Industrial pollution can take many forms.听For example, polluting drinking water sources, releasing unwanted toxins into the air, and reducing soil quality.听Environmental disasters especially those caused by industrial accidents must be controlled.听This condition encourages companies to carry out social and environmental responsibility, which is often referred to as CSR (corporate social responsibility).听Green companies have higher market value and听stock听returns, because green companies are considered to have lower risks.
This research was conducted at companies included in the听high profile听industry because the industry is very vulnerable to the possibility of environmental damage.听Companies from environmentally sensitive industries tend to disclose more environmental information than other industries.
There is an underlying assumption that the industries sensitive to the environment are usually subject to various environmental regulations, and as a result they face greater pressure. In this industry, information on performance and environmental risk should be used by investors in decision making, as it will determine the cost of share capital and stock liquidity.
Voluntary disclosure has a large impact on company liquidity and value.听It justifies the company to voluntarily disclose more information than is required, while proving that managers can form stock liquidity, at least to a certain extent.听Disclosures are made to reduce information asymmetry, because it creates costs due to听adverse selection听in transactions between buyers and sellers of company shares.
To avoid potential investor reluctance to include their capital in illiquid markets, companies must spend capital at discount prices. This discount makes capital costs higher. If disclosure of risk increases investor predictions, there is greater confidence and thus increases trading volume.
In the听sustainability听literature, there is a statement saying environmental risk management will provide many benefits.听Investors make the transactions and determine the cost of capital of a company by evaluating the risk of its cash flow relative to other investment opportunities available to them.听The company carries out emission and pollution reductions to reduce the risk of litigation either from government regulators or from non-government.听It will reduce both current and potential risks.听Every environmental activity is likely to be valued by the market in terms of increasing the company’s risk perception from an investment perspective.
The sample of this study is companies listed on the Indonesian stock exchange in 2013-2015 and assessed in the听Trucost听Database. It听is the only database that provides data on the magnitude of potential environmental impacts for the benefit of investment to investors in various countries, including Indonesia.听Trucost has become part of the听Dow Jones S & P听Index, so it can be said to be a reliable source of data.听Secondly, companies make disclosures or reports on the environment in听sustainability reports.听However, if it does not publish a听sustainability听report, an听annual report听will be used.
The test results show that disclosure on environmental performance is used by investors to determine the value of the company, and disclosure of environmental risk is not used. Furthermore, companies that disclose more environmental risks will have higher stock liquidity. Although disclosure of environmental risk does not result in changes in the value of the company, the disclosure can increase trading volume.
The sample is categorized into two groups, namely听high risk听and听low risk.听In the听high risk听group, companies face more potential environmental damage, disclosure of performance and risk will be responded more by investors.听While in the听low risk听category, this information is not used by investors in decision making.
The practical implications of this study advise the policy and regulatory bodies that companies with high risk of environmental damage, need more detailed regulations regarding environmental activities, because investors need this information. (*)
Author : Rizky Eriandani, I Made Narsa
Details of this research available at:听
