Functional mechanisms of mandatory corporate environmental disclosure: an empirical study in China

This paper analyzes the functions of a government-oriented disclosure program in China, which rates company environmental performance into five colors and discloses the results to the public. The rating results and their annual changes during 2005–2007 are statistically summarized by using the detailed database provided by municipal environmental protection bureau of the study area: Changshu city in Jiangsu province. The reflexive, deterrent and enhancement mechanisms, preliminarily identified for the disclosure program, are qualitatively evaluated by using the information collected by onsite interviews to 32 program participating firms. In overall, the firms' environmental performances have been improved. The companies with worse rating records would be more likely to improve their environmental performances in the following years. The disclosure program encourages the firms to be more reflexive to their internal environmental problems. The deterrent and enhancement functions of the program are weak due to the marginal pressure from the classified stakeholders such as investors, business partners and creditors. The influence of the public, such as neighboring communities and environmental NGOs, is weak too. Encouraging serious reactions of firm's stakeholders to the disclosed rating results should be addressed in order to enhance the effectiveness of the disclosure strategy.