The relationship between international financial reporting standards, carbon emissions, and R&D expenditures: Evidence from European manufacturing firms

a r t i c l e i n f o JEL classification: Q53 Q55 M40 C33 Keywords: CO2 emissions R&D expenditures IFRS adoption European manufacturing firms TAR model This study examines the impact of research and development (R&D) expenditures on carbon dioxide (CO2) emissions prior to and under the mandatory adoption of International Financial Reporting Standards at the firm level within the manufacturing sectors of three European countries, i.e. Germany, France and the U.K. Estimation of a threshold autoregressive model using quarterly data from 1998 to 2011 reveals that in the post-IFRS mandatory adoption year R&D expenditures show a reduction in CO2 emissions to firms, i.e. rising CO2 abatement. This is likely due to the presence of incentives provided by the new accounting disclosure regime. Our results remain robust in terms of a sector analysis, firm size, and the introduction of the European Union Emission Trading Scheme (EU-ETS) across the three countries. Carbon dioxide emission reductions can be achieved, among other means, through technological changes and investments in R&D. Jones (2002) and Vollebergh and Kemfert (2005) argue that innovations enhance labor and capital productivity, which is crucial for economic growth. Investment in R&D has an impact on technological changes, an assumption which receives support by the 'new growth theory' or 'induced technological change' literature (Vollebergh and Kemfert, 2005). Thus, technological changes and investment in R&D are common denominators for achieving both CO2 abatement and economic growth. Along these lines, Parry et al. (2003) assess whether the welfare gains from technological innovation leading to CO2 emission reductions are larger or smaller than the 'Pigouvian' welfare gains from optimal pollution control. Their empirical findings indicate that such welfare gains from innovation are smaller than those from pollution control, while Jaffe et al. (2005) claim that R&D generates positive externalities that contribute to both welfare gains and pollution control. As noted by Edenhofer et al. (2005), there is a close link between reducing emission cost efficiently and economic growth, in the sense that cost efficient abatement decreases the costs in terms of growth foregone. Related to the role of R&D investment in the reduction of carbon emissions is the impact of environmental information disclosure by firms. Mason (2008) notes that firms have been increasing environmental information disclosure to satisfy requests from external regulatory bodies and the general public. Indeed, such information disclosure may be far ranging in light of the absence of …