Communication via responsibility reporting and its effect on firm value in Finland

Abstract

n this paper, we first analyzed the responsibility reporting literature with an emphasis on the linkage between responsibility reporting and a firm's performance and valuation. Based on the literature review, we developed a research question: How does communication via responsibility reporting affect firm value? We analyzed the market valuation of listed Finnish firms through a conventional valuation model combined with responsibility reporting. The starting point for our valuation was the Ohlson model. We expanded upon the conventional valuation by studying whether communication via responsibility reporting is related to firm valuation. Our research question is linked to the broader academic question of whether earnings worth as an information source has been erased over the last few years. In addition, we contribute to the literature that tries to understand the link between corporate social responsibility and firm performance/share performance. Specifically, we focused on responsibility reporting according to the Global Reporting Initiative (GRI) and especially on whether the existence of these reports provides a further explanation for firm value. Our sample was a population type that covered all listed Finnish firms that have adopted GRI. No other responsibility reporting practice was used by listed firms in their responsibility reporting communication during the years 2002–2005. The other necessary information for valuation models was obtained from Thomson Financial Services (commercial database). The applied model supported the conclusion that communication via GRI responsibility reporting is an important explanatory factor for a firm's market value. The result indicates that responsibility reporting is a part of a firm's communication tools in order to decrease information asymmetry between managers and investors. In other words, GRI responsibility reporting is called for in order to produce a more precise market valuation of a firm. Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment.