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Article

Unlocking the Power of Reporting: Exploring the Link between Voluntary Sustainability Reporting, Customer Behavior, and Firm Value

by
Omar. A. Alghamdi
1 and
Gomaa Agag
2,3,*
1
Business Administration Department, Applied College, Najran University, Najran 55461, Saudi Arabia
2
Nottingham Business School, Nottingham Trent University, Nottingham NG11 8NS, UK
3
Marketing Department, Faculty of Commerce, University of Sadat City, Sadat City 32897, Egypt
*
Author to whom correspondence should be addressed.
Sustainability 2023, 15(21), 15584; https://doi.org/10.3390/su152115584
Submission received: 3 October 2023 / Revised: 27 October 2023 / Accepted: 31 October 2023 / Published: 3 November 2023
Versions Notes

Abstract

:
Voluntary sustainability reporting is becoming more common, as evidenced by the hundreds of organizations that have adopted the Global Reporting Initiative (GRI) standards or similar reporting frameworks within the last decade. This research aims to explore the influence of voluntary sustainability reporting on customer behavior and firm value. Drawing on signaling theory, this paper developed and empirically tested four hypotheses to understand the relationships between the study variables. We collected actual data from the petrochemical companies in Saudi Arabia from 2012 to 2022. Data were analyzed using a fixed-effect panel model. The findings revealed that, in general, sustainability reporting has a negative impact on firm value and customer behavior. Nonetheless, the association between sustainability reporting, firm value, and customer behavior became positive over time. We conclude that sustainability reporting is a costly signal at first but that it ultimately increases firm value as businesses improve their ability to inform stakeholders about sustainability activities and as investors become more adept at assessing report quality. This paper offers several theoretical and managerial implications.

1. Introduction

Hundreds of organizations have adopted the “Global Reporting Initiative” (GRI) standards or equivalent reporting frameworks in the recent decade [1], demonstrating the growing prevalence of voluntary sustainability reporting. The triple bottom line (TBL) framework provides the foundation for sustainability reporting [2]. The TBL approach advises businesses “to track and manage economic (not just financial), social, and environmental value added—or destroyed” [3]. Because the GRI standards provide a structured method for enterprises to disclose their impacts to stakeholders on the environment, society, and the economy, the GRI reporting platform is an embodiment of the TBL concept. Sustainability reporting has the potential to promote corporate accountability since it helps organizations better understand how their operations affect various stakeholder groups [4].
Sustainability reports are used by businesses as promotional materials [5,6]. Efforts by businesses to enhance product quality, address climate change, reduce poverty and inequality, and create a more sustainable future are frequently detailed in annual reports. Executives believe voluntary disclosures of ESG operations through sustainability reports or comparable media have a favorable effect on financial performance, according to a recent McKinsey survey [7]. Sustainability reporting is also seen favorably by marketing scholars [8]. However, there has been a dearth of empirical research into the connections between sustainability reporting and traditional indicators of financial performance. Therefore, we still do not know if reporting has an impact on objective measurements of firm value, and we do not know how corporations and investors feel about sustainability reporting. While organizations should be commended for genuine sustainability measures, this does not guarantee that messages about sustainability that are under firm control will be valued by the financial markets.
There is a chance that sustainability reporting reduces rather than increases business value due to the high costs involved, the opportunity costs incurred, and investor concerns about greenwashing. The Friedman doctrine is the foundation of the first argument against sustainability reporting. Management’s principal duty, according to the Friedman doctrine [9], is to advance the interests of the company’s stockholders, which are commonly defined as the maximization of the stockholders’ wealth. The high cost of sustainability reporting is one possible downside. It has been estimated that it can cost a corporation over a million dollars to compile and release a sustainability report [10]. Investors today care more about environmental and social performance than they did in Friedman’s day, but traditional investors may be hesitant to put money into a company whose executive spends a lot of money on social or environmental programs without seeing a significant return on investment. In addition, there are opportunity costs associated with sustainability reporting. Some investors may be opposed to sustainability reporting if it means less money for things like advertising, R&D, personal selling, and other classic marketing strategies [11]. While it is well-established that marketing efforts can boost a company’s value and, in turn, raise the wealth of its shareholders, the impact of sustainability reporting on firm value is less certain. Prior research pointed out that potential investors may also be skeptical of the reliability of disclosures that are not related to finances. U.S. [12]. Securities and Exchange Commission (SEC) investigations into companies making false or misleading claims about their contributions to sustainable development have increased in recent years due to complaints from watchdog groups, academics, and institutional investors [13]. Investors may be wary of sustainability reports due to growing fears about greenwashing [14].
Sustainability reporting, on the other hand, is generally seen as a positive trend in the business world that contributes to the adoption of more environmentally friendly procedures [15]. Key concepts from stakeholder theory, such as stakeholder engagement [16] and the organizational legitimacy literature [17], support the argument that sustainability reporting is a positive contributor to company value. There has been a rise in the number of voices demanding that businesses be more forthcoming about their sustainability efforts [11]. Sustainability reporting has been shown to be an efficient method of stakeholder engagement since it lessens information asymmetry [18], which in turn improves investors’ ability to foresee cash flows [19]. Moreover, sustainability reporting helps organizations meet stakeholders’ expectations for corporate social performance [4], so its processes should benefit shareholders, according to proponents of stakeholder management. This is because sustainability-oriented firms will outperform their competitors in the long run.
Despite sustainability reporting’s promised benefits, little is known by researchers and practitioners regarding the influence of reporting on business value. This research aims to examine the connection between sustainability reporting and the financial performance of companies. We go into the following lines of inquiry: Question 1: “Does sustainability reporting increase or decrease the value of a company”? Question 2: “Has the effect changed over time”? Question 3: “Which aspects of sustainability reports are most valued by investors from the perspective of reporting organizations”?
There are theoretical and practical ramifications of this study. First, our research fills a gap in the literature by addressing the lack of studies focusing on sustainability reporting’s long-term implications on company value in emerging nations [20]. Second, we add to the sustainability reporting literature by showing that the connection between reporting and company value is more nuanced than previously thought. Although the primary effect of reporting on Tobin’s q is negative under most model assumptions, this negative effect gradually shifts to a positive one when permitted to vary over time. We see this reversal in sentiment as an indication that investors are becoming more open to sustainability reports. Third, we discovered a favorable relationship between external auditing and firm value for reporting companies. Our research shows that third-party audits strengthen the reliability of ESG data in published reports.

2. Conceptual Background and Hypotheses Development

Accounting and finance scholars frequently examine the impact of non-financial disclosures in annual reports and press releases on more conventional measures of financial success, while mainstream marketing journals and interdisciplinary business journals publish far fewer studies on sustainability reporting. There are three main types of writings in the existing literature. Conceptual studies are the first type, and they examine sustainability reporting in relation to issues like business ethics and promotional tactics. These theoretical investigations focus heavily on stakeholder theory, legitimacy theory, and the idea of information asymmetry. According to previous examination, a report that conveys an organization’s underlying ideology to both internal and external stakeholders is an essential aspect of market-oriented sustainability [21]. Reporting also allows businesses to detail their sustainable ideas, which could provide them an edge in the market [8]. In addition, the sustainability report is a part of the dialogue between management and stakeholders [22], and productive conversation about ESG spending can lessen information asymmetry [23] and safeguard credibility for the business [24].
The second type of study is an empirical inquiry into the factors that influence the selection of information to include in sustainability reports. Prior examinations [4,25] suggested that competitive pressure and stakeholder pressure play significant roles in sustainability reporting. Several firm characteristics influence reporting decisions, including firm size [26], industry category [27], profitability [28], analyst following [29], ownership/shareholder characteristics [30], and media exposure [4]. Boards with more demographic diversity, a higher proportion of women on the board, and independent directors are more likely to issue sustainability reports [31].
The third and final subfield of sustainability reporting studies the effects of reporting on investment decisions, stock market reactions, and non-financial outcomes. Changes in organizational culture and strategic decision-making are possible outcomes of adopting a sustainability reporting framework, as is the eventual decline in ecologically and socially harmful corporate practices [32]. Sustainability reports are used by investors to make educated investment decisions, according to the literature [33]. Sustainability reporting does help level the playing field between managers and investors, as hypothesized by a previous study [23], and this has been confirmed by prior research [18]. The first publication of a sustainability report has been shown to increase analyst forecast accuracy [34]. This may be due to a reduction in information asymmetry. The positive relationship between reporting and cumulative abnormal returns is stronger for firms in weak information environments [32], which may explain why sustainability reports generate positive abnormal returns for firms listed on emerging economy stock markets.
The third type of study is the one to which this one most closely relates. Our research is similar to others listed above in that we focused on reporting rather than the monetary impact of sustainability initiatives. However, this study departs in important ways from its predecessors. To begin, this study goes beyond the scope of many others by analyzing the effects of sustainability reporting on firm value over a period of years that extends well beyond the initial adoption of reporting standards [20]. Second, our research responds to the need for more studies examining the outcomes of sustainability reporting in developing economies [35]. Tobin’s q, the “most widely accepted firm value measure in the marketing, management, and finance literature” [36], is the third metric we use to assess the value of a company. In the fourth place, we look into the dynamic nature of the reporting–firm–value connection. Fifth, we are able to examine the effect of incorporating stakeholder feedback, external assurance, and additional sustainability requirements on firm value in a sample of reporting organizations because we have access to the actual sustainability reports. Table 1 summarizes the results of our research and other empirical studies on the topic. Christensen and coworkers provide a comprehensive summary of sustainability reporting studies [19].
The reliability of report data is also crucial to the usefulness of sustainability reporting. The efficiency of a signal is largely determined by its observability, the cost of copying, and its credibility. Since sustainability reports are made available online, observability is not a major concern in this area. Firms can reduce the risk of dishonest signaling by adopting one of the numerous available standardized reporting systems, but doing so comes at a hefty expense. Following the reporting requirements established by GRI and other similar non-governmental organizations [10] can be very costly. Imitating a company that has adopted such standards would entail a substantial time and energy investment on the part of management [37]. Stakeholders typically assume that non-financial disclosures are irrelevant, inaccurate, or deceptive [12]; hence, trustworthiness is the most important feature of effective reporting, given that sustainability reports are already observable and expensive. Greenwashing in sustainability reports has been called out by activists and institutional investors [13]. Companies may respond by taking measures to boost the reliability of their reporting. To begin, many companies have adopted standardized reporting frameworks like GRI, which mandate the disclosure of critical metrics regardless of whether or not doing so will enhance or damage the company’s reputation. Second, businesses may establish stakeholder panels to aid in the reporting process and validate the veracity of reports. Third, businesses can have their reports audited by hiring outside accounting firms, engineering firms, or specialized consultants. Lastly, businesses have the option of reporting against expanded sustainability criteria. For instance, a company that reports using the GRI framework may also be in compliance with ISO 26000 requirements; such evidence is frequently included in a GRI-approved report.

2.1. Sustainability Reporting and Firm Value

The research shows contradicting evidence that sustainability reporting may negatively affect market value despite the many reasons why sustainability reporting may work as a good signal to investors. The implementation of sustainability reporting might be costly for businesses [10], which is a possible downside. To maintain compliance with the requirements of the certification process and to incorporate firm-specific strategic considerations in reporting, businesses that use a sustainability reporting framework like GRI must devote substantial, continuous human and financial resources [4]. Managers of GRI-sanctioned businesses, for example, still need to devote considerable time and effort to developing sustainability initiatives that align with the organization’s mission, despite the fact that the GRI standards provide guidance about what to report (i.e., performance indicators) and how to report (i.e., reporting protocols). In order to facilitate sustainability reporting, managers may need to establish new procedures, establish new committees, or reorganize departments, all of which may call for more resources [37]. Investors nowadays do care about a company’s environmental and social activities, but there is a limit to how much they are willing to sacrifice in terms of financial success in order to do so [38]. Management has a duty to maximize profits for shareholders [39], but there is a risk that reporting costs will have a negative impact on profits for shareholders without compensating in other ways [40].
The situation is made worse because there is no obvious link between sustainability reporting and financial indicators. Because the measures for ESG success do not correspond with standard measurements for financial performance, shareholders and potential investors have a hard time determining if the costs associated with sustainability reporting actually generate shareholder wealth [41]. Investors may question managers’ motivations for spending money toward sustainability reporting if the activity does not appear to bring value. Because of this, agency costs may increase if a report is filed [41]. Investors may also realize the opportunity costs associated with sustainability reporting. When making strategic decisions, shareholders consider more than just the bottom line. They are also making predictions about whether or not strategic actions make the best use of available resources [11]. Some investors may worry that if management spends more time and money on sustainability reporting, it may come at the expense of more conventional means of making money, such as research and development or advertising [42]. Therefore, we suggest the following hypothesis:
H1: 
Sustainability reporting has a significant negative influence on firm value.
Sustainability reporting can be used as a tool for managers to gain credibility for their businesses [17]. Corporate reporting improves the public’s perception of a business [43]. By conforming to social norms and expectations about environmental, social, and governance (ESG) transparency, an organization can establish its credibility by using a sustainability reporting framework [4]. Among the various non-governmental organizations (NGOs) devoted to creating sustainable standards, GRI stands out as a legitimation agent; by submitting reports to GRI and joining the GRI community, businesses gain a measure of legitimacy [37]. In addition, the sustainability report can serve as a marketing communications tool by highlighting the company’s distinctive ESG initiatives, which may, in turn, boost the company’s reputation [4]. To prospective investors, a company that has adopted and is using a sustainability reporting framework demonstrates that it is “a legitimate corporate citizen with sustainable plans for the future” [4]. The favorable benefits of voluntary non-financial disclosures on financial disclosures have been documented [30]. Reporting should lessen the gap in knowledge between stakeholders because of the positive relationship between sustainability reporting transparency and financial reporting transparency. Sustainability reporting can help investors evaluate climate change and regulatory risks, two areas that are often overlooked in financial statements and letters to shareholders [44].
There has been a shift in the way investors view sustainability and non-financial reports. Improved disclosures of ESG problems have been called for by a variety of stakeholders, including institutional investors, regulators, academics, and the general public, in recent years [45]. The CEO of BlackRock, in prior research, pointed out that “better sustainability disclosures are in the interests of companies as well as investors” [32]. This is because “all investors...need a clearer picture of how companies are managing sustainability-related questions”. According to the literature on “signaling theory,” investors improve their ability to decode company communications as time goes on [46]. When it comes to climate risk, regulatory risk, and other sustainability risks that could affect future cash flows, investors should become more efficient at extracting material information [47], and they would be more likely to reward firms that meet their information expectations. Sustainability reporting is expected to become more effective and stronger as firms learn from their reporting experiences and adapt to investor expectations for sustainability communications [48]. As a result of this complementarity, the value of businesses that publish sustainability reports may rise. Therefore, we suggest the following hypothesis:
H2: 
The relationship between sustainability reporting and firm value is increasingly positive over time.

2.2. Sustainability Reporting and Customer Behavior

Customers are a key stakeholder group in sustainability reporting since there are several advantages for businesses to report and improve their sustainable performance from the perspective of their customers [49]. Positive effects on sales and market share, as well as customer satisfaction and loyalty, can result from being transparent about your company’s environmental performance. Companies are considerably motivated to adopt voluntary environmental practices due to the expectations of this group of stakeholders [49]. This group of stakeholders is made up of customers whose awareness of environmental concerns creates considerable demand to lessen the environmental impact of the firm’s activities. Consequently, the actions of businesses in their surrounding environments have a beneficial impact on customers’ actions and intentions to buy [50,51]. Since consumers are increasingly likely to take action to reward good corporate practices and punish bad ones, awareness of environmental initiatives plays a significant impact on buying behavior [49]. Prior research found that customers not only want companies to do good in the community, but they also want to know about it [52]. Sustainable customer loyalty efforts help businesses gain more socially responsible clients, which in turn boosts revenue [53]. A positive environment in which consumers are more likely to favorably evaluate and have more positive attitudes towards a company is created when consumers are well informed about the company’s sustainable practices [53]. Sustainable client satisfaction may lead to financial gains for businesses. Similarly, a previous examination conducted a content analysis on 45 environmental reports from US and non-US enterprises and showed that increased disclosure of environmental information about environmental management practices is significantly and positively correlated with revenue expansion [54]. However, prior research investigates whether or not GRI-compliant environmental reporting correlates with improved business results [55]. Disclosure of environmental information was found to be inversely correlated with sales growth in a sample of Swedish, Chinese, and Indian manufacturing enterprises.
Customers’ decisions to engage in environmentally friendly behaviors are influenced by various factors. These include their levels of environmental concern [56], their perception of their own effectiveness as consumers, their environmentally conscious behaviors [57], and their belief in the ability of their actions to address environmental issues [58]. According to prior research, it has been asserted that the implementation of environmental practices by enterprises has a positive impact on various aspects, such as customer purchase intention [59], customer loyalty [60], consumers’ decision-making process [61], and the financial success of the firm. However, it was shown that the decision of customers to purchase was not significantly influenced by the environmentally friendly activities of the firm [61]. In contrast, numerous existing studies have examined the intents of customers [62], their pleasure [63], and their preferences [64] regarding the environmental practices of firms. According to Paul et al. [62], there is a belief that the nation of origin can potentially impact the level of environmental concern among consumers. Singh and Gupta [65] conducted a study which revealed that a higher proportion of persons residing in developed countries, specifically 61.5% of Australians, exhibit a greater inclination towards the use of environmentally friendly products compared to their counterparts in developing nations. Furthermore, sustainability reporting involves disclosing a company’s environmental, social, and governance (ESG) practices and performance. When companies are transparent about their sustainability efforts, it can build trust with consumers. Customers are more likely to trust and support companies that are open and honest about their impact on the environment and society. Sustainability reporting provides consumers with information about a company’s sustainability initiatives, such as reducing carbon emissions, using sustainable materials, or supporting ethical labor practices. Informed consumers can make choices that align with their values, preferring products and services from companies that prioritize sustainability. Therefore, we suggest the following hypotheses:
H3: 
Sustainability reporting has a significant negative influence on customer behavior.
H4: 
The relationship between sustainability reporting and customer behavior is increasingly positive over time.

3. Research Method

3.1. Sampling and Data Collection

We gathered report-level data from Saudi petrochemical companies as well as data at the firm level from a variety of sources. Because of their significant impact on GDP, this analysis focuses on publicly Saudi petrochemical firms. Previous research revealed estimates that the petrochemical industry in Saudi Arabia accounts for 30 percent of the country’s GDP [66]. The function of petrochemicals in the manufacturing industry as a whole is crucial. In addition to leaving a large carbon footprint, the petrochemical sector is a major contributor to environmental problems such pollution of air and water supplies, depletion of soil quality, and destruction of natural habitats for wildlife. Since the petrochemical industry has a significant impact on the environment, adopting sustainable operations and performance is crucial for ensuring the sector’s long-term viability [67].
We began by cataloging all petrochemical firms that published a sustainability report between 2012 and 2022. We compared 100 random entries from the Sustainability Disclosure Database with the corresponding entries from the companies’ sustainability reports. There were no erroneous or incorrect items that we were able to locate, suggesting that the initial data gathering was successful. To begin with, we took the COMPUSTAT database and its population of companies from 2012 through 2022 and combined it with the data from the Sustainability Disclosure Database of the petrochemical firms. A professional data processing company was contracted to extract PDF versions of the reports from GRI’s Sustainability Disclosure Database (2022). This process also involved capturing relevant firm and report details, such as the publishing firm’s name, the report’s year, and a compilation of supplementary sustainability standards featured in the report. Data on both independent and control variables can be found in COMPUSTAT. The data obtained from the Sustainability Disclosure Database was combined with the population of enterprises available in the COMPUSTAT database, covering the time span from 2012 to 2022. After the final merge, the total sample size available for evaluating the hypotheses of this study was 12,308 firm-year observations.

3.2. Measures Operationalization

3.2.1. Dependent Variables

Our study has two dependent variables (i.e., firm value and customer behavior). Firm value, commonly known as market value, can be approximated using Tobin’s q [68]. The following arguments suggest that Tobin’s q is a valid valuation metric for businesses. Tobin’s q is a long-term performance-focused statistic, and sustainability spending is only expected to have a long-term (as opposed to short-term) impact on company value [17]. As a market-based measure of business value, Tobin’s q also accounts for the input of external stakeholders [69]. Third, unlike other common measures of firm value [17,69], Tobin’s q is less affected by differences in accounting practices, making it simpler to compare businesses in different sectors. In keeping with prior research in the field of marketing, we employ the Tobin’s q computation developed by prior research [70].
Tobin’s q = (MVE + PS + DEBT)/AT
where MVE = (market value per share on the last day of the fiscal year) (“total number of common shares outstanding”), PS = liquidating value of the company’s preferred shares, DEBT = (“current liabilities − current assets”) + (“book value of inventory”) + (“book value of long-term debt”), and AT = 2 book value of total assets”. Thus, “Tobin’s q is equal to the ratio of the sum of the market value of equity, preferred stock, and debt to the book value of total assets”.
Consistent with prior research [71], customer behavior was operationalized using revenue per cross-buy. Therefore, “behavior observed from customer I at time T, in this case average revenue per cross-buy”.

3.2.2. Independent Variable

The triple bottom line (TBL) technique for sustainability is reflected in sustainability reports [2]. The Global Reporting Initiative (GRI) reporting standards offer a standardized format for companies to share information about their effects on the economy, society, and the environment with their various stakeholders. According to the GRI archives, the analysis uses a binary variable called Sustainability Report with the value “1” if the company issued a sustainability report in year t and the value “0” otherwise.

3.2.3. Control Variables

In line with prior studies [72,73], our study included several control variables that have a significant impact on firm value. Firm size was operationalized as “the logarithm of the number of employees at t”. Financial leverage was operationalized as the ratio of total liabilities to total assets”, liquidity was operationalized as the ratio of current assets to current liabilities”, R&D intensity was operationalized as “ratio of research and development expense to total assets”, and sales growth was operationalized as “percentage year-to-year change in sales revenue”. Table 1 demonstrates the study variables’ operationalization.

3.3. Other Factors

The Saudi Government places significant emphasis on the concept of sustainability and sustainable development as part of a concerted effort to transition the economic model away from a rentier state towards a more sustainable economy [74]. This commitment is reflected in the promotion and encouragement of circular economy (CE) initiatives, as outlined in the KSA 2030 vision. This is accompanied by many additional measures, such as promoting economic diversification as an alternative to a heavy reliance on crude oil exports. In 2008, the “Saudi Arabian Monetary Authority” (SAMA) implemented a mandate that required a majority of enterprises, specifically those in the petrochemical industry, to adopt complete “International Financial Reporting Standards” (IFRS) [74]. According to the Saudi Companies Law of 2015, it is mandatory for companies to prepare their financial statements in adherence to established accounting standards [75]. The petrochemical sector in Saudi Arabia accounts for around 30% of the nation’s overall gross domestic product (GDP) [66]. The petrochemical sector has a substantial carbon dioxide (CO2) footprint, alongside its significant contribution to other adverse environmental consequences such as air and water pollution, soil degradation, and biodiversity depletion [66]. Consequently, it is of utmost significance for the petrochemical sector to adopt sustainable practices and enhance its operational efficiency in order to mitigate its environmental footprint and secure the industry’s long-term viability [76].
During the sample period, central banks across the globe implemented multiple iterations of quantitative easing [77]. The significance of quantitative easing measures implemented by central banks in developed countries, with a specific focus on the US Federal Reserve (Fed), lies in their ability to disrupt the equilibrium values of asset markets, tail risks, exchange rates, and sustainability reporting [78,79]. According to the research conducted by Cortes et al. [77], the spillover effects resulting from the Federal Reserve’s quantitative easing (QE) policies might have significant negative consequences for developing market economies, including Saudi Arabia. Consequently, we incorporated the size of the Fed’s assets (mp) as a variable that influences the valuation of firms. “The US Federal Reserve’s assets and economic policy uncertainty” can be found respectively at https://fred.stlouisfed.org/series/WALCL (accessed on 24 October 2023) and https://www.policyuncertainty.com/ (accessed on 25 October 2023).
The concept of economic policy uncertainty pertains to the potential economic risks that arise from the lack of clarity surrounding forthcoming government policies and regulatory frameworks [80]. This paper focuses on economic policy uncertainty in the home country (i.e., Saudi Arabia). The implementation of dynamic economic policies may result in additional expenses and uncertainty for enterprises’ long-term investment endeavors [79]. The concept of global economic policy uncertainty (epu), as introduced by Baker et al. [79,81], is a significant factor that influences sustainability reporting [82,83] and has the potential to impact the value of firms.

4. Analysis and Results

The statistical analysis revealed that the entire model exhibited a significant level of statistical significance (as indicated by the likelihood-ratio test with a p < 0.000 value). This suggests that the model effectively differentiated between firms that provided sustainability-related information and those that did not. The results of the Hosmer and Lemeshow test suggested that the model exhibited a satisfactory level of fit. The pseudo-R-squared values of the model were determined to be 0.3107 for Cox and Snell R-squared and 0.4019 for Nagelkerke R-squared, indicating a good fit [84]. The fit of the models and terms is assessed by means of the Akaike information criterion (AIC) [85], Bayesian information criterion (BIC) [86], and log-likelihood metrics. In each instance, the residuals of the most optimal model are subjected to a range of diagnostic tests, including the Kolmogorov–Smirnov test to assess the adequacy of the distribution fit, a non-parametric dispersion test to evaluate overdispersion, a test to identify zero inflation, an examination for outliers, and a test for heteroskedasticity. In order to mitigate the potential endogeneity issue arising from the interdependence or independence of the dependent variables, an endogeneity test was developed. The Durbin and Wu–Hausman tests were conducted using the STATA software 16. The obtained results, namely the Durbin Chi2(1) statistic of 1.6702 with a p-value of 0.3129 and the Wu–Hausman F(13, 179) statistic of 1.6120 with a p-value of 0.3605, indicate that we may accept the null hypothesis (H0). This implies that the variables under consideration are exogenous, and we can confidently exclude any concerns related to endogeneity.
Before choosing between a random effect and a fixed-effects panel regression model, we first conduct a Hausman specification test [87]. The Hausman specification test’s null hypothesis is rejected (m = 391.60, d.f. = 19, p < 0.01), leading us to conclude that a fixed-effects model is better suited to the data. The panel model with fixed effects is constructed progressively. Model 1 is made up of the regulating factors. The list of safeguards is expanded in Model 2 to include a sustainability report. The third model has a time effect. Sustainability report, temporal effect, and the interaction of sustainability report*temporal effect make up the set of control variables in Model 4. Here are the technical details of Model 4:
Tobin’s qi,t = “β1 Sustainability Report i,t + β2 Temporal Effect i,t + β3 Sustainability Report ∗ Temporal Effect i,t + β4 SIZE i,t + β5 Financial Leverage i,t + β6 Liquidity i,t + β7 R&D Intensity i,t + β8 Sales Growth i,t + β9 mp i,t + β10 epu i,t + αi + ui,t”.
Behavior i,t = “β1 Sustainability Report i,t + β2 Temporal Effect i,t + β3 Behavior ∗ Temporal Effect i,t + β4 SIZE i,t + β5 Financial Leverage i,t + β6 Liquidity i,t + β7 R&D Intensity i,t + β8 Sales Growth i,t + β9 mp i,t + β10 epu i,t αi + ui,t”.
In the fixed-effects model, heterogeneities between businesses are captured by the αi-th firm-specific intercept, which is denoted by i, and the i-th error term is denoted by ui,t. The analysis makes use of Newey–West standard error estimations. Standard errors calculated using the Newey–West method are resistant to the heteroscedasticity and autocorrelation that frequently arise in panel data [88]. The fixed-effects approach has the advantage of accounting for company characteristics that are constant throughout time, whether or not these are actually measured. While the fixed-effects model does take into account the possibility of endogeneity due to omitted variable bias, it does not take into account endogeneity due to selection bias. Sustainability reporting firms are not randomly sampled from a larger population; rather, organizations voluntarily submit sustainability reports; therefore, selection bias may confound the findings of this study [19]. Since endogeneity may affect the correlation between the sustainability report and Tobin’s q, we need to test this hypothesis. We use the instrument-free, control-function approach pioneered by previous examination [89] and recently popularized in the marketing literature to account for selection bias and other potential sources of endogeneity [90]. To account for the possibility of an endogenous regressor in the fixed-effects panel model, we incorporated a residual term into the equation.

4.1. Descriptive Statistics and Correlation Matrix

Table 2 shows the descriptive statistics of our study variables. The construct correlation matrix is presented in Table 3. Despite the low correlation coefficients between the independent and dependent variables, we nonetheless calculate variance inflation factors (VIF) to test for multicollinearity. To determine if multicollinearity is an issue, we utilize a cutoff value of 4.00 [91]. The VIF ranges from 1.370 to a high of 2.89. Multicollinearity does not have an effect on the regression coefficients, as shown by the VIF values.

4.2. Hypotheses Testing

Table 4 revealed the analysis of our study regarding the impact of a sustainability report on firm value. The results revealed that the sustainability report has a significant negative impact on Tobin’s q in Model 2–Model 5, demonstrating support for H1. The analysis also indicated that the interaction effect “sustainability report ∗ temporal effect) was significant and positive in both Model 4 and Model 5. In addition, the analysis indicated that the “sustainability reporting-Tobin’s q link” became positive over time, supporting H2.
Table 5 indicates the analysis of our study regarding the impact of a sustainability report on customer behavior. The results show that the sustainability report has a significant negative impact on customer behavior in Model 2–Model 5, showing support for H3. The analysis also indicated that the interaction effect “customer behavior ∗ temporal effect) was significant and positive in both Model 4 and Model 5. The analysis indicated that the “customer behavior- Tobin’s q link” became positive over time, supporting H4. These findings indicate that different stakeholders (such as shareholders and customers) may react similarly to the information that companies reveal regarding their sustainable responsibilities since they share comparable expectations and information demands. The analysis demonstrates that some of the control factors (i.e., sales growth and R&D intensity) have a significant impact on Tobin’s q, which is consistent with prior research [36,92]. Moreover, the analysis also indicated the control function (i.e., “Residual”) was not significant (p > 0.10), demonstrating no concern regarding the endogeneity issue [93]. In addition, our analysis revealed that both the Fed’s assets (mp) and the global economic policy uncertainty have a significant impact on firm value.

5. Discussion and Conclusions

5.1. Key Findings

This paper explores the impact of sustainability reporting on customer behavior and firm value (i.e., “Tobin’s q”) in Saudi petrochemical companies. Drawing on the signaling theory, we have developed a model to explain the relationships between our study variables.
The findings revealed that sustainability reporting has a significant negative impact on firm value. These results are consistent with prior research [72,73]. This result is also in line with the notion that sustainability reporting has a negative impact on firm value in the short term [7,16]. This result indicated that the ability of petrochemical companies to report more on sustainable information will not lead to an increase in firm value. One possible explanation for the negative reaction of shareholders to more sustainable reporting is the “win–win” argument [94]. Unless the benefits surpass the expenses, shareholders do not seem to value the costs associated with achieving improved sustainable performance. There are hidden expenses associated with environmentally responsible business practices, such as the increased price tag of pollution control and protection [95]. Financial performance improvement is challenging [96]. This is because investments in environmental protection (emissions reduction) may outweigh the savings realized by doing so. The analysis also revealed that the influence of sustainability reporting on firm value increases over time. This finding is also consistent with prior research that demonstrated that the sustainability reporting–firm value relationship increases over time [72]. This finding further supported the idea that sustainable reporting strategies should prioritize shareholder value maximization.
Our analysis also revealed that the influence of sustainability reporting on customer behavior is negative. These findings are in line with prior research that revealed a significant negative influence of sustainability reporting on customer behaviors [73]. However, this influence became positive and increased over time. This result is aligned with previous examinations that indicated that sustainability reporting–customer behavior link increases over time [11,72,73].

5.2. Theoretical Implications

This study offers several theoretical contributions to sustainability reporting literature. This paper answered the call for more examination of the impact of sustainability reporting on firm value and customer behavior [72]. Long-term effects of sustainability reporting on company value are an area where we fill a gap in the literature [4,35]. Our findings further address a need for studies examining the association between sustainability reporting and business value in emerging markets [20]. Though previous research has shown a positive stock market reaction to the first adoption of a sustainable reporting system [20,35], our analysis shows the opposite, with a negative primary effect on firm value and customer behavior. In the context of the marketing literature, this result is a major surprise.
Reporting on Tobin’s q has a negative main effect, but the interaction effect of sustainability reports and temporal effects is positive; thus, this only reveals part of the picture. The main effect and interaction effect parameter estimations suggest a favorable trend in the link between sustainability reporting and Tobin’s q after 2019. Over the past decade, shareholders’ views on sustainability reports have shifted. Institutional investors are among those pushing for greater disclosure from businesses regarding their sustainability efforts [97]. Positive findings suggest that businesses take on board this criticism and gradually enhance their sustainability signals as a result. Now that the direct costs, agency costs, and opportunity costs of reporting have been established, the reporting literature may shift its focus to best practices for report form and the framing of sustainability activities in ways that appeal to a wide variety of stakeholders. Our results also revealed that sustainability reporting has a significant negative impact on customer behavior. However, this influence increases over time. Thus, improved sales growth and better operational efficiency arise from clients being more concerned about sustainable reporting. Moreover, our study revealed that the Fed’s assets and the global economic policy uncertainty have a significant impact on the firm value, which has been neglected by prior research.
Our research confirms the fundamental assumptions of signaling theory. Effective signals are both expensive and forthright [98]. If a company wants to show that it is dedicated to marketing strategies that are consistent with and beneficial to sustainable economic development, it should use sustainability reporting. Not only can reporting have a detrimental impact on a company’s value right from the bat, but it also has the obvious financial implications associated with it. Institutional norms around reporting have shifted, and investors have sought more and better sustainability disclosures; thus, firms that embraced these requirements before 2019 may have suffered in the short term. Obviously, the context in which a signal is received might affect how it is understood. As the sustainability movement matures, investors are learning to value transparency and see reports as a good indicator. The context provided by industry is also crucial; thus, this facet of the signals environment must not be disregarded.

5.3. Managerial Implications

Over the past few years, business leaders have asserted that disclosing their spending and efforts on sustainability to the public boosts the worth of their company [7]. It is possible that by voicing their convictions, they made them real. The sustainability report had a negative main effect but a favorable interaction effect. Investors first saw reports as a bearish indication; however, this perception shifted throughout the course of 2012. While it is true that early adopter companies who released sustainability reports may not have witnessed a boost in valuation, such reports have grown increasingly significant and valuable as an indication of a company’s dedication to promoting sustainable economic growth in recent years. If your company is not already reporting, you should start if you want to reap the benefits of this trend.
Customers are a key stakeholder group when considering the effect of sustainable reporting on consumer behavior, as the benefits to businesses from enhancing and disclosing such information are numerous [99]. Superior sustainable performance and its disclosure can result in both monetary (increased sales and market share) and non-monetary (higher customer satisfaction and loyalty) benefits. The expectations of this group of stakeholders considerably stimulate enterprises to adopt voluntary sustainable processes [49], and customers’ growing awareness of environmental problems is a major driver of this demand. Therefore, consumers’ actions and intentions to buy are positively influenced by businesses’ commitment to sustainability [54,100]. Consumers desire to know that corporations care about society, as demonstrated by research by prior research [52]. More and more socially conscious consumers are purchasing from companies that have implemented sustainable efforts to reward their loyalty [53,54].
Although initially expensive, organizations that produce reports should maintain that practice. If a company starts reporting, it should keep doing it since it will have positive long-term implications on its reputation and internal learning. The positive trend in the association between reporting and firm value through time and across industries is indicative of sustainability reporting’s rise to prominence in the business world. Managers of businesses that report on sustainability should have patience. They should start seeing profits within the next few years, even if they have not yet. Managers in the transportation, logistics, and utility industries might greatly benefit from this guidance.

6. Limitations and Directions for Future Studies

There are limitations to this study despite the many ways in which it advances theory and practice. To start, our research demonstrates how crucial it is to consider context when studying sustainability. When we utilize both a global, static measure of reporting and a dynamic measure of reporting that accounts for shifts across time, we obtain a clearer picture of reporting. The connection between reporting and business value is influenced by the signaling environment. We caution that our findings may only be generalizable to other emerging financial markets that are conceptually comparable to the Saudi Arabian market. Our study did not explore the link between sustainability reporting and firm value in a developed financial economy, in which transparency and agency costs are greater concerns. The impact of sustainability reporting on firm value may vary in developed economies compared to developing ones. Second, although managers may place a high premium on Tobin’s q, they may also place a high premium on other valuation metrics. The growth rates of large, established companies, for instance, are constrained by characteristics associated with age and size; therefore, their managers may be interested in metrics like return on assets (ROA) or return on equity (ROE). Third, we have only looked at petrochemical companies; therefore, our findings cannot be generalized to other types of businesses. It could be instructive to replicate this research in different fields. Fourth, our analysis exclusively focuses on firms that willingly disclose information regarding their sustainability endeavors. Therefore, we are unable to make any inferences regarding firms that are legally mandated to issue sustainability reports. It would be beneficial to replicate this research in a market where there are standardized sustainability disclosure requirements for all firms or in a market where almost all listed firms voluntarily opt to report. This approach could help mitigate selection bias and minimize endogeneity issues by deliberate design. Finally, this is the first research to establish a negative correlation between sustainability reporting, business value, and consumer behavior. However, some reports may have inherent qualities that make them more useful to the investing community than others, hence increasing the value of the issuing company. Therefore, it may be instructive to use computer-assisted text analysis to probe the accuracy of reporting.

Author Contributions

Methodology, G.A.; Software, G.A.; Validation, G.A.; Formal analysis, G.A.; Investigation, O.A.A.; Resources, O.A.A.; Writing—original draft, O.A.A.; Writing—review & editing, G.A.; Project administration, G.A.; Funding acquisition, O.A.A. All authors have read and agreed to the published version of the manuscript.

Funding

This research was funded by the Deanship of Scientific Research at Najran University for funding this work under the Research Priorities and Najran Research Funding Program, Grant Code (NU/NRP/SEHRC/12/1).

Institutional Review Board Statement

The study was conducted according to the guidelines of the Declaration of Helsinki and approved by the Ethics Committee of the Deanship of Scientific Research (Grant: NU/NRP/SEHRC/12/1, date of approval: 15 May 2023).

Informed Consent Statement

All subjects gave their informed consent for inclusion before they participated in this study. This study was conducted in accordance with the Declaration of the authors’ universities, and the protocol was approved by the Ethics Committee.

Data Availability Statement

Data will be available upon request.

Acknowledgments

The authors are thankful to the Deanship of Scientific Research at Najran University for funding this work under the Research Priorities and Najran Research Funding Program, Grant Code (NU/NRP/SEHRC/12/1).

Conflicts of Interest

The authors declare no conflict of interest.

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Table 1. Variables’ operationalization.
Table 1. Variables’ operationalization.
VariableOperationalizationData Source
Tobin’s qRatio of the sum of the market value of equity, preferred stock, and debt to the book value of total assets.Compustat
Sustainability ReportCoded 1 if the firm issued a sustainability report, 0 otherwise.“GRI”
Customer Behavior“Behavior observed from customer i at time t, in this case average revenue per cross-buy.Compustat
Firm SizeMeasured as the logarithm of the number of employees at t.Compustat
Financial LeverageRatio of total liabilities to total assetsCompustat
LiquidityRatio of current assets to current liabilities.Compustat
R&D IntensityRatio of research and development expense to total assets.Compustat
Sales GrowthPercentage year-to-year change in sales revenue.Compustat
Table 2. Descriptive statistics.
Table 2. Descriptive statistics.
VariableMeanSD
Tobin’s q1.6051.273
Customer Behavior16.26918.164
Sustainability Report0.1380.369
Firm Size12.38619.327
Financial Leverage0.4130.382
Liquidity3.2703.401
R&D Intensity0.0570.060
Sales Growth0.1050.199
Table 3. Correlation matrix.
Table 3. Correlation matrix.
12345678
1. Tobin’s q1
2. Sustainability Report −0.03 *1
3. Customer Behavior 0.19 *−0.12 *1
4. Size 0.080.090.071
5. Financial Leverage 0.02 *0.080.02 *0.01 *1
6. Liquidity0.08 *0.01 *0.06 *0.04 *0.02 *1
7. R&D Intensity 0.05 *0.06 *0.15 *0.02 *0.15 *0.24 *1
8. Sales Growth0.10 *0.14 *0.23 *0.01 *0.04 *0.11 *0.26 *1
* p < 0.05.
Table 4. “Fixed effects panel regression model”: sustainability report-Tobin’s q.
Table 4. “Fixed effects panel regression model”: sustainability report-Tobin’s q.
Variable Tobin’s q (1)Tobin’s q (2)Tobin’s q (3)Tobin’s q (4)Tobin’s q (5)
EstimateS.EEstimateS.EEstimateS.EEstimateS.EEstimateS.E
Sustainability Report --−0.159 **0.0470.138 **0.0600.138 **0.0540.140 **0.093
Temporal Effect----0.049 *0.0230.063 *0.0600.034 *0.030
Sustainability Report ∗ Temporal Effect------0.077 *0.0410.070 *0.042
Firm Size 0.029 *0.0530.094 *0.0310.018 *0.0490.039 *0.0430.029 *0.063
Financial Leverage −0.024 *0.027−0.372 *0.039−0.014 *0.030−0.044 *0.029−0.022 *0.090
Liquidity −0.044 *0.024−0.048 *0.014−0.182 **0.015−0.020 *0.054−0.015 *0.045
R&D Intensity 7.029 **4.0206.129 **3.3906.032 **2.5315.327 **3.5595.048 **4.039
Sales Growth0.163 **0.0420.136 **0.0260.357 **0.0250.309 **0.0460.254 **0.051
Log-Likelihood7035.3945639.2305329.2375632.3095278.2345612.4306027.3495679.3086023.3275693.637
AIC26,039.62723,360.12823,829.10223,338.16222,323.19923,328.12723,331.89723,329.14322,738.91022,326.728
BIC28,327.12028,229.60228,240.63928,234.62726,239.62428,239.12927,830.63626,803.63726,829.93626,830.917
Mp0.027 *0.0040.041 *0.0030.062 *0.0050.049 *0.0020.037 *0.003
Epu0.059 *0.0020.106 *0.0010.080 *0.0020.056 *0.0080.061 *0.001
Year EffectYesYesYesYesYesYesYesYesYesYes
Residual--------−0.0320.08
Observations 12,308 12,308 12,308 12,308 12,308
R2 0.837 0.828-−0.821 0.840 0.8840
* p < 0.05; ** p < 0.01.
Table 5. “Fixed effects panel regression model”: sustainability report-customer behavior.
Table 5. “Fixed effects panel regression model”: sustainability report-customer behavior.
Variable Customer behavior (1)Customer behavior (2)Customer behavior (3)Customer behavior (4)Customer behavior (5)
EstimateS.EEstimateS.EEstimateS.EEstimateS.EEstimateS.E
Sustainability report --−0.116 **0.0410.109 **0.0540.217 **0.0430.318 **0.061
Temporal Effect----0.058 *0.0390.053 *0.0590.064 *0.086
Sustainability Report ∗ Temporal Effect------0.061 *0.0430.090 *0.034
Firm size 0.1320.0800.1650.0390.0190.0650.0940.0800.0430.028
Financial Leverage −0.058 *0.064−0.179 *0.046−0.053 *0.028−0.051 *0.068−0.064 *0.042
Liquidity −0.056 *0.049−0.084 *0.060−0.158 *0.050−0.065 *0.041−0.0390.089
R&D Intensity 4.307 **1.0543.439 **1.5474.430 **1.1254.840 **1.4384.328 **2.477
Sales Growth0.130 *0.0480.167 **0.0190.241 **0.0440.159 **0.0690.290 **0.052
Log Likelihood6892.2094397.2314397.3724397.8934399.3094397.6294397.8314397.8354397.8284397.381
AIC20,391.41220,210.36520,212.98220,392.20920,391.23020,391.25620,391.28220,391.93720,391.26120,391.345
BIC21,840.63921,830.272218,321.2921,830.82721,830.92021,830.92021,830.02821,830.63021,830.65321,830.647
Mp0.038 *0.0060.056 *0.0040.073 *0.0080.059 *0.0030.047 *0.009
Epu0.042 *0.0030.135 *0.0020.044 *0.0030.047 *0.0070.052 *0.004
Year effectYesYesYesYesYesYesYesYesYes Yes
Residual--------−0.0170.06
Observations 12,308 12,308 12,308 12,308 12,308
R2 0.794 0.792 0.746 0.790 0.790
* p < 0.05; ** p < 0.01.
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Alghamdi, O.A.; Agag, G. Unlocking the Power of Reporting: Exploring the Link between Voluntary Sustainability Reporting, Customer Behavior, and Firm Value. Sustainability 2023, 15, 15584. https://doi.org/10.3390/su152115584

AMA Style

Alghamdi OA, Agag G. Unlocking the Power of Reporting: Exploring the Link between Voluntary Sustainability Reporting, Customer Behavior, and Firm Value. Sustainability. 2023; 15(21):15584. https://doi.org/10.3390/su152115584

Chicago/Turabian Style

Alghamdi, Omar. A., and Gomaa Agag. 2023. "Unlocking the Power of Reporting: Exploring the Link between Voluntary Sustainability Reporting, Customer Behavior, and Firm Value" Sustainability 15, no. 21: 15584. https://doi.org/10.3390/su152115584

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