Carbon Disclosure Quality, Internal Control, and Corporate Financial Performance

Weiqin Liu; Zulnaidi  Yaacob

doi:10.17323/j.jcfr.2073-0438.19.4.2025.31-49

Weiqin Liu Shaoguan University, Shaoguan, Guangdong https://orcid.org/0009-0007-5031-6440
Zulnaidi Yaacob Universiti Sains Malaysia, Minden, Penang, Malaysia https://orcid.org/0000-0002-1222-1949

DOI: https://doi.org/10.17323/j.jcfr.2073-0438.19.4.2025.31-49

Keywords: carbon disclosure quality, corporate financial performance, internal control, stakeholder theory, fixed effects model, China

Abstract

Amid intensifying climate commitments, this paper investigates whether and how carbon disclosure quality (CDQ) translates into corporate financial performance (CFP), and whether internal control (IC) strengthens this translation. Using a balanced panel of 1,218 Chinese A-share firms over 2010–2023, we build a multidimensional CDQ index – covering carbon governance, strategies and targets, footprints, and relevance/reliability – weighted via the entropy method and lagged to mitigate reverse causality. The sample comprises 15,834 firm-year observations, and models include firm, year, and industry fixed effects with clustered standard errors. Three-way fixed-effects estimations and two-step system GMM address unobserved heterogeneity and endogeneity; diagnostics (no AR (2), valid Hansen test) support instrument validity. Analyses further control for size, leverage, institutional ownership, board independence, ownership concentration, CEO duality, audit quality, heavy-polluting industry, and state ownership. The study finds that higher CDQ significantly improves CFP. Further, IC positively moderates the CDQ–CFP link: firms with stronger IC convert transparent carbon reporting into greater financial value, consistent with stakeholder theory. Results remain robust to an alternative market-based proxy (market-to-book ratio) and to exclusion of pandemic years (2020–2021), and are insensitive to multicollinearity checks. This study advances theory by demonstrating that credible climate disclosure yields financial benefits in an emerging market when coupled with effective internal governance; advances practice by highlighting that managers and regulators should pair disclosure mandates with IC reinforcement; and advances method by offering a replicable, Python-assisted scoring framework aligned with TCFD/ISSB guidance. Policy and investment implications follow: encouraging credible carbon reporting and strengthening internal control can lower information asymmetry, bolster legitimacy, and enhance firm valuation as economies transition to low carbon.

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