The Impact of Environmental and Social Costs Disclosure on Financial Performance Mediating by Earning Management

The Impact of Environmental and Social Costs Disclosure on Financial Performance Mediating by Earning Management

Khalis Hasan Yousif Al-Naser, Hosam Alden Riyadh, Faeq Malallah Mahmood Albalaki
Copyright: © 2021 |Pages: 15
DOI: 10.4018/JCIT.20210401.oa5
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This research empirically investigated the effect of environmental cost disclosure (ECD) and social cost disclosure (SCD) on financial performance (FP) mediated by earning management (EM). To achieve this purpose, a quantitative research method was employed using secondary data sources including reports of corporate social responsibility (CSR) and annual reports. Then, the data were examined using smart partial least squares (PLS). The research sample was represented by international energy corporations during the period (2016, 2017, and 2018). The study results revealed that the environmental and social costs disclosure significantly affected financial performance. This was in agreement with theories of instrumental stakeholders, legitimacy, and agency. This means that more cost on environmental and social information disclosure can generate greater opportunities for corporations.
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The phenomenon of environmental and social accounting emerged with the societies' need for social accounting reports similar to those of capital markets. This has required financial data provided by financial accounting frameworks. Likewise, users of social accounting data need information enabling them to judge if the organization is being socially and financially responsible or not. Regardless of social accounting, green accounting and reporting is a new phenomenon and relatively suffered at lack of any mandatory codes or regulation towards the mandatory disclosure. Hence, the organizations are voluntarily engaged in reporting several social responsibility activities in their annual financial reports. Globally, it appears that organizations have progressed in substantial issues further than those found in literature (Eljayash, James & Kong, 2012; Raey, 2006).

Here, the problem arises when the organization does not invest heavily in environmental reporting due to the poor understanding of environmental issues or increasing the costs of incurred environmental disclosure. According to Ageda (2015), only few investigations have been done in the area of environmental accounting like reporting and its effect on the association's financial performance. Consequently, most associations are starting to spend much of their income on social activities, leading them to vague vision towards environmental accounting.

There is a long-running discussion on the effect of green or environmental accounting on firms, particularly in corporate financial performance. This discussion illustrates numerous parallels with investigations of corporate social responsibility. The conventional financial argument showed the advantages of natural accounting for firms that will collect a limited extent to the organizations themselves. Therefore, firms have a motivating force to under embrace the environmental accounting disclosures. On the other hand, the government's intervention effort to implement or enforce environmental standards will bring about an exchange off between advantages to society (improvements for environmental measures) and expenses to the firm (lower benefits).

The conflicts started when some authors like Porter (1991); Porter and Van der (1995) argued that progressively stringent guidelines might predominantly provide a long-run increase to firm benefit and profitability. This is done by driving firms to concentrate on decreasing extra generation costs and expanding consumer or purchasers satisfaction and sales. In this context, the effect of empirical connection between environmental and social costs on financial performance is significantly explicit. Thus, exploring a positive relation between the two factors could offer help for the enormous contention. Although observational examinations on both aspects revealed differentiating results, firm heterogeneity or deem powerful impacts on the environmental accounting financial relationship were less investigated in the existing literature. As a result, this study aims at examining the effect of environmental and social costs disclosure on financial performance.

Hence, Epstein and Buhovac (2014) believed that nowadays, enterprises become increasingly oversensitive to environmental issues and partner's concerns and are endeavouring to convert into better corporate residents. Regardless of whether the inspiration is a worry for the society and environment, government guidelines, partner pressures or monetary benefit, the outcome is that managers must unveil huge improvements for a more adequately deal with their environmental effects. The association between environmental and social costs on firm performance in current debate remains inconclusive, offering further explorations for researchers, especially in the context of energy corporations.

Besides, by developing and using environmental accounting, entities may have benefited from several advantages like strict control of environmental expenditure, leading to gaining more customers' trust. Therefore, higher incomes in the long-term sustainability and the environmental information disclosure in annual reports are highly utilized by big firms because of their effectiveness to report, in addition to being the main references of information for outside and inside shareholders such as customers, investors, creditors, employees, government and others.

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