Does managerial ability affect the quality of environmental financial disclosure?

Abstract

Purpose The purpose of this paper is to determine whether managerial ability affects the quality of corporate environmental financial disclosures. Design/methodology/approach Regression analysis is used to examine the association between managerial ability and the quality of corporate environmental financial disclosures. Findings The results of primary empirical tests find a negative association between projection errors of corporate environmental capital expenditures and managerial ability. Overall results suggest that (1) managers appear to be equally capable of making relatively accurate projections of total corporate capital expenditures, and (2) managers with higher managerial ability are capable of estimating the projection amounts that appear to be significant, yet do not deviate substantially to what they intend to spend in the subsequent year(s) for legitimation purposes. Research limitations/implications The data collected and analyzed include only publicly traded companies in the environmentally sensitive industries in the USA; therefore, the results should not be generalized to non-US listed, private and non-publicly traded businesses. Practical implications Results of this study provide practical implications for stakeholders in their decision-making. For instance, understanding how different levels of managerial ability affect corporate environmental disclosures quality assists the board of directors in their evaluations of the performance of current top management. Furthermore, when contemplating new laws, governmental agencies and legislators can consider how managerial ability might affect the likelihood of environmentally sensitive businesses to comply with full disclosure and other reporting requirements. Social implications Information regarding top management’s ability to carry out socially acceptable environmental practices is very valuable for investors who are interested in socially responsible and green investing. Originality/value This study contributes to and links between two research streams: managerial ability in management literature and environmental financial disclosure literature. This is the first study that empirically tests whether the managerial ability is a determinant of the quality of corporate environmental financial disclosures.