Information asymmetry in the market leads to adverse selection problems because buyers cannot differentiate the quality of certain products. This problem can also happen in the capital market as uninformed potential investors lack information about firms’ future cash flow, which may lead to a ‘lemons problem’. This provides incentives to high quality firms to convey their private information to the market and reduce the underpricing of their securities. Investors can infer private information from some action(s) or decision(s) of management. Companies can use voluntary disclosures, especially environmental disclosures as a means of transferring their information to the market because of the expected economic benefits (e.g., reducing underpricing). This paper links the economic benefits of voluntary disclosures with the problem of environmental externalities.

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