Political Cost Theory of Environmental Disclosure

As indicated above, the development of disclosure theories has been influenced by the advancement of other accounting theories, such as agency theory and positive accounting theory (Jensen & Meckling 1976; Watts & Zimmerman 1978). In agency theory (Jensen & Meckling 1976), a firm is treated as a nexus of contract in which interested parties are trying to maximise their welfare. According to this assumption, it does not make sense to assume that a firm has a motive (e.g. to engage in environmental or social commitments) such as that highlighted by the social perspective discussed earlier. The personalisation of a firm contradicts the agency concept, which assumes that conflicting individual objectives (although some may be congruent) are brought into disclosure equilibrium. 

Using this self-interest assumption, Watts and Zimmerman (1978) argue that certain groups in society, such as government and non-government organisations, trade unions, and consumer groups, act upon their own interests to maximize their utility. These groups of stakeholders will lobby the political sector to impose costs on corporations through wealth transfer devices, such as taxes, wage claims, product boycotts and subsidies. It seems that the notion of proprietary costs is more comprehensive than political costs because proprietary costs include political costs and other costs (e.g. competition in a market entry game). However, due to the difficulty of measuring the other types of proprietary costs, most studies of the economic motives of environmental disclosure have used the political costs notion . 

Watts and Zimmerman (1978) suggest that the magnitude of political costs is highly dependent upon political visibility. Politically visible firms easily attract public attention and become the potential targets of interested parties. These firms need to address visibility issues in order to reduce public attention and its consequences. In order to do so, these firms may employ a variety of devices, such as a media campaign, government lobbying and discretionary accounting practices to reduce reported earnings (Watts & Zimmerman 1978). Several studies provide evidence that visibility triggers public scrutiny, which leads to political costs and gives incentive for corporate responses to social, environmental and political issues (Belkaoui & Karpik 1989; Friske 1994; Bowen 2000; Belen & Manuel 2005; Gill-de-Albornoz & Illueca 2005). 

Firm visibility comes in different forms depending on the aspect that constitutes the visibility. For example, a firm can be visible in social and political aspects (e.g. underpaid labour, occupational health and safety, monopoly power) as well as environmentally (e.g. polluting, involved in environmental accidents, exploiting natural resources). In the environmental disclosure literature, it is argued that firms will disclose more environmental information to avoid the political costs that come from environmental issues (e.g. Yue et al. 1997; Bae 1998; Patten & Trompeter 2003). The following sections describe the concept of environmental visibility as a subset of political visibility and the fundamental incentives for environmental disclosure.

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