al. (1998), and Arlow and Ackelsberg (1991) depicted the relation between company's size and its FP.

While only two works from the table above had found negative relation between SR and FP, after 2006 more and more studies began to assess the possibility of reverse causality between these two concepts. Main common reasoning about the need to consider such relation was the argument that different dimensions of SR may be not cause but consequence of FP (Schreck, 2011). According to such studies, if companies had reached an adequate level of financial well-being, they may afford costs for attaining SR indicators of good quality. Thus, such works pay high attention to potential problem of endogeneity and construct their methodologies accordingly (discussed in the next section).

1.2.2 Newer studies

The analysis of past studies on SR-FP link revealed several major groups of methodologies and approaches to data processing. Let us, thus, discuss in greater details recent works reflecting such trends in assessment of nature of potential dependency between companies' sustainability behavior and financial results.

In their work, Laan, Ees and Witteloostuijn (2008) question the direct dependence of FP on SR, as well as the sign of the relation, and make an attempt to shed some light on such a controversial object of years of research by including a psychological aspect of stakeholders' decision making. According to authors, the link between SR and FP may be highly influenced by the degree of involvement of company's stakeholders and their attitude to its SR politics, as there exist different “categories” of the latters - primary and secondary ones. Thus authors argue, that dissimilar perception of company's responsibility practices by two kinds of stakeholders has a heterogeneous effect on its financial results.

The sample authors analyzed includes companies from S&P 500 from 1997 to 2002 resulting in panel data. For the assessment of socially responsible behavior of chosen corporations two indices were used: Fortune Corporate Reputation Index (FCRI) and Kinder, Lydenberg, Domini Index (KLD). To capture SR, authors introduced 14 variables measuring socially responsible behavior (dummy variables), out of which 6 were applied to the first group of interested parties (stakeholders), while other 8 - to the second one. In order to measure firms' financial performance during specified period, authors extracted corresponding ROA and ROE measures from Thomson Financial' Datastream. Including debt amount and company's size as control variables, authors hypothesize the existence of positive link between SR and FP for the first group of stakeholders and its absence for the second category of interested parties. Both hypotheses appeared to be rejected by research results, making authors conclude that the effect a firm produces on society is important for secondary stakeholders leading to improvement in FP for that group.

Robinson, Kleffner and Bertels (2011) also undertook an attempt to define the nature of relationship between SR and FP. On the contrary to the previous study, authors do not introduce specific measures of firms' socially responsible behavior, but rather observe the inclusion or deletion of a particular company from the list of sustainable business units elaborated and regularly updated by Dow Jones (DJ). Thus, for assessing the affiliation of a firm to SR concept, authors use Dow Jones Sustainability Index (DJSI). As for the sample of companies for the analysis, they start with 63 North American companies that were present in DJSI list in 2003 and observe the changes in index membership during following years up to 2007. To analyze the relationship between SR and FP, authors undertake event study calculating cumulative abnormal returns (CARs) on stocks for those companies, that were moved from/to DJSI. Hence, two main hypothesis were proposed:

H1: Information about firm's inclusion in DJSI list has a positive effect on change in its price.

H2: Information about firm's elimination from DJSI list has a negative effect on change in its price.

Figure 3. CARs around announcement of movement to/from DJSI.

Source: Laan, Ees and Witteloostuijn (2008).

As Figure 3 verifies, there is no significant effect on companies' price changes around the announcement about movement to/from DJSI, however, there appear significant benefits to companies added to DJSI in longer term prospective (scale of measurement - 60 trading days before and after announcement date). Thus, authors of the research suggest the existence of positive overall SR-FP link.

Study performed by Lopez, Garcia and Rodriguez (2007) was also built on DJSI as a tool for SR assessment; however, methodology of the research was quite different. The approach to the analysis of SR-FP link was based on comparison of financial results of two groups of companies - those included in DJSI list and those that have never been members of the latter. 55 European companies were chosen for each subsample in such a way, that for every “sustainable” firm a peer with comparable characteristics was found. Overall, activity of sustainable companies was tracked for the period starting from 1998 and ending in 2004. The relation analyzed by authors was expressed by the following regression equation:

EBT = б+в1 REVENUES+в2 SR+в3 SIZE+в4 RISK+в5 INDUSTRY+e,

where earnings before tax (EBT) were put in the dependence on SR measure represented by dummy variable with the value of 1 in case of company's inclusion in DJSI list. Control variable were represented by firm's size, riskiness measured as debt to asset ratio, its revenues, and belonging to particular industry. Thus, authors hypothesized the absence of any noticeable differences in financial results of two groups of firms. The results of the study indicated the presence of negative relation between SR and FP in the short run: companies included in DJSI list performed worse in the following years after the first membership in comparison to their peers. According to authors, such link is explained by the need of high resource investments for the start of social responsibility compliance. The study does not analyze the long term financial prospective for sustainable companies.

Next research was performed by Ye and Zhang (2011). For their analysis of potential SR-FP link, authors employed valuation of firm's philanthropy as a measure of socially responsible behavior. As a reflection of financial health of the company, debt-financing costs (DFC) were used. Authors used a sample of 1387 and 1446 Chinese listed companies (Shenzhen Stock Exchange Shanghai Stock Exchange) in 2007 and 2008 correspondingly. In their work they suggest that DFC can be considered as a direct determinant of firm's growth path. A practice of philanthropy, in turn, can contribute to the improvement of company's reputation in the eyes of investors. Perception of the firm as less risky by the stakeholders can lead to the decrease in DFC. Hence, a negative relation between philanthropy and DFC was hypothesized (from the point of view of SR-FP link, relation is clearly positive). The equation of proposed regression took the following form:

DFCt = б + в1 SRt + в2 SR2t + в3 LEVERt + в4 SIZEt + в5 ROAt + в6YEARt + в7 INDUSTt + в8 STATEt +e ,

where SR was measured by charity giving to revenues ratio and company's leverage (LEVEL), size, ROA, belonging to 1 of 13 proposed industries (INDUST), year of activity, and operation under state ownership (STATE) were used as control variables. Authors found that relation between philanthropy and DFC is negative for companies whose expenses on SR (charity giving) are below a particular level; for others relation is reversed (that is SR-FP link is positive up to some level).

Soana (2011) makes an attempt to analyze potential SR-FP link that may exist in companies operating in banking industry. For measuring socially responsible behavior, ethical ratings constituted by AXIA, AEI, and Ethibel rating agencies were employed. The sample under examination consisted of 68 Italian and international banks that were functioning during the year of 2005. In order to assess their financial performance, author used ROA and ROE ratios of each corresponding bank, as well as their market to book value (MTBV) and price to earning ratio (P/E). All mentioned financial indicators were collected via Datastream base. The logic behind examined relation was grounded on the fact that more ethical and sustainable firms earn more valuation from the external parties. The study did not indicate any control variables used. The regression analysis of the potential link between SR and FP revealed no significant relationship between banks' sustainability performance and their financial results.

Unlike the previously discussed works, Schreck (2011) bases his investigation of the nature of SR-FP link and socially responsible behavior assessment on the ratings constructed by Oekom research AG agency. He attempts to find out the possibility of SR-FP link and determine its direction clearly accounting to potential endogeneity problem. For SR measurement, author distinguishes several dimensions of sustainable and responsible behavior. They characterize firm's attitude to: 1) employees; 2) society; 3) environment; 4) corporate governance; 5) customers. Each dimension was assessed by Oekom rating agency and the level of responsibility was assigned. For every company analyzed in the study, all of mentioned SR categories were determined separately. As for the assessment of FP, author explicitly distinguish between two categories of financial results measures - accounting-based (A-B measures) and market-based (M-B measures). While calculation of first group variables, as suggested by its name, is based on company's accounting results, second group measures take into account market valuation of the firm. Hence, in his work author uses ROE figures as A-B measure and Tobin's Q as M-B measures. The sample author used for his research consisted of 300 firms - all firms for which ratings on separate SR dimensions were available in Oekom database in 2006. Using OLS regression analysis, the following relations were tested:

FP = б + в1 SR1 + …+ в5 SR5 + в6 RISK + в7 LEVER + в8 SIZE + e,

where FP variable was represented by either ROE or Tobin's Q measures for each company, while SRi indicators meant corresponding rating levels. Firms' riskiness, leverage and sizes were used as controlled variables.

In his work, Schreck takes into account possible reverse causality between SR and FP. According to him, previous good financial results and availability of adequate resources may appear to be determinants of high-level indicators on sustainable behavior. To test the developed model for endogeneity problem, author employs Two Stage Least Squares procedure using lagged values of SR dimensions measures as instrumental variables (IVs). The logic behind the choice of IVs was reinforced by the argument that company's current financial results can hardly influence past SR dimensions values. No endogeneity was indicated by the performed test.

As for general results on SR-FP link, significant positive influence of only two SR dimensions - environmental and corporate governance ones - on Tobin's Q measure was found. Other tested relations appeared to be insignificant.

Study conducted by Ameer and Othman (2011) is built on comparison of financial results of two groups of companies: those, which undertake SR practices, with those, that do not follow sustainability development. Authors suppose that FP results are higher for the first group of firms. The overall study was based on Lopez, Garcia and Rodriguez (2007) research (discussed above). According to Ameer and Othman, the contribution of their work manifested in the choice of the samples and modification of explanatory variables in potential SR-FP link. For the target sample, study analyzed companies that were presented in the list of top100 sustainable global firms for the year of 2008. To measure SR behavior of chosen firms, their non-financial reports were analyzed and scores from -4 to +4 had been introduced depending on the effect of firms' practices on external parties (mainly environmental impact and philanthropy were analyzed). To assess FP, ROA, EBT, and cash flows from operations (CFO) were introduced. No control variables were indicated. The results obtained after regressing SR variables on FP of two samples for the period of 2006-2010 indicated the positive dependence of financial results on some but not all dimensions of SR behavior. Moreover, the study revealed bi-directional dependence for SR and FP.

Study performed by Torugsa, O'Donohue and Hecker (2012) analyzed possibility of SR-FP link based on the sample of 171 small and medium Australian manufacturing companies. SR behavior of those firms was measured via perception of sustainability practices of their management using means of survey. For FP assessment, no conventional ratios and measurements were used; instead the responses of managers about their firms' financial health were used again. As for control variables, company's size, the length of respondents' work on managerial positions, and the extent of firm's exposure to economic instabilities (via managers' responses) were used. Statistical modeling with LISREL Software was used to construct regression. The study found bi-directional relation between SR practices and FP.

The result of the above research may be highly dependent on the nature of used data. Two main explanations may exist here. Firstly, study used information given by sustainability managers on both SR activities and FP, which could highly subjective. Secondly, the work of sustainability managers itself and thus SR results may be closely correlated to financial reserves of a company.

Finally, research conducted by Duran-Encalada and Paucar-Caseres (2012) aimed to give an aggregated model for a company's development after beginning SR practices based on the analyses of performance of one company - “Petroleos Mexicanos” (PEMEX). After investigation of PEMEX's sustainability reports prepared according to recommendations of Global Reporting Initiative and analysis of PEMEX's FP in 2005-2012, authors suggest a positive relationship between the content of information reported and financial results. The study does not perform any statistical modeling, but rather perform merely qualitative information analysis. Despite the potential use of research results for some external users, the study, using such a limited data and not accounting for possible confounding factors, still should be questioned for being highly subjective and inapplicable for aggregation.

The table below summarizes the main aspects of analyzed studies that will be used in the following reasoning.

Table 2. Analysis of past SR-FP link studies.

Study

Index for SR assessment

FP measures

Control variables

SR-FP link

Laan, Ees, Witteloostuijn (2008)

FCRI; KLD

ROA, ROE

Amount of debt, size

Positive or non-significant

Robinson, Kleffner, Bertels (2011)

DJSI

Stock price change

Presence in S&P 500 or DJ Industrial Average Index

Positive

Lopez, Garcia, Rodriguez (2007)

DJSI

EBT

Revenues, size, risk, industry

Negative in SR

Ye, Zhang (2011)

None (Philanthropy)

DFC

Size, leverage, industry, ROA, year, state ownership

Positive (for small SR expenses)

Soana (2011)

AXIA, AEI, Ethibel ethical ratings

ROA, ROE, MTBV, P/E

None

Non-significant

Schreck (2011)

Oekom rating

ROE, Tobin's Q

Size, leverage, risk

Positive for some SR dimensions

Ameer, Othman (2011)

Top 100 sustainable firms list

ROA, EPT, CFO

None

Positive for some SR dimensions, bi-directional

Torugsa, O'Donohue, Hecker (2012)

Self introduced

Self introduced

Size, exposure to economic instabilities, managers' experience

Bi-directional

Sourse: Authors' research.

As can be seen from the table, methodologies of discussed studies in respect to SR assessment can be divided into two main categories. The first group of studies concluded the presence of sustainability practices in a company if the letter was included in a particular sustainability index list or if dimensions of its socially responsible behavior were assessed by a rating agency [Laan, Ees and Witteloostuijn (2008); Robinson, Kleffner and Bertels (2011); Study performed by Lopez, Garcia and Rodriguez (2007); Soana (2011)]. Thus, such works introduced dummy variables for SR assessment into their models. The second group of studies, on contrary, attempted to measure the quality of companies' sustainable practices by assigning scores or quantitative values to SR variables [Ye and Zhang (2011); Schreck (2011); Ameer and Othman (2011); Torugsa, O'Donohue and Hecker (2012); Duran-Encalada and Paucar-Caseres (2012)]. Thus, firm's commitment to socially responsible practices was regarded either via the fact of its recognition as such by an external organization, or via the analysis of its activities for compliance with identified sustainability standards.

As for measurement of companies' financial performance, there were no certain trends in variables use: while some studies applied merely A-B or M-B measures, others introduced a mix of both types. The most common control variables employed by authors were company's size and leverage. All analyzed works performed model testing either on samples of only sustainable companies, or conducted a comparison of two samples with the use of control firms not involved in SR practices. Results of studies were quite divergent indeed, so the steady conclusion about the nature and direction of SR-FP link could not be made yet.

After the diversified analysis of major approaches to assessment whether sustainable practices of companies can indeed influence their financial performance, as well as identifying strengths and weaknesses of that approaches, we are able to develop new advanced methodology for SR-FP link evaluation (will be discussed in the next sections).

2. Research approach

Now it is time for turning to the research object of this work. The aim of the study is to enrich the existing findings about SR-FP link by examination of a very new type of this possible relation. Moreover, by inclusion of sustainability reports analysis of companies that follow new popular non-financial reporting guidelines of Global Reporting Initiative, the paper will assess whether the amount of suggested for disclosure information presented in the company's very first sustainability report influences firm's financial performance. In other words, it will be evaluated whether the greater volume of first time reported non-financial indicators, perceived and assessed by external parties, contributes to improvement of financial results. Moreover, the study will contribute to the existing conclusions by comparing the long-term financial behavior of firms that report non-financial information with behavior of non-reporting peers. None of the previous studies employed indicated approach to SR-FP link assessment.

The intuition behind the relationship that would be tested is based on general logic for SR-FP link discussed in previous sections and is the following. As it has already been mentioned, corporate social behavior of companies requires accountability for their actions in respect to environment and society as a whole. One of the forms of reflection of sustainability development results is non-financial reporting - a convenient and easy for perception way to disclose information on firm's SR behavior and communicate it to the end users. There are several representatives of such end users of non-financial information, which include company's consumers, suppliers, investors (current and potential), government and other public bodies, employees, various financial, environmental and social organizations. Undoubtedly, the more sustainability information a company disclose in its report, the more transparent it becomes in eyes of its stakeholders. Of course, the further relations with stakeholders may depend on the essence of information represented, i.e. the quality of firm's sustainability activities and their impact on outside parties (for instance, influence of company's operations on environment or its policy in respect to its employees). Nevertheless, the volume of reported sustainability practices may also have its effect on stakeholders' valuation of the firm, which, in turn, will be reflected in company's financial results. While such influence may subside with time due to reduction in new aspects of firm's SR behavior disclosed in each subsequent year, the volume of reported indicators in the very first sustainability report may indeed have a significant effect on company's financial performance. The potential problem of endogeneity that have been mentioned by the past works on SR-FP link may take place: it could be thought that past financial results influence the amount of disclosed information and transfer into better future FP. In order to account for endogeneity, appropriate steps in model construction will be taken.

Apart from the discussed effects of sustainability reporting on firms' financial results, another possible phenomenon may exist. Namely, firms once disclosed non-financial results and then made sustainability reporting their regular practice, continuously deliver information about their SR behavior to investors. Thus, in the future any new piece of information about activities related to firm's SR practices will be if not fully expected, then just taken smoothly by stakeholders. On contrary, for firms that have never report on sustainability development any release of non-financial information about their behavior in respect to society will be unforeseen and thus may lead to fluctuations in FP. Hence, it may be supposed that long run financial behavior of companies publishing non-financial information is much more stable that that of their non-reporting peers.

Now let us consider in greater details the approach of measuring the sustainability information disclosure volume. However before that, the choice of sustainability reporting framework for analysis will be substantiated.

This study uses a sample of companies that report non-financial information according to Global Reporting Initiative (GRI) guidelines. GRI is a relatively recently formed (end of 1990s) non-state organization that develops standards of sustainability reporting [GRI website]. Such standards are not mandatory (non-financial reporting as well as its format are not established by legislation), but rather advisory in nature. However, today, at times of transition to globalized economic markets, a unified format of sustainability information representation, that such standards offer, rapidly gains popularity among business agents. GRI guidelines can be considered as such unified non-financial reporting format. There are several reasons for social passing to unified guidelines. First of all, they allow vertical analysis of non-financial reports of within a given company, i.e. tracing its SR activities through the years. Second, they enable reports comparison between different firms from different sectors, which is highly useful for investors' needs and benchmarking. Finally, they facilitate stakeholders' involvement by offering available explanations for every non-financial indicator disclosed and, thus, implying more positive perception of sustainability reports as a class. All these aspects are attributable to GRI guidelines.

Various studies on current GRI guidelines employment by businesses identified a number of significant advantages of this reporting framework over other practices of sustainability information representation. Hohnen (2012) in his research states that among the companies reporting their non-financial results, GRI guidelines are the most used framework. According to his investigations, more that 95% of all firms chosen by DJSI as sustainable in 2010 prepared their non-financial reports with GRI guidelines. Moreover, in the same year, nearly 80% of companies from FTSE4Good Global 100 and 70% firms listed on Global 100 Most Sustainable Corporations rating followed GRI framework. In addition to that, Hohnen identified advantages of GRI framework. According to him, GRI guidelines were developed through multi-stakeholder comprehensive negotiations and thus represent interests of a multitude of concerned parties. Also, mentioned guidelines are regularly updated so as to reflect new trends in sustainability reporting and include obtained expertise.

In their work, Daizy and Das (2014) state that GRI framework suggests reporting on more than 90 SR indicators, while, for instance, DJSI uses only 9 categories for sustainability assessment. This allows fuller and deeper reflection of SR practices. Also, as pointed by Willis (2003), GRI provides a framework that can be used by any company of any size regardless the industry it operates in, which indeed facilitates comparison in different directions. Finally, under GRI recommendations, companies themselves, not external organizations, prepare non-financial reports, which increase their reputation as socially responsible businesses.

Theoretical arguments about GRI benefits found empirical confirmation. Under Research undertaken by GreenBiz Intelligence Panel in 2013, members of the latter were asked about their perception of the most credible and useful SR framework. Out of 277 respondents, 49% of corporations and organizations named GRI. The only framework that stayed ahead in number of votes “for” was Carbon Disclosure Project (67%). DJSI was indicated in 45% of times. It should be noted, that Carbon Disclosure Project (CDP) deals with greenhouse gas emissions reporting [CDP website], while GRI embraces many aspects of sustainable development. As for DJSI, its list of sustainable companies is prepared by DJ together with RobecoSAM [DJSI website], i.e. externally. Thus, GRI guidelines, being a more universal framework in terms of reported aspects and giving companies an opportunity to fully participate in sustainability declaration, may have a qualitative advantage.

As can be seen, today GRI indeed becomes one of the most popular and widely used sustainability reporting frameworks. Thus, its use for assessment of SR practices in this study would provide obtained results with necessary relevance.

Let us now briefly discuss components of a sustainability report prepared according to GRI guidelines. GRI suggests revealing indicators on three main aspects of companies' SR behavior: economic, environmental, and social [here and below - GRI website]. A report, however, should include several sections. The first part of the report ("Profile" section) contains information regarding company's organizational structure, its strategy and actions undertaken to maintain sustainable development. The second section ("Economic dimension", EC) discloses economic indicators and operational performance results and describes the policy of corporate governance and relations with shareholders. The third section ("Environmental dimension", EN) analyzes the consequences of company's activities for environment in general and natural ecosystems in particular. Publishing the relevant indicators, firm reveals the level of "environmental friendliness" of its production. The fourth section (“Labor practices and decent work", LA) describes company's approach to labor process maintenance and relations with employees. It reports on company's principles of labor protection, analyzes the strategy of human resources management and their potential improvement. The fifth section ("Human rights", HR) analyzes the compliance of company's rights and freedoms policies with relevant legislation. Sixth section (“Society performance”, SO) describes company's relations with social institutions and local communities. Finally, the last section of the report ("Product responsibility", PR) provides characteristics of firm's products and describes the different aspects of their realization in respect to all market participants, as well as economic, social and environmental security. All mentioned sections provide a wider division into subsections, each of which has a specific number. For instance, “EN5”, the fifth subsection of the third section "Environmental dimension", implies disclosure of information on the amount of saved energy due to improvements in company's production processes. As mentioned before, companies following GRI recommendations are not required to report on every subsection of the guidelines - the volume of information being disclosed depends entirely on firms' willingness and abilities.

Now, after having discussed all relevant aspects of sustainability practices, we are ready to proceed to methodology developed for this research.

3. Methodology and data

As it was indicated in the previous section, there will be several main questions about SR-FP relation assessed in this work. For the fist part of the research, a sample of companies publishing sustainability reports under GRI recommendations was collected and regression analysis performed, while for the second part of the research, a sample of not reporting peers was chosen and graphical analysis for two indicated samples employed. Let us now discuss models developed in a formal way.

Figure 4. Proposed SR-FP link.

Source: Author's analytics.

Figure 4 symbolically depicts the proposed causal relationship. The greater the volume of reported information on sustainability practices is, i.e. the more transparent the company is, the higher is its reputation of socially responsible business, which means greater valuation by external agents - consumers, suppliers, employees, investors and other market players, public bodies, etc. The latter, in turn, lead to improved financial performance via increased sales, reduced costs, stronger market's valuation, and so on. As for the first time reporting (as depicted on the scheme), the more non-financial information company discloses in its first sustainability report at a time, the greater is the “positive shock” to its annual financial indicators. Let us now move to the description of sample used and introduction of the dependent and explanatory variables relevant for the model in the first part of the research.

As sustainability reporting according to GRI recommendations was considered in the research, GRI database was used as a source of non-financial reports. GRI database represents a collection of all sustainability reports published by companies in different years. Sorting by countries, years and industries is available. It was decided to test proposed relationship for companies operating on developed markets to gain more reliability for used data. Thus, markets of Group of Seven (G7) countries were chosen as ones of the most developed: according to International Monetary Fund, all G7 countries - Canada, France, Germany, Italy, Japan, United Kingdom, and United States of America (USA) - are in the top 10 advanced economies list (by GDP). Thus, all listed G7 companies presented in GRI database with reports published in English were identified (due to impossibility of diligent analysis of reports published, for instance, in Japan or Italian; the number of such reports, however, was insignificant). The final sample amounted to 202 companies. Also, continuous publication of reports, i.e. annual publication after the first reporting year, was an important condition. All picked companies, however, complied with it. For each of the 202 mentioned companies, first sustainability reports were found (here and later on, “first report” corresponds to the year in which a company started to publish non-financial information under GRI guidelines).

Next, let us consider how the assessment of volume of disclosed non-financial information was performed. For the sake of that, method of evaluating the percentage of reported information (out of the full set of information recommended by GRI) was developed. As it was mentioned in the previous section, GRI provides its users with a set of indicators on which a company should report. Thus, the percentage of disclosure was calculated according to the following formula:

...

Подобные документы

  • The concept, types and regulation of financial institutions. Their main functions: providing insurance and loans, asset swaps market participants. Activities and basic operations of credit unions, brokerage firms, investment funds and mutual funds.

    реферат [14,0 K], добавлен 01.12.2010

  • Тhe balance sheet company's financial condition is divided into 2 kinds: personal and corporate. Each of these species has some characteristics and detail information about the assets, liabilities and provided shareholders' equity of the company.

    реферат [409,2 K], добавлен 25.12.2008

  • The General Economic Conditions for the Use of Money. Money and Money Substitutes. The Global Money Markets. US Money Market. Money Management. Cash Management for Finance Managers. The activity of financial institutions in the money market involves.

    реферат [20,9 K], добавлен 01.12.2006

  • Economic essence of off-budget funds, the reasons of their occurrence. Pension and insurance funds. National fund of the Republic of Kazakhstan. The analysis of directions and results of activity of off-budget funds. Off-budget funds of local controls.

    курсовая работа [29,4 K], добавлен 21.10.2013

  • The economic benefits to the recipient countries by providing capital, foreign exchange. The question of potential causality between foreign debt and domestic savings in the context of the Kyrgyz Republic. The problem of tracking new private businesses.

    реферат [26,7 K], добавлен 28.01.2014

  • Введение системы возврата налога на добавленную стоимость юридическими и физическими иностранными лицами в России: Tax Free Russi, Business Tax Free, Business VAT Fre China. Ставки, права и льготы на возврат части уплаченных средств в различных странах.

    статья [11,9 K], добавлен 15.02.2014

  • Changes in the legal regulation of the clearing, settlement system of securities in Ukraine aimed at harmonizing Ukrainian securities legislation with European and international regulatory standards. Netting regulation in Ukraine. Concepts of securities.

    статья [23,2 K], добавлен 19.09.2017

  • Brief description of PJSC "Kyivenergo". Basic concepts of dividend policy of the company. Practice of forming and assesing the effiiency of dividend policy of the company. The usual scheme of dividend policy formation consists of six main stages.

    курсовая работа [1004,4 K], добавлен 07.04.2015

  • Capital Structure Definition. Trade-off theory explanation to determine the capital structure. Common factors having most impact on firm’s capital structure in retail sector. Analysis the influence they have on the listed firm’s debt-equity ratio.

    курсовая работа [144,4 K], добавлен 16.07.2016

  • Features of financial planning in June. Summary and objectives of the financial plan in August. Of the Financial Planning business in Ukraine. Role of financial management of enterprises. Improving financial planning in modern business environment.

    курсовая работа [28,4 K], добавлен 11.05.2011

  • Financial bubble - a phenomenon on the financial market, when the assessments of people exceed the fair price. The description of key figures of financial bubble. Methods of predicting the emergence of financial bubbles, their use in different situations.

    реферат [90,0 K], добавлен 14.02.2016

  • Aspects of the concept and of consolidated financial statements. Procedure for consolidation. Development of methodological recommendations on the formation of the consolidated accounts. Automating the process of consolidated financial statements.

    реферат [43,7 K], добавлен 09.10.2012

  • The global financial and economic crisis. Monetary and financial policy, undertaken UK during a crisis. Combination of aggressive expansionist monetary policy and decretive financial stimulus. Bank repeated capitalization. Support of domestic consumption.

    реферат [108,9 K], добавлен 29.06.2011

  • The causes and effects of the recent global financial crisis. Liquidity trap in Japan. Debt deflation theory. The financial fragility hypothesis. The principles of functioning of the financial system. Search for new approaches to solving debt crises.

    реферат [175,9 K], добавлен 02.09.2014

  • The main objectives promotion as the process. Overview and the Unique Aspects of Financial Services Industry. Financial Services, Customer Trust and Loyalty, Relationship Building. Aims of the DRIP elements as a "communication flow" model of promotion.

    курсовая работа [119,9 K], добавлен 25.04.2015

  • The City of London as a Financial Center. The main branches of the City’s development. Major business and financial centre. The Bank of England. National Savings Bank. Financial Futures and Traded Options. The flag of the City of London. College of Law.

    курсовая работа [26,3 K], добавлен 19.02.2012

  • Analysis of the status and role of small business in the economy of China in the global financial crisis. The definition of the legal regulations on its establishment. Description of the policy of the state to reduce their reliance on the banking sector.

    реферат [17,5 K], добавлен 17.05.2016

  • Description of exchange stocks as financial point-of-sale platforms. Description of point-of-sale algorithm of broker trade at the financial market. Parameters of price gaps on financial auctions and optimization of currency point-of-sale algorithms.

    контрольная работа [1011,9 K], добавлен 14.02.2016

  • General characteristic of the LLC DTEK Zuevskaya TPP and its main function. The history of appearance and development of the company. Characteristics of the organizational management structure. Analysis of financial and economic performance indicators.

    отчет по практике [4,2 M], добавлен 22.05.2015

  • Development banking, increasing the degree of integration of the banking sector of Ukraine in the international financial community, empowerment of modern financial markets, increasing range of banking products. The management mechanism of bank liquidity.

    реферат [17,2 K], добавлен 26.05.2013

Работы в архивах красиво оформлены согласно требованиям ВУЗов и содержат рисунки, диаграммы, формулы и т.д.
PPT, PPTX и PDF-файлы представлены только в архивах.
Рекомендуем скачать работу.