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NTU Management Review Vol. 34 No. 1 Apr. 2024

The Effects of Environmental Information Disclosure on
Investors’ Perceptions of Earnings Quality: The Difference in
Managerial Ownership Structure

Huan-Yi Li, Department of Accounting, National Changhua University of Education
Hsin-Yi Chi, Department of Accounting, National Chung Hsing University
Ching-Hua Chen, Deloitte & Touche, Taiwan

1. Purpose/Objective

Ongoing challenges in the global ecological environment and the continued depletion

of natural resources are leading to an increasingly alarming trend of extreme climate
variability and escalating global warming. As a result, environmental protection and green
issues are receiving increasing attention worldwide. Due to increasing environmental
awareness, corporate environmental disclosure is receiving more attention than ever. Prior
literature finds that firms with better Corporate Social Responsibility (CSR) performance

outperform in financial capital markets (Dhaliwal, Radhakrishnan, Tsang, and Yang, 2012),
and nonfinancial information disclosure can reduce analysts’ earnings forecast errors
(Kim, Park, and Wier, 2012). This study differs from previous research in that it is the first

to examine whether the extent of corporate environmental disclosure affects investors’
perceptions of earnings quality.
Moreover, previous research has taken different perspectives on managerial
ownership. Jensen and Meckling (1976) propose the “convergence of interest” hypothesis,
suggesting that the convergence can have significant positive effects if managers’ goals

are aligned with those of owners, and managers prioritize maximizing firm value. On the
other hand, Jensen and Ruback (1983) propose the “entrenchment hypothesis”, stating
that when managers have sufficient power to control the organization, they may be more

inclined to pursue their own personal interests or to protect their own positions in the firm,
which eventually results in actions that are detrimental to firm value. This study takes the
perspective of the convergence of interest hypothesis and further analyses the impact of
environmental disclosure on investors’ perceptions of earnings quality in both high and
low managerial ownership companies.

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