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

Hypothesis 2: For companies with a high level of managerial ownership, the positive
relationship between environmental disclosure and investors’ perceptions of
earnings quality is more pronounced under the same conditions.

Methodologically, following previous studies (Baber, Krishnan, and Zhang, 2014;
Fang and Lu, 2020; Lyubimov, Davis, and Trompeter, 2020), we estimate the following
regression to test Hypotheses 1 and 2 on investor perceptions of earnings quality. The

empirical Model (1) is as follows:

CAR = β + β UE + β EAID + β UE × EAID +β UE × CS + β UE × DR + β UE i,t
0
i,t
3
1
i,t
2
i,t
5
6
i,t
i,t
i,t
i,t
i,t
4
i,t
× GROWTH + β UE × BIGF + β UE × FIRMAGE + β UE × NETLOSS
8
i,t
7
i,t
9
i,t
i,t
i,t
i,t
i,t
+ β UE × BETA + β UE × SVAR + β CS + β DR + β GROWTH + β 15
13
14
i,t
12
i,t
i,t
i,t
10
i,t
i,t
i,t
11
BIGF + FIRMAGE + β NETLOSS + β BETA + β SVAR +Year Fixed
i,t
18
i,t
i,t
i,t
17
i,t
16
19
Effects + Industry Fixed Effects + ε , (1)
i,t
where CAR is the cumulative abnormal return; UE is the changes in earnings; EAID is
the indicator for the disclosure of environmental information. The variable of interest in
Model 1 is the interaction term of UE × EAID. We predict the sign of β in Equation (1) to
3
be positive.
3. Findings
First, we test Equation (1). The full sample analysis is the test of Hypothesis 1. The
estimated coefficient of UE×EAID is 3.4937 (t-value = 6.05). The result is consistent with
our Hypothesis 1, indicating that investors’ perception of higher earnings quality is evident
when companies disclose higher levels of environmental information. Additionally, we
test hypothesis 2 by analyzing the sample with a high degree of managerial ownership.
The estimated coefficient of UE×EAID is 0.0960 (t-value = 2.77). The result is consistent
with our Hypothesis 2, indicating that the positive relationship between environmental
disclosure and investors’ perceptions of earnings quality is more pronounced for firms with
higher levels of managerial ownership. Overall, these results suggest that environmental
disclosure is important to market participants and that there is a convergence of interests in
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