How Firms Respond to Mandatory Information Disclosure

When new institutional pressures arise, which organizations are particularly likely to resist or acquiesce? When subjected to new information disclosure mandates, an increasingly popular form of market-based government regulation, which types of organizations are more likely to subsequently improve their performance in ways that meet policy makers’ objectives? This study addresses these questions. We build on institutional theory to propose that several organizational characteristics moderate how organizations respond to institutional pressure, and provide among the first evidence characterizing organizations’ heterogeneous responses to information disclosure regulations. We hypothesize that establishments more proximate to their headquarters will have greater access to their capabilities and be subjected to increased monitoring, both of which will cause these establishments to be more responsive to institutional pressures. We also hypothesize that establishment size and ownership structure increase the salience of institutional pressures, which increases organizations’ responsiveness to institutional pressures. We test our hypotheses in the context of one of the most prominent disclosure programs, the U.S. Environmental Protection Agency’s Toxic Release Inventory. We examine how thousands of establishments responded to the regulator’s requiring them to publicly disclose emissions of hundreds of toxic chemicals, and take advantage of an exogenous shock that occurred when the agency expanded the number of chemicals required to be reported. We find that establishments that improved more rapidly were more proximate to their headquarters, smaller than average, and were owned by private firms. We also found that establishments near their headquarters and private firms more aggressively reduced particularly harmful emissions. Finally, we found that large firms reduced their overall emissions, do not significantly reduce particularly harmful emissions, relative to smaller firms. These results may provide evidence for the characteristics of “good citizen” or “green washing” firms. We highlight the important implications of our results both for the further development of institutional theory and for information disclosure policy makers as well as those who use such disclosed information.