Document Type : Research Paper

Authors

• Mandana Taheri ¹
• Asma Sajedifar ²

¹ Assistant Professor, Faculty of management and accounting, University of Allameh Tabatabai

² MSc. Accounting, Allameh Tabataba'i University, Faculty of Management and Accounting, Tehran

Abstract

This study investigates the effect of earnings per share (EPS) disclosure pressure on the level of environmental information disclosure among companies listed on the Tehran Stock Exchange, with an emphasis on the moderating role of corporate governance. Using data from 110 firms over the period 2012-2023 and employing a panel data approach, the results indicate that pressure to disclose EPS has a significant negative impact on environmental disclosure levels. Meanwhile, corporate governance mechanisms, through enhanced transparency and oversight, can help mitigate this adverse effect. However, the findings reveal that corporate governance has not been fully effective in moderating the negative influence of EPS disclosure pressure on environmental disclosures. These results provide valuable insights for policymakers and corporate managers aiming to strengthen governance frameworks and improve the quality of environmental reporting.

Introduction

In emerging capital markets, listed firms increasingly operate under dual, and potentially conflicting, pressures: capital market expectations to meet or exceed earnings per share (EPS) benchmarks, and growing stakeholder demands for transparent environmental reporting. While EPS targets sharpen the focus on short-term profitability, they may also create incentives to downplay or delay disclosures that highlight environmental risks and costs. Prior evidence on the relationship between earnings pressure and environmental disclosure is scarce and primarily drawn from developed markets, where regulatory enforcement and governance infrastructures differ markedly from those in developing economies. Against this backdrop, the present study examines whether EPS disclosure pressure reduces the extent of environmental disclosure and explores the potential moderating role of selected corporate governance mechanisms in the context of the Tehran Stock Exchange.
 

Literature Review

The literature on sustainability reporting highlights environmental disclosure as a primary channel through which firms seek legitimacy, respond to regulatory and societal pressures, and communicate long-term strategic commitments. Studies grounded in legitimacy theory suggest that firms expand environmental reporting when facing public scrutiny, whereas agency-based analyses emphasize that managers may strategically withhold or bias such information if it threatens their private benefits. Research on earnings pressure shows that managers under tight EPS targets may engage in real activities management, accrual manipulation, or selective disclosure to maintain a favourable financial narrative, but only a few studies explicitly link EPS-related pressures to non-financial reporting, particularly environmental disclosure. At the same time, corporate governance characteristics, such as institutional ownership, board independence, and CEO tenure, are argued to constrain opportunistic behaviour and enhance transparency, although evidence from emerging markets indicates that governance structures may be less effective where ownership is concentrated, and investor protection is weak. This study extends the literature by integrating these strands into a single framework and providing evidence from an underexplored institutional setting.

Methodology

The empirical analysis is based on an unbalanced panel of 110 non-financial firms listed on the Tehran Stock Exchange over the period 2012–2024. Environmental disclosure is measured using a six-item checklist applied to annual reports and board of directors’ reports, covering pollution prevention, waste reduction, recycling initiatives, conservation of natural resources, compliance with environmental regulations, and investments in environmentally friendly technologies. The firm-year disclosure index is calculated as the ratio of disclosed items to the total number of items. EPS disclosure pressure is operationalized as a composite index obtained via factor analysis of several proxies that capture both financial dynamics and managerial incentives, including EPS growth pattern and volatility, overinvestment as a proxy for managerial overconfidence, managerial ability scores derived from a data envelopment analysis framework, industry competition measured by a sales-based Herfindahl–Hirschman index, and a market-specific investor sentiment indicator. Corporate governance is captured through a separate factor-based index that combines the presence of institutional blockholders, the proportion of independent directors on the board, and CEO stability, defined as the absence of CEO turnover in the previous two years. Panel regression models with firm and year fixed effects are estimated, controlling for firm size, leverage, profitability, loss status, inventory and receivables intensity, auditor size, audit opinion type, and liquidity. Standard panel-data diagnostics and robust estimation techniques are employed to address multicollinearity, autocorrelation, and heteroskedasticity.

Results

The regression results show a negative and statistically significant association between EPS disclosure pressure and the level of environmental disclosure, indicating that firms exposed to stronger pressure to maintain favourable EPS figures tend to provide less extensive environmental information. This effect remains robust across alternative specifications and after controlling for firm-specific, industry, and time-varying factors. The composite corporate governance index exhibits a positive and significant relationship with environmental disclosure, suggesting that firms with higher institutional ownership, more independent boards, and more stable executive leadership are generally more inclined to report on environmental issues. However, the interaction term between EPS disclosure pressure and the governance index is not statistically significant, implying that the selected governance mechanisms do not materially mitigate the adverse impact of EPS pressure on environmental disclosure. Additional sensitivity analyses confirm that the main inferences are not driven by outliers, alternative variable definitions, or different estimation approaches.

Discussion

These findings suggest that, in the examined emerging-market context, environmental disclosure is treated by managers as a discretionary margin that can be curtailed when the pressure to meet EPS expectations intensifies. From a legitimacy-theory perspective, managers appear to prioritize the short-term legitimacy gained from delivering target EPS over the longer-term legitimacy associated with transparent environmental reporting. From an agency-theory viewpoint, the results reflect a misalignment between shareholders’ broader interest in credible sustainability disclosure and managers’ incentives tied to short-term financial performance. The positive direct effect of corporate governance on environmental disclosure indicates that stronger monitoring and oversight can foster more extensive reporting; yet the lack of a significant moderating effect reveals the limitations of these governance arrangements when confronted with intense EPS pressure. In markets characterized by concentrated ownership, evolving regulation, and relatively weak enforcement, formal governance structures may improve average transparency but remain insufficient to prevent managers from sacrificing environmental communication under earnings stress.

Conclusion

The study contributes to the literature by developing a multidimensional measure of EPS disclosure pressure, focusing specifically on environmental disclosure in an emerging capital market, and assessing the conditional role of corporate governance. The evidence shows that EPS-related pressures systematically undermine environmental transparency, and that conventional governance attributes, while beneficial on average, do not fully counteract this effect. These insights have important policy implications: regulators and standard setters may need to strengthen environmental reporting requirements, refine enforcement mechanisms, and encourage performance evaluation frameworks that balance EPS outcomes with sustainability metrics. Boards and institutional investors should also reconsider compensation and monitoring practices that place excessive weight on short-term earnings targets and pay closer attention to the consistency and completeness of environmental disclosures. Future research could extend this analysis by exploring alternative dimensions of sustainability reporting, employing dynamic panel estimators to better address endogeneity concerns, and conducting cross-country comparisons to examine how institutional differences shape the interplay between earnings pressure, governance, and environmental disclosure.
 

Keywords

• Corporate accountability
• Corporate governance
• Environmental disclosure
• EPS pressure
• Financial disclosure

Main Subjects

• stock exchange
• Profitability
• Profit management