TALKING TRASH:LEGITIMACY,IMPRESSION MANAGEMENT,
AND UNSYSTEMATIC RISK IN THE CONTEXT OF
THE NATURAL ENVIRONMENT
PRATIMA BANSAL
一根笋University of Western Ontario
IAIN CLELLAND Radford University
Applying institutional theory,we argue that environmentally legitimate firms incur less unsystematic stock market risk than illegitimate firms.Firms earn environmental legitimacy when their performance with respect to the natural environment conforms to stakeholders’expectations.This relationship was supported with the analysis of media reports and stock prices of 100firms over a five-year period.The analysis also showed that firms with low environmental legitimacy can attenuate this effect by expressing commitment to the natural environment.
Studies have shown that investors react immedi-ately to the relea of new information about a firm’s e
nvironmental performance (Hamilton,1995;Klasn &McLaughlin,1996;Konar &Cohen,1997;Muoghalu,Robison,&Glascock,1990).1For example,Hamilton (1995)found that within a day of the relea of the U.S.Environmental Protection Agency’s (EPA’s)Toxics Relea Inventory (TRI),companies with significant toxic releas experi-enced an average loss of $4.1million in equity.The newly relead toxic emissions data led investors to adjust their expectations of the firms’pollution control and clean-up costs,liabilities,fines,and penalties.However,the impact on share prices can be short-lived.Tho firms willing to be labeled as heavy polluters can save the higher short-term costs often associated with environmental manage-ment.As a result,their share price may rebound with the relea of new earnings-related informa-tion.If being en as a heavy polluter has no en-during impact on share prices,then why should managers care about what is reported about their firm’s environmental performance?
In this paper,we argue that the relea of new environmental information has an enduring impact on firms.Through the negative impact on the firm’s legitimacy,share price volatility increas over the long term.In other words,firms perceived as envi-ronmentally illegitimate will experience higher un-systematic risk than tho en as legitimate.Fur-ther,we argue that firms can manipulate this relationship by releasing information about their own commitment to the environment and by vol-unta治肝的中药
rily disclosing environmental liabilities.Our arguments and findings provide incentives for firms to manage stakeholder impressions about themlves.Further,we provide insights about stakeholders,such as competitors,regulators,and customers,who can influence investors’asss-ments of firms’environmental legitimacy.
THE RELATIONSHIP BETWEEN
ENVIRONMENTAL INFORMATION AND
UNSYSTEMATIC RISK Unsystematic Risk
洞彻“Unsystematic risk”reflects the variability in a firm’s stock price associated with events that pri-marily affect only that firm.Firm-specific events,such as a labor strike or an oil spill,may influence investors’perceptions of a company’s future cash flows.Investors react to this information by buying and lling stocks,influencing the stock price and,ultimately,the firm’s unsystematic risk.“System-atic risk,”on the other hand,reflects the variability
We appreciate the comments provided by David Deep-hou,Dev Jennings,Bill Judge,Rob Klasn,Charlene Nicholls-Nixon,Kendall Roth,and Jim Walsh on drafts of this paper.We also pren
ted an earlier version of this work to the Rearch Seminar at the Ivey Business School,where we received valuable input from our col-leagues.We would also like to thank Sydnee Manley and Joel Ryman for their rearch assistance and the Social Sciences and Humanities Council of Canada for their financial support.
1
Throughout this work,we refer only to the natural environment when we u “environment.”Our reference is not to the wider organizational environment.
Academy of Management Journal 2004,Vol.47,No.1,93–103.
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in a firm’s stock price associated with events of a more macroeconomic nature,such as adjustments in interest or exchange rates.A firm’s unsystematic risk is generally measured through the unexplained portion,or error term,of the expected returns for a stock after the firm’s systematic risk has been ac-counted for.
Investors and managers are concerned with un-systematic risk for veral reasons.First,investors oft
en are not fully diversified and find it difficult to be so(Falkenstein,1996;Lubatkin&Chatterjee, 1994).Aaker and Jacobson(1987)suggested that investors prefer stocks with low unsystematic risk to avoid having to diversify their portfolios.Sec-ond,unsystematic risk influences investor returns. Goyal and Santa-Clara(2001)found that market return was related,not only to systematic risk,but also to total stock risk.Unsystematic risk,they showed,accounted for more than80percent of total stock risk and more than70percent of its variation over time.Finally,strategic management theorists have argued that managers care about un-systematic risk(Lubatkin&Chatterjee,1994;Lubat-kin&O’Neill,1987).Firms with high levels of unsystematic risk will often have trouble ensuring stable cash flows and entering new business. This limitation can compromi the firms’ability to rvice debt and can contribute to firm failure (Lubatkin&Chatterjee,1994).
Of the many different types of information influ-encing a firm’s unsystematic risk,environmental information is of specific interest to us for two reasons.First,environmental costs are often unpre-dictable and firm specific(Jiang&Bansal,2003). Conquently,investors find it difficult to antici-pate negative environmental information and, therefore,may not account for it in their asssment of a firm’s discounted future cash flows.When such information is relead,it is generally specific to a firm and,therefore,provides a good domain in which to test hypothes on unsystematic risk. The cond
reason we studied environmental in-formation is that it is potentially a government pol-icy tool to influence environmentally responsible organizational change.Regulations and market-bad tools,such as carbon taxes,are known to influence firm behavior,and there is also evidence to suggest that the relea of corporate environmen-tal performance data may do the same.Konar and Cohen(1997)found that firms who share prices fell the most with the relea of the TRI data re-duced their toxic emissions more than their indus-try peers.The firms also tried to reduce the num-ber and verity of oil and chemical spills in order to improve their environmental performance.Corporate Environmental Legitimacy
To understand the relationship between a firm’s environmental legitimacy and its level of unsystematic risk,we applied institutional theory. Extending Suchman’s(1995:574)definition of legitimacy,we defined corporate environmental le-gitimacy as the generalized perception or assump-tion that a firm’s corporate environmental perfor-mance is desirable,proper,or appropriate. Stakeholders—which include managers,custom-ers,investors,and community members—asss the firm’s legitimacy according to their own dis-tinct and diver norms,“cognitive maps,”and pragmatic preferences.For example,if a firm con-taminates a water supply,a member of the local community may worry about the conquences to human health,while an investor may be more in-terested in th
e associated legal liabilities.We fo-cud on investors’asssments here,as it is their sale and purcha of firm equity that influences firms’stock market prices and unsystematic risk. To asss corporate environmental legitimacy,in-vestors will likely ek information from whatever sources are available,including the media and other informed parties,and they will obrve the actions of other informed stakeholders,such as government regulators,suppliers,customers,and competitors.
Within an institutional framework,firms aim to meet,not exceed,the expectations of“social ac-tors”(DiMaggio&Powell,1991).Institutional the-ory directs attention away from the risk-eking behaviors associated with extracting superior or-ganizational performance and directs it to the risk-reducing behaviors that support the stability and persistence of organizational forms and actions in meeting the expectations of societal stakeholders (Suchman,1995;Zucker,1977).
Corporate environmental legitimacy may be as-sociated with lower unsystematic risk for three reasons.First,organizations acquire legitimacy by conforming to institutional expectations(Such-man,1995).Becau of the many externalities associated with corporate environmental perfor-mance,regulatory pressures are often strong,and local community and customer activism is often prent.As Responsible Care,an initiative of the American Chemistry Council,demonstrated,com-petitors may even collaborate to t standards in order to prevent the continuous and costly ratchet-i
ng up of capital investments in improving environ-mental performance.Furthermore,industry associ-ations often transfer information pertaining to“best practices”in order to protect the legitimacy of their focal industries.As a result,firms will adopt simi-
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lar practices and structures that will help to reduce the likelihood of an environmental mishap. Second,higher corporate legitimacy is associated with lower unsystematic risk becau legitimate firms often have better access to resources than illegitimate firms(Pfeffer&Salancik,1978).The resources can help to even further improve the environmental performance of legitimate firms. The firms can mobilize the resources to miti-gate the conquences of an environmental mishap by,for example,cleaning up an oil spill or curing the assistance of competent lawyers.
Third,legitimate firms are often insulated from scrutiny.By adopting institutional norms,firms re-duce inspection by both internal and external con-stituents(Meyer&Rowan,1977).A visible firm, possibly becau of its size or its involvement in the community,attracts attention from stakehold-ers(Powell,1991),making it particularly important that the firm meets stakeholder expectations for en
vironmental performance.In the event of a crisis, the firm’s legitimacy will help to protect and de-couple the illegitimate activity from the rest of the organization and rve to reassure organizational constituents that the incident is out of the ordinary. Stakeholders will continue to rally around the or-ganization so that the effects of an environmental incident on unsystematic risk will be lesned.For the reasons,we predict:世界一流大学建设高校
Hypothesis1.Firms with higher corporate en-vironmental legitimacy will experience lower unsystematic risk.
The Role of Impression Management
Whereas investors ba asssments of a firm’s legitimacy on its passive conformance to social structures,firm managers can actively shape the way in which the stakeholders view the firm. Organizational actors often u shareholder meet-ings,press releas,and annual reports and other corporate documents to influence insiders’and outsiders’perceptions of their firm(Brown,1997; Elsbach,1994;Elsbach&Sutton,1992;Ginzel, Kramer,&Sutton,1992).Impression management tactics,such as excus,justifications,concessions, apologies,denials,and attacks,are often ud to influence stakeholder perceptions(Ginzel et al., 1992).The deliberate impression management tact
ics inevitably both influence unsystematic risk directly and affect its relationship with corporate environmental legitimacy.We focus on two im-pression management tactics:the disclosure of en-vironmental liabilities and the expression of envi-ronmental commitment.
Voluntarily disclosing environmental liabili-ties.Even the most legitimate firms can experience environmental liabilities.Under most generally ac-cepted accounting practices,firms are required to disclo their environmental liabilities in their fi-nancial statements.At the time of an environmen-tal infraction,however,the extent of a firm’s liabil-ity is often unclear becau often all the implicated parties are not known,the costs and methods of cleaning up the damaged site have not been as-sd,and the opportunity to claim insurance has not been investigated(Kennedy,Mitchell,&Sefcik, 1998).This uncertainty gives the firm flexibility about what to report and when.
Information that is disclod voluntarily about a firm’s environmental liabilities may have new con-tent that can influence the firm’s unsystematic risk. The new information will lead investors to readjust their expectations of the firm’s future discounted earnings and lead them to ll the firm’s shares, resulting in a lower share price for it.This move-ment in the share price increas its volatility and so contributes to the firm’s unsystematic risk.We therefore predict:
Hypothesis2.Firms that voluntarily disclo en-vironmental liabilities will experience higher un-systematic risk.
A firm with high legitimacy has much to lo if it experiences an environmental accident.By disclos-ing its liabilities voluntarily,the firm can apologize for the infraction,make excus for why the acci-dent occurred,and even shift blame.Further,the firm may be able to reassure investors that such liabilities will not reoccur.As a result,the disclo-sure will act as a normalizing account,an impres-sion management tactic that“parates the threat-ening revelation from larger asssments of the organization as a whole”(Suchman,1995:598).If the firm does not disclo its environmental liabil-ities,investors may believe that the firm’s account-ing or management practices are inadequate or in-accurate(Kennedy et al.,1998).Investors may worry that the firm has even more undisclod liabilities or that the firm does not care about its environmental liabilities.The firm that does not disclo its environmental liabilities will then mag-nify the impact of legitimacy on unsystematic risk. As a result,we predict:
Hypothesis3.The voluntary disclosure of en-vironmental liabilities moderates the relation-ship between corporate environmental legiti-macy and unsystematic risk;this relationship will be stronger for firms that do not disclo environmental liabilities.
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Expressing environmental commitment.To manage impressions,a firm can convey informa-tion regarding changes to its products or process that demonstrate its commitment to the natural en-vironment.Examples might include purchasing a new,environmentally superior factory,or aligning the firm with symbols or endorments that convey environmental commitment.Good-news stories like the emphasize the positive aspects of the firm’s actions(Ginzel et al.,1992;Marcus&Good-man,1991).
When a firm’s legitimacy is low,investors may not judge the firm as harshly if it express envi-ronmental commitment.By expressing commit-ment to the environment,the firm can deflect the negative criticism by signaling that it does actu-ally care about the environment.This normaliz-ing account can help to decouple the threatened part of the organization from its more legitimate parts(Marcus&Goodman,1991).Investors,then, may continue to have confidence in the entire organization,even though specific firm practices may be questioned.If the firm does not express commitment to the environment,investors will act on their perceptions of the firm’s legitimacy, which
are bad on data from external sources. Further,by not expressing commitment to the environment,the firm may be signaling to inves-tors that it is unresponsive them.As a result, investors may be concerned with ongoing firm operations and withdraw their support for the firm.
Even when a firm’s legitimacy is high,the firm will gain some value by expressing commitment to the environment.While most investors may believe the firm is legitimate,there may be a few skeptical stakeholders who can ultimately influ-ence the opinion of others.Legitimate organiza-tions may not perceive an erosion in their legiti-macy.By continually reinforcing its commitment to the natural environment,the firm may be able to retain the support of some stakeholders and sway skeptical others.By not reinforcing commit-ment to the natural environment,even legitimate firms could ultimately lo the support of com-mitted investors.The relationships lead us to suggest:
Hypothesis 4.Expression of environmental commitment moderates the relationship be-tween corporate environmental legitimacy and unsystematic risk;this relationship will be stronger for firms not expressing environmen-tal commitment.
METHODS
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Sample
In lecting our sample,we focud on firms within heavily polluting industrial ctors.If we had focud on firms in industries with low en-vironmental risk,the number of firms that had been the target of environmental legitimacy as-ssments would have been too small for this study.To lect heavily polluting industries,we first identified the ctors that contained corpo-rations listed among the“Top Ten Polluters”from1990through1994in the EPA’s Toxics Re-lea Inventory.The initial sample included268 corporations in11manufacturing ctors.How-ever,becau many firms had no news articles in the Wall Street Journal over the study period (1990–94)and becau some industry ctors were underreprented,100firms remained in the final sample.The following five ctors were reprented in the sample:paper(firms with the two-digit SIC code26),chemicals(SIC28),petro-leum(SIC29),primary metals(SIC33),and trans-portation equipment(SIC37).
We conducted an independent-samples t-test on the dependent variable to asss the repren-tativeness of the sample.Firms in the final sam-ple of100had lower unsystematic risk than did firms in the initial sample frame of268(tϭϪ2.34,pϽ.05),indicating that firms in our final sample had less stock price variability than tho in the initial sample frame.This implies that the results of our analys concerning unsystematic risk may be more conrvative than they would have been using the original sample frame.Ad-ditionally,firms in our sample tended to have more employees(tϭ1.96,p
Ͻ.10),higher stock price(tϭ 4.21,pՅ.001),lower stock price returns(tϭϪ1.82,pՅ.10),and more equity capital(tϭ4.19,pՅ.001).The findings sug-gest that in our final sample,firms were more visible and more involved in the stock market than in the initial sample and,therefore,were more likely to be scrutinized by the media than were the firms in our initial sample(DiMaggio& Powell,1991).However,the sampling bias do not limit the generalizability of our findings becau our analysis only applies to firms for which legitimacy can be assd.Becau we were interested in the possibility of a longer-term relationship between the independent variables and unsystematic risk,data were collected over five years instead of over a single,narrow event window.
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Measures
Unsystematic risk.Unsystematic risk was mea-sured as the standard deviation of the error term (that is,the residual)of the capital ast pricing model(CAPM;Fama,1970).Data were collected from the CRSP databa.A market index for each of the five industries(each two-digit SIC category) was derived from all firms trading on the NYSE and AMSE exchanges.The unsystematic risk for each cor
poration was calculated over a160-day period beginning20days after the public relea of the TRI data(that is,TRI relea dayϩ21to TRI relea day ϩ180).We deliberately excluded the20days be-cau abnormal returns have been found to sur-round the annual TRI announcements(Brown& Warner,1985;Hamilton,1995;Konar&Cohen, 1997).We averaged the unsystematic risk measures for the years1990to1994to calculate the final measure.For consistency,all other measures were also averaged over the same time frame—the c-ond and third quarters of1990–94.
Corporate environmental legitimacy.We ud media accounts to asss corporate environmental legitimacy.The media reprents a good source for such asssments becau it has been ud in prior rearch to asss investors’reactions(Hamilton, 1995;Konar&Cohen,1997).Also,in telephone discussions,six investment fund managers indi-cated that they primarily ud media reports in asssing firms’environmental legitimacy.We ud the Wall Street Journal as our media source becau of its national coverage and its importance to investment communities.We relied on this sin-gle source to avoid the duplication of stories,espe-cially since the corporate environmental legitimacy measure was nsitive to the number of articles. However,the Wall Street Journal is likely oriented to large firms or to small firms with large problems. This limited our sample lection in that we could only include firms that had at least one story over the rearch time frame.Furthermore,the Wall Stre
et Journal may have a probusiness bias in that it prints more“good”news stories than“bad.”How-ever,any such bias would be consistent across all firms and so should not have compromid the validity of the results.It is important to note that legitimacy was measured in relation to the natural environment.Although we believe that the theoret-ical and empirical analys we carried out can be generalized to wider measures of legitimacy,we leave this task to future rearchers.
We extracted full-text articles electronically using the company’s name and one or more of the following modifiers:“environmental,”“toxic,”“pollution,”and“Superfund.”Articles were col-lected for the cond and third quarters(April to September)of each calendar year from1990to 1994.This procedure permitted a temporal match with our dependent variable measure,which did not include data six months immediately prior to the March/April relea of the TRI data.A single measure for legitimacy was calculated for each firm over the five-year period.A total of1,049relevant stories were identified,and each article was coded for whether its impact on the firm’s environmental legitimacy was neutral,negative,or positive(0ϭ“neutral,”1ϭ“negative,”and2ϭ“positive”). An intercoder reliability check was completed for50randomly lected stories.The two raters agreed on44of the50cas(88%),suggesting high levels of intercoder reliability(Weber,1991).Dis-agreement between the two raters occurred primar-ily becau the key rater ud the neutral category more fre
quently than the other rater.We dropped the266articles that had been coded as neutral both in order to isolate the influence of positive and negative environmental actions of firms on unsys-tematic risk and to reduce unreliable coding.We also dropped125articles that were summaries of press releas or other corporate documents,as the reflected the impression management activi-ties of the companies.Including the articles would have confounded the tests of Hypothes2, 3,and4.In the end,we ud658articles to calcu-late corporate environmental legitimacy.
To calculate the measure,we followed the work of Deephou(1996),who applied the Janis-Fadner coefficient of imbalance.The Janis-Fadner coeffi-cient ranges fromϪ1.0toϩ1.0;a high prence of favorable articles yields a value clor toϩ1.0,and a high prence of unfavorable articles yields a value clor toϪ1.0.The formula is as follows: Janis-Fadner coefficientϭ联想电脑系统
(e2Ϫec)
t2
if eϾc
(ecϪc2)
2
if cϾe
0if eϭc,
where e is the annual number of favorable environ-mental articles,c is the annual number of unfavor-able environmental articles,and t is eϩc.
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To check for the reliability of this final measure, we calculated the Cronbach alpha for the Janis-Fadner coefficient of imbalance derived from our data compared to that derived from Kinder,Lyden-berg,Domini&Co(KLD)data,where e reprents total environmental strengths and c is total envi-ronmental concerns.There were overlapping data
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