Impacts of family entities on environmental disclosure: Examining the mediating role of earnings management and board independence

Abstract

AbstractThis study empirically analyzes how earnings management and board independence mediate the link between family ownership and environmental disclosures, using a sample of non-financial firms listed on the Indonesia Stock Exchange (IDX) for the fiscal years 2014 to 2017. Unsurprisingly, the main finding from multiple regression analyses suggests a positive association between family-controlled entities and environmental disclosure, but this relationship is statistically insignificant. Yet, intriguingly, the study finds that the association between family business entities and environmental disclosures is indirect through producing high-quality financial reports and appointing independent members to the board of directors. Our study contributes to Indonesian literature on the role of earnings management and independent boards in mediating the relationship between family firms and corporate environmental performance. Specifically, our results align with the agency theory suggesting that family owners and managers act in the best interests of the entire organization and its stakeholders, thus reporting higher-quality earnings. This study also contributes to the literature on corporate governance, highlighting the critical role of an independent board of directors as a supervisory mechanism. The study has practical implications that managers of Indonesian corporations should consider increasing the proportion of independent members on the board of directors to support the implementation of the company’s environmental strategy effectively. Likewise, the study offers insight to the policymakers in enhancing the oversight role of corporate boards in limiting earnings management practices and encouraging the communication of corporate environmental information. Finally, our study contributes to the global literature, which seeks to find positive implications for family business environmental performance.

Keywords

• family ownership
• board independence
• earnings management
• environmental disclosure
• Indonesia