This study uses mandatory disclosures of environmental expenditures for public companies in Taiwan, to examine the impact of investment in pollution control on long-run financial performance. We break down pollution control investments into the following two categories by analyzing the content of the disclosures made in annual reports: (1) pollution prevention and (2) end-of-pipe solutions. Based on a sample of five major polluting industries in Taiwan from 1989 to 2006, we find that firms moving forward proactively with pollution prevention investments have significantly outperformed their counterparts who react sluggishly with end-of-pipe solutions. In addition to the notion that environmental expenditures are not necessarily detrimental to firms, our results also suggest that the often conflicting goals of financial reporting, namely representational faithfulness and macroeconomic growth, may be harmonized if the accounting standards embody the different features of pollution control investments.
