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The IUP Journal of Accounting Research and Audit Practices:
Decision Usefulness of Corporate Environmental Reporting and Firm Performance: Evidence from Sri Lanka
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The study attempts to assess the degree to which Corporate Environmental Reporting (CER) contributes to firm performance in Sri Lanka. Four qualitative characteristics of financial information as stated in the Conceptual Framework for Financial Reporting (i.e., relevance, faithful representation, understandability and comparability) and three performance indicators (i.e., ROA, ROE and EPS) have been used to measure the decision usefulness of CER information and firm performance, respectively while three variables, namely, growth, firm size and leverage, were controlled in the study. For this purpose, top 30 companies based on the market capitalization in the Colombo Stock Exchange (CSE) of Sri Lanka were selected as the sample. Data were gathered from the annual reports of these companies during the period from 2013 to 2016, and data analysis was carried out using content analysis, descriptive statistics, Pearson correlation coefficient and multiple regression analysis. The findings show that scores for the two fundamental characteristics (i.e., relevance and faithful representation) were relatively lower than those of the enhancing qualitative characteristics (i.e., comparability and understandability), indicating a lower level of decision usefulness. With regard to the association between CER reporting and firm performance, it was evident that there is a positive association between the two variables. The findings of the study have significant policy implications such as the importance of provision of environmental information for decision making purposes rather than merely satisfying the stakeholders of companies.

 
 
 

Sri Lankan industrial sector has expanded rapidly through local and foreign investments since the liberalized open economic policies were introduced in the late 1970s (Pathfinder Foundation, 2015). As a result, free trade zones, multinational companies and local manufacturing companies have emerged and a large number of factories in various types of industries have been established. Even though this industry evolution has largely contributed to the growth of the economy, the operations of these factories caused damages to the environment in a number of ways such as discharging polluted water, carbon, chemicals and waste material. In the modern context, business entities have a greater responsibility to protect the environment within which they operate, while the society has a right to demand information about environmental factors affected by the operations of the businesses. However, recent incidents such as Rathupaswala suggest that most of the firms neither take necessary actions to prevent such environmental pollution nor adequately report the damages they cause to the environment in their annual reports or any in other form of communication. This could be because the damages caused by the companies to the environment do not appear as a cost to the organization, as Power and Laughlin (1992) suggested.