International Conference On Applied Economics – ICOAE 2011 179

THE RELATION BETWEEN FIRM SIZE AND ENVIRONMENTAL DISCLOSURE

1
DESPINA GALANI, EFTHYMIOS GRAVAS AND ANTONIOS STAVROPOULOS
Abstract
This paper investigates the level of environmental reporting in corporate annual reports. Specifically, it investigates the extent to
which Greek companies have implemented a set of environmental accounting practices and analyzes the relationship between various
firm characteristics and environmental disclosures. The results obtained show that the degree of development of environmental
accounting practices is low and there is a positive relationship between corporate size and the disclosure of environmental
information in annual reports. However, neither profitability nor listing status seems to explain differences in environmental
disclosure practices between Greek companies. This study adds to the international research on environmental disclosure by
providing empirical data from a country, Greece, where empirical evidence is still relatively unknown, extending the scope of the
current understanding of the environmental reporting practices.

JEL codes: M21, M41, Q56.

Key Words: Annual Reports, Company Characteristics, Environmental Disclosures, Greece.
1.Introduction
In recent years more companies disclose information about their environmental performance according to stakeholder demands of
environmental responsibility and accountability. Social disclosures can be defined as reporting that considers environmental, ethnical
and human issues (Gray, 1995a; Hackston & Milne, 1996). The extent and content of social disclosure differs from corporation to
corporation. Research has shown that firm size influence the reporting of environmental information (Gray, 1995a; Hackston &
Milne, 1996; Patten, 2005). With varying levels of success researchers have also tried to relate environmental reporting to
profitability (Patten, 2005; Hackston & Milne, 1996).
Hence, the voluntary disclosure of environmental information by companies has become increasingly important issue of academic
researchers in many countries. Firstly, voluntary environmental reporting was mostly restricted to firms from high environmental
impact industries in industrialized countries. Today, empirical studies show that environmental communication is becoming common
in non-industrial sectors and different regions in the world (KPMG, 2008). However, environmental reporting still continues to be
the highest in countries, such as USA, Japan, Germany, and U.K. and in industries, such as chemicals, pharmaceuticals, electronics
and automotive (KPMG, 2008).
This study focuses on the Greek setting, because most of the present literature is based on an Anglo-Saxon context, and more
specifically on countries such as Australia, New Zealand, the UK and the USA. As a consequence of this relative lack of research on
the topic, there is limited understanding on the environmental accounting and reporting practices and evidence should be added about
other institutional contexts like countries from continental Europe. As far as we are aware there is currently no published study
examining the determinants of corporate voluntary environmental reporting by Greek companies. A study of Greece could make a
significant contribution to the environmental reporting literature in the context of European countries. Therefore, this study presents
an attempt to address this gap in the literature by analyzing whether the specific features of Greek companies result in a significant
difference between the factors influencing environmental disclosure practices of Greek firms when compared to firms from other
different institutional contexts. Also, this study will examine if Greece is ready to conform to the European Recommendation and
adopt accounting legislation for mandatory disclosure of environmental information in companies‘ annual reports.
The paper is structured as follows. Part 2 develops the theoretical framework of environmental reporting of countries from
continental Europe, while part 3 describes the hypothesis development. Part 4 presents the methodology, the analysis of the data and
relevant findings and part 5 offers the concluding remarks.
2.Literature review
Countries from continental Europe, such as Denmark, Sweden, Finland, Portugal, France and Spain have adapted their accounting
legislation to conform with the European Recommendation (2001/453/EC), enacting an obligation for companies to report on
environmental issues in their financial statements. In Greece, corporate environmental disclosure is on a voluntary base without any
regulatory or legislative requirements. However, there is increasing pressure from shareholders and stakeholders for companies to
voluntarily comply with international social accounting standards and codes and the number of corporations that voluntarily disclose
environmental information in their annual reports have an increase trend over years. In response to this pressure some countries have
introduced formal and informal social and environmental reporting acts and codes.
In France, the law on new economic regulations (NER), enacted May 15, 2001, established disclosure requirements and imposes
that all publicly-traded companies include in their annual reports a discussion of the social and environmental consequences of their

1
Despina Galani: Ph.D Candidate of Accounting – Msc Statistics, Department of Applied Informatics, University of Macedonia, Egnatias 156
Thessaloniki, Greece, Tel: +30 2461024364, E-mail: ddg97@yahoo.com
Gravas Eythymios: Ph.D Candidate of Accounting – MBA Economist, Department of Applied Informatics, University of Macedonia, Egnatias 156
Thessaloniki, Greece, Tel: +30 2461024364, E-mail: makisgravas@yahoo.gr.
Antonios Stavropoulos: Assistant professor of accounting at the department of Applied Informatics at University of Macedonia, 156 Egnatias,
Thessaloniki, Greece. E-mail: stavrop@uom.gr
180 International Conference On Applied Economics – ICOAE 2011

activities. Enforcement decree No. 2002-221 of the NER Law lists the categories of social and environmental information required,
thereby shaping the initial guidelines of a social reporting procedure. Social reporting Initiative (GRI), which, since its adoption in
1997, has been aimed at developing and promoting a common framework to report on the economic, environmental and social
performance of companies and, more generally, of any governmental or non-governmental organization (Dejean and Martinez
2009).For France companies, the determinants behind environmental disclosure relate to company size, financial leverage and the
number of financial analysts tracking company stock. As for the impact of environmental disclosures on the cost of equity, the
present study does not enable drawing any conclusions on an eventual drop in the cost of equity (Dejean & Martinez, 2009).
In Spain, the first attempt to regulate environmental accounting was s standard issued in 1998 by ICAC (ICAC-1998). A general
lack of compliance with this standard led the Spanish government to issue a similar but more comprehensive standard (ICAC-2002)
in 2002, complementing and developing the previous regulation in conformity with the European Recommendation. The ICAC-
2002 Standard affects the individual as well as the consolidated annual accounts of all companies, regardless of their size, and
requires them to disclose information pertaining to environmental assets, expenses, contingencies, provisions, compensation to third
parties and long term obligations (Criado-Jimenez, et al. 2008). Criado-Jimenez, et al. 2008investigate the compliance of Spanish
companies with the ICAC-2002 standard, which obliges Spanish companies to make environmental disclosures in their financial
statements. The results suggest that progressive and improved regulation could increase the volume and quality of environmental
disclosures. They also suggest, however, that persistent non-compliance means that the problems associated with voluntary
disclosure still exist. Larrinaga, et al. 2002 find that 80% of Spanish companies included in their study failed to report any of the
information required under the ICAC-1998 standard.A survey conducted on 43 listed companies on Spanish Stock Exchange shows
that firms with higher CSR ratings present a statistically significant larger size and a higher media exposure, and belong to more
environmentally sensitive industries, as compared to firms with lower CSR rating (Reverte, 2009).
Portugal following the European Commission Recommendation on the recognition, measurement and disclosure of environmental
matters in companies‘ annual reports, has approved its first accounting standard on such issues: Accounting Standard 29:
Environmental Matters (2002). However, it has only been in force since January 2006. This accounting standard establishes the
obligation to disclose environmental information in the Portuguese companies‘ financial statements and regulates the type of
information that these firms have to include in their annual reports. A study (Monteiro & Aibar-Guzman, 2009) focuses on the
environmental disclosures made in the annual reports by a sample of 109 large firms operating in Portugal during the period 2002-
2004 indicates that firm size and the fact that a company is listed on the stock market, are positively and statistically related to the
extent of environmental disclosure.
Generally, there is an extensive accounting literature relating to the factors of environmental information that companies disclose
in their annual reports and the characteristics they share with other companies that do the same. The empirical results show that
characteristics, such as company size, industry type, and media exposure are the three variables that have the greatest impact on
voluntary environmental disclosures (Meek & Roberts, 1995; Gray, 1995a; Deegan & Gordon, 1996; Hackston & Milne, 1996; Choi,
1999; Cormier, Magnan, & Velthoven; Al-Tuwaijri, Christensen, & Hughes, 2004; Gao, Heravi, & Xiao, 2005; Freedman & Jaggi,
2005; Stanny & Ely, 2008; Reverte, 2009).
3.Hypothesis Development
3.1Size
A number of studies over the past decades test the influence of firm size on the level of disclosure. Most researchers report a
positive relationship between company size and the extent of disclosure in both developing and developed countries (Cerf, 1961;
Singhvi and Desai, 1971; Kahl and Belkaoui, 1981; Cooke, 1989a, 1992; Ahmed and Nicholls, 1994; Hossain et al., 1994; Wallace et
al., 1994; Craig and Diga, 1998). Similarly, a number of studies test the influence of firm size on environmental disclosures and find
that there is a positive association between the size of the company and the environmental disclosure(Deegan, 1996; Gray, 1995a;
Patten, 2005; Hackston & Milne, 1996; Choi, 1999; Al-Tuwaijri, Christensen and Hughes 2004; Freedman and Jaggi 2005; Gao,
Heravi and Xiao 2005; Brammer and Pavelin 2008; Haddock-Fraser and Fraser 2008; Garcia-Sanchez 2008;Stanny and Ely 2008).
There are several reasons in the literature in an attempt to support this positive association. Firstly, the cost of accumulating and
generating certain information is greater for small firms than large firms. Small companies may not be able to afford such costs from
their resource base (Owusu-Ansah, 1998). Larger companies might have sufficient resources to afford the cost of producing
information for the user of annual report. Secondly, the agency cost is higher for large firms because shareholders are widespread
and in that way, disclosing more information reduce the potential agency cost (Watts and Zimmerman, 1983). Additionally, these
firms might publish more information in their reports to supply information relevant to different users. Thirdly, larger companies
may tend to disclose more information than smaller companies in their annual reports due to their competitive cost advantage (Lang
&Lundholm, 1993; Lobo & Zhou, 2001). Hence, small companies disclose less information than large companies. The size of the
company is operationalized using a number of measures, such as, sales, total assets and number of employees.
This study employees the logarithm of sales for 2009 as the firm size variable.
H1: Companies with different values of sales disclose varying amounts of environmental information.
3.2 Profitability
In the literature, the results on the association between profitability and environmental disclosure are mixed. For example, Li and
McConomy (1999) and Neu, Warsame and Pedwell (1998) indicate that profitability is significant and positively associated with
environmental disclosure. However, other studies report that a significant association between a company‘s profitability and its level
of environmental disclosure does not exist (Hackston and Milne 1996; Choi 1999; Stanny and Ely 2008).
Singhvi and Desai (1971) argues that when profitability is high and the company achieves a high margin of profit, the
managerial groups are motivated to disclose more information in order to show off good reputation to the consumers, shareholders,
International Conference On Applied Economics – ICOAE 2011 181

investors and other stakeholders. On the other hand, if the profitability is low or the company suffers losses, they may disclose less
information in order to cover the reasons for such losses or declining profits.
Therefore, it is interesting to study the impact of profitability on the depth of environmental disclosures. Profitability can be
measured employing different indicators. In this sense, the three measures that have frequently been used in the majority of the
studies on this subject as proxies of profitability are return on revenues, return on total assets and return on equity (Jaggi and
Freedman, 1992). In this study we have considered as an independent variable representing profitability the return on equity in 2009,
which is calculated as the ration of the net income (income after tax) and equity capital in 2009. Based on some of the previous
studies, the H3 purports that:
H2: Firms with high profitability are more likely to disclose more information in their annual reports compared with firms with
low profitability.
3.3 Quotation on the Stock Market
There are a few studies that have investigated the relation between environmental disclosures and quotation on the stock market
(Moneva and Llena, 2000; Monteiro and Aibar-Guzman, 2009). The study of Monteiro and Aibar-Guzman (2009) focuses on the
environmental disclosures made in the annual reports by a sample of 109 large firms operating in Portugal during the period 2002-
2004 indicated that companies,listed on the stock market,are positively and statistically related to the extent of environmental
disclosure. On the other hand, in the context, it seems that there are no significant differences as regards environmental disclosure
between large quoted and non-quoted companies (Movena and Llena, 2000).
In Greecce, the Athens Stock Exchange does not specifically require listed companies to disclose environmental information.
Generally, annual reports of listed companies are under the spotlight of regulators, investors and the press and this influence
company‘s environmental disclosure practices and the depth of disclosed environmental information.
Considering that firms that are listed on the stock market disclose more environmental information than non-listed companies, we
state the following hypothesis.
H3: Listed companies disclose more environmental information in their annual report than non-listed companies.
4.Methodology
4.1 Sample
The focus on the largest companies offers a better porspect of finding disclosures, since earlier research suggests that quality of
corporate social disclosure is linked to firm size (Gray, 1995a). The targer population of 100 biggest Greek companies was selected
by following the ICAP list of top 500 companies. The ‗top‘ is based on size ranking of EBITDA as presented in corporate official
financial statements for the year 2009. From 100 firms, 66 were found to disclose no environmental information in their annual
reports and were therefore removed from the sample. This indicates that a total of 34 per cent made environmental disclosure. The
final sample included 34 companies.
4.2 Disclosure index construction and dependent variable
A disclosure index was constructed which consists of 15items of information, in order to identify the factors that may have a
significant influence on the disclosure level of environmental information by Greek companies. By referring to the envrironmental
disclosures a list of voluntary disclosures was prepared based on the information that firms supply in their annual reports to
shareholders. In order to decide what data to collect, an exmploratory analysis was carried out with the aim to obtain a checklist that
capture the environmental disclousure items mainly used in earlier studies (Gray, 1995a; Hackston & Milne, 1996; Choi, 1999; Al-
Tuwaijri, et al., 2004). From the analysis, a checklist was developed including the items which we consider that Greek companies
can disclose environmental information in their annual reports. Table 1 shows the comprehensive list of 15 environmental items that
may be contained in annual reports.
A dichotomous approach to scoring the items was adopted, in which an item scores on if disclosed and zero if not disclosed. This
procedure is conventionally termed the unweighted approach, and it was adopted for the study as other researchers have used it
successfully (Cooke, 1992; Hossain et al., 1994; Ahmed and Nicholls, 1994). Thus, the unweighted disclosure method measures the
corporate environmental disclosure score (EDS) of a company as additive (Cooke, 1992) as follows:

n
di
DS  
t 1 d

Where, d= 1 if item d1 is disclosed, zero, if the item d1, is not disclosed; n=number of items which might be disclosed by a
sample company; d=maximun number of items (15)
In the unweighted disclosure index it is assumed that all companies are identical and, therefore, no difference need exist in
disclosure requirements. Thus, all items of information in the index are considered equally important to the average user. This
approach has been employed in prior study of Hossain, 2008.
Finally, we have calculated the value of EDS of each firm as the ratio of the computed total disclosure score to the maximum
number of points that is possible to obtain (which corresponds to the total expected number of items to de disclosed by the firms, that
is, the 15 items included in the checklist). The environmental disclosure score (EDS) is then expressed as a percentage.
182 International Conference On Applied Economics – ICOAE 2011

4.3 Independent variables

Table 1 describes the explanatory variables proposed to test the hypotheses from the third section. The information needed to
create these variables was obtained from each company‘s annul report for fiscal year 2009.

Table 5: The explanatory variables

Expected
Variable Description Hypothesis
sign
SIZE Corporate size measured by sales H1 +
(annual sales turnover).
PROFITABILITY Return on equity measured as H2 +
ratio net income to stockholders‘
equity.
QUOTATION ON Dummy varible which takes the H3 +
THE STOCK MA- value 1 if the company is listed on
RKET Greek stock exchange, and 0
otherwise.

As for control varibales, we control for the influence of three dummy variables. The first variable represents the activity sector in
which the company operates within the following sectors: chemicals, energy, metals, petroleum. The second variable represents
whether the corporation is listed on the Greek Stock Exchange. Table 3 shows the control variables considered.

4.4 Model development

The estimated multiple linear regression model employed to test the relationship between specific-related variables and the level
of environmental disclosure is presented below:
EDS= bο+b1SIZE+b2PROF+b4QUO+e
Where:
EDS:environmental disclosure score
bo: Intercept
SIZE: Log of Total Assets
PROF: profitability, ratio of net income to equity
QUO: quotation on the stock market, dummy variable whose value is I if the company is listed on the Greek stock market
and 0 otherwise
e: residual error
As mentioned above, a positive relationship is predicted between the EDS and all independent variables.

4.5 Descriptive statistics

Table 2synthesises the descriptive statistics for the overall dependent variable used in this study. In addition, it compiles
information on the relative frequencies of the specific environmental items which form the environmental disclosure index. With
regard to environmental items, on average, companies report 8 out of 15 items considered, with minimum value 2 items and
maximum value 15items.
Analysis of the frequencies of the 15 items comprising the environmental disclosure index yields the following significant
frequencies:
More than 10 per cent of companies report items related to materials.
More than 22 per cent of companies report items related to energy.
More than 10 per cent of compnaies report items related to water.
Items related to emissions, are the more frequently disclosed of the selected items.
Only 5.24 per cent of companies report items related to environmental protection expenditures.

Table 6: Descriptive statistics for dependent variable

Mean Median Std. deviation Min Max
Environmental
8.17 7.00 4.28 2.00 15.00
Disclosure Index

Tables 3 and 4 display the descriptive statistics of the independent and control variables. For the numerical variables, the mean,
the standard deviation and the minimuma and maximum values are reported, and for binary variables, the absolute and relative
frequencies are given.
International Conference On Applied Economics – ICOAE 2011 183

Table 7: Descriptive statistics for independent variables

Std,
Mean Median Min Max
deviation
Sales 1,454,086 627,580 1,681,234 42,546 6,172,586
Ebidta 255,249 125,000 338,483 22,791 1,667,999
Profit
173,277 75,010 250,559 -216,234 988,989
before tax
TotalAssets 19,135,803 1,488,389 53,080,261 135,684 290,879,424

There is a wide range of variation within the sample indicated by the minimum and maximum values. Specifically, total assets,
have considerable dispersion in the scores, as represented by the minimum, maximum and the standard deviation.
Also, this table indicates that the companies examined in this study are large and important to the Greek economy.

Table 8: Descriptive statistics for dummy variable

Listing Status
No listed Listed
Frequency 16 19
Valid
45.71% 54.29%
percentage

4.6 Correlation Matrix and Multicollinearity Analysis

Multicollinearity in explanatory variables has been diagnosed through analyses of correlation factors and Variable Inflation
Factors (VIF), consistent with Weisberg (1985). Table 5 presents the correltation matrix of the dependent and continuous variables,
from which, it has been observed that the highest simple correlation between independent variables was 0,320 between sales and
listing status. Judge et al. (1985), and Bryman and Cramer (1997) suggest that simple correlation between independent variables
should not be considered harmful until they exceed 0.80 and 0.90. Simple correlations of 0.80 or 0.90 are usually associated with
Variable Inflation Factors (VIF) of between 6 and 10. The VIF in exceess of 10 should be considered and indication of harmful
multicollinearity (Neter et al, 1989).

Table 9:Correlation matrix

listed sales profitability
listed Pearson Correlation 1 .320 .013
Sig. (1-tailed) .030 .472
N 35 35 35
sales Pearson Correlation .320 1 .252
Sig. (1-tailed) .030 .072
N 35 35 35
profitability Pearson Correlation .013 .252 1
Sig. (1-tailed) .472 .072
N 35 35 35

In the present model the observed correlations were not considered harmful. These findings suggest that multicollinearity
between the independent variables is unlikely to pose a serious problems in the interpretation of the results of the multivariate
analysis.

4.7 Multivariate Analysis

The results of the multiple regression analysis of the association between the company characteristics and the environmental
disclosure in the financial statements of a sample of listed companies are documented in Table 6 and show that the F-ratio is 3.078
(p=0.042). The result statistically supports the significance of the model. The model‘s explanatory power is relatively high, with an
adjusted R2 measure of 0.155, which is a respectable result, implies that independent variables explain 15.5 percent of the variance in
environmental disclosure index.

Table 10: The model

Model Summary
184 International Conference On Applied Economics – ICOAE 2011

Adjusted Std. Error of Durbin-

R R Square R Square the Estimate Watson
.479 .229 .155 .2624708 1.471
ANOVA
Sum of
Squares df Mean Square F Sig.
Regression .636 3 .212 3.078 .042
Residual 2.136 31 .069
Total 2.772 34
Coefficinets

Unstandardized Standardized
Coefficients Coefficients
Std.
B Error Beta t Sig.
(Constant) -.763 .515 -1.483 .148

listed .006 .094 .011 .064 .949

sales .234 .091 .442 2.565 .015
profitability -.336 .172 -.320 -1.956 .060

From the three independent variables proposed to test the hypotheses, one of them, size, turn out to be statistically significant for
a confidence level of 95 per cent. Size displays a positive effect on the dependent variable. The remaining independent variables
have a statistically non-significant effect.
Specifically, firm size coefficient shows that this variable is significantly positively correlated to the environmental disclosure
level, thereby suggesting that large firms disclose more environmental information than small ones. The variable sales (log of sales)
was significantly positive and in line with the results from previous research as mentioned. Hence, the results provide support to H1,
and therefore we might affirm that size is an important factor in explaining the extent to which the sample‘s companies develop
environmental accounting practices. In other words, the hypothesis concerning the organisational size provide a satisfactory basis for
explaing the breadth of environmental management practices implemented by Greek companies.
Nevertheless, the remaining hypothesis, relating to variables such as stock exhange listing and profitability were rejected by the
analysis. The fact that a company is listed on the Greek stock market does not appear to be a differentiating attribute in its level of
environmental disclosure. This happens because there are not compulsory environmental acounting standards accepted from the
Athens Stock Exchange. Simirarly, there are no significant differences between companies that have a higher level of profitability
and firms whose level of profitability is lower.
Overall, the results are consistent with some previous studies‘ findings (Deegan & Gordon, 1996; Al-Tuwaijri, Christensen, &
Hughes, 2004; Freedman & Jaggi, 2005; Hackston & Milne, 1996; Brammer & Pavelin, 2008; Monteiro & Aibar-Guzman, 2009),
which consider the firm size as a determinant of environmental disclosures. Simirarly, they provide support to several authors‘
arguments that there is not a significatn association between the companies‘ financial profitability and the extent to which they
disclose envrionmental information (Movena & Llena, 2000; Hackston & Milne, 1996; Choi, 1999; Monteiro & Aibar-Guzman,
2009). Also, the results are consistent with the study of Moneva and Llena (2000) which reports no statistically signifiant differences
between listed and lon-listed firms in relation to their decision to disclose envrionmental information.
5.Conclusion
This study examins patterns in the quality of voluntary environmental disclosures made by the 100 more profitable Greek
companies. The paper has emprically studied the influence of three variables (size, profitability, listing status) on the extent to
which a sample of Greek companies have developed a set of environmental accounting practices. The analysis showed that only 35%
of Greek companies disclose environmental information in their corporate annual reports. These disclosures were voluntary in nature
and largely qualitative. The study has reported the results of multiple linear regression to test the association between a number of
corporate attributes and the extent of envrionmental disclosure in company annual reports. The extent of environmental disclosure
was measured using unweighted environmental disclosure index.
The results showed that corporate environmental disclosure levels are associated with some company characteristics. For Greek
companies, the variable that were found to be significant in determining disclousure levels is the size of the company. This means
that the companies with larger sales turnover disclose more environmental information than the small companies.This means that
large companies are thoroughly analysed by the mass media, public opinion and governments, which have encouraged them to reveal
a higher volume of envirionmental information.
Greece is currently experiencing a phase of expansion of environmental reporting which means that is time for the development
of regulatory environmental disclosure requirements.
International Conference On Applied Economics – ICOAE 2011 185

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