ESSAYS ON CARBON DISCLOSURE, CORPORATE SUSTAINABILITY AND COST ASYMMETRY

The dissertation comprises six chapters, encompassing two research streams: corporate carbon disclosure and sustainability, and cost asymmetry. Chapters 1 to 3 focus on corporate carbon disclosure and sustainability. Chapter 4 serves as a transitional chapter, linking emission disclosure with cost asymmetry. Chapters 5 and 6 explore the determinants of cost asymmetry. Chapter 1: Detecting Carbon Emissions Disclosure Management Abstract: This study develops a proxy to capture firms’ quantitative carbon Emission Disclosure Management (EDM). Whereas many papers empirically study financial disclosure management in terms of earnings management, the literature is silent on firms’ quantitative non-financial disclosure management. We fill this gap by empirically evaluating whether firms manage numerical carbon emission disclosure in their favor after a reputation shock led by irresponsibility controversies. We collect corporate carbon emission data from Corporate Reports (CR) manually and measure the EDM as the gap between the carbon numbers disclosed in the CR and those reported to the Carbon Disclosure Project (CDP) (Depoers et al., 2016). Our results support the hypothesis that firms engage in EDM after a reputation shock. Further analyses reveal that audits of sustainability reports are not able to prevent the problem ofEDM when firms obtain only limited assurance. Our results imply that: audit professionals should revise their practice of auditing carbon emissions; investors and other stakeholders should treat carbon disclosure with caution; and regulators should establish effective control mechanisms for biased carbon disclosure. Chapter 2: Environmental Enforcement and Corporate Carbon Disclosure Abstract: This study investigates the effect of environmental enforcement in terms of regulatory punishments for environmental infractions on the disclosure of corporate carbon emissions. Using a sample of companies listed in the Chinese market from 2009 to 2019, the study reveals that companies are more inclined to disclose carbon emissions in their corporate reports following the penalties related to environmental infractions. Furthermore, these companies are more likely to provide higher-quality carbon disclosure, including quantifiable carbon performance data and external assurance for their sustainability reports. Environmental enforcement incentivizes managers to actively participate in sustainable practices, such as pursuing green patents, establishing environmental management systems, and effectively communicating their carbon performance at a later stage. The findings of this study shed light on how environmental enforcement can effectively incentivize companies to pursue sustainable development and increase the transparency of corporate climate impacts. Chapter 3: Russian Business Leaders Speaking Out on the Ukraine-Russian War Abstract: This paper investigates whether firms with better ESG rankings are more likely to have business leaders who speak out and raise concerns over a dramatic social shock – the 2022 war in Ukraine. Using a sample of 71 Russian listed firms in 2022, this study shows that better ESG rankings are associated with a higher likelihood of business leaders’ propensity to speak out and raise concerns over the Ukraine war, even after controlling for occidental board representation, state ownership, and potential selection bias. This finding is mainly driven by the environmental and social dimensions of a firm’s ESG ranking. This study advances the understanding of business leaders’ activism on controversial social, political and environmental issues. It theorizes and provides evidence that an extreme institutional context, such as that provided by Russia during the Ukraine war, can trigger stakeholder-enlarged stewardship behaviours and on the boundary conditions that influence this behaviour. The study provides useful insights for business leaders, investors and other corporate stakeholders who rely on a firm’s ESG ranking to assess actual responsible corporate behaviour. Chapter 4: Asymmetric Behavior of Emissions and Carbon Reduction Targets Abstract: This study examines the relationship between carbon emissions and sales revenue. Based on a sample of US firms that responded to the Carbon Disclosure Project (CDP) during the period 2008 -2018, I find that carbon emissions increase on average 0.42% per 1% increase in sales but decrease only 0.20% per 1% decrease in sales. My results suggest that carbon emissions respond asymmetrically to changes in activity levels, similar to the findings of ABJ (Anderson et al., 2003) for Selling, General, and Administrative (SG&A) costs. Further, I show that firms with a carbon reduction target tend to reduce their emissions more when sales decline, which results in less asymmetric emissions behavior. I contribute to the literature by transferring the concept of cost asymmetry to carbon emissions and by identifying emission reduction targets as an important determinant of the asymmetry in carbon emission adjustments. Chapter 5: Local Party Committee and Labor Cost Asymmetry Abstract: Chinese state-owned enterprises (SOEs) operate under the seemingly incompatible logics of economic and noneconomic objectives and, thus, within a setting of institutional complexity (Durand and Jourdan, 2012; McPherson and Sauder, 2013). This complexity manifests in the coexistence of the modern enterprise system and a firm-level Local Party Committee (LPC). LPCs check proposals from a political standpoint before executives decide based on economic feasibility (Jin et al., 2022). We provide evidence that SOEs with more LPC participation exhibit higher labor stickiness, and this association is more pronounced after the enforcement of the “Labor Contract Law” in 2008, when LPCs became more focused on noneconomic objectives. Additional analyses reveal that regional differences in market-based institutional quality moderate the impact of LPC participation on labor cost asymmetry. Our results are relevant for emerging market investors who attempt to incorporate cost asymmetry into their profitability forecasts and for other stakeholders who strive to understand and anticipate the impact of the complex Chinese institutional setting on cost behavior. Chapter 6: A Second Look at Free Cash Flow and the Agency Problem in the Asymmetrical Behavior of Selling, General, and Administrative Costs Abstract: This paper addresses important theoretical and empirical ambiguity in the research on the agency problem in SG&A cost asymmetry; i.e., free cash flow as defined in the seminal study of Chen et al. (2012) does not correlate consistently with more SG&A cost stickiness. We argue that this phenomenon can be explained by a mismatch between the theoretical concept of free cash flow (Jensen, 1986) and its operationalization in the management accounting literature. We propose the alternative measure of free cash flow before changes in abnormal SG&A expenditures, which correlates consistently with higher SG&A cost stickiness.