Voluntary Non-Financial Disclosure and the Cost of Equity Capital

In the paper, Voluntary Non-Financial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting, forthcoming in The Accounting Review, we examine a potential benefit associated with the initiation of voluntary disclosure of CSR activities—a reduction in the cost of equity capital.

We find that the likelihood of a firm initiating standalone disclosure of CSR activities is associated with a higher prior year cost of equity capital. Firms with CSR performance superior to that of their industry peers enjoy a reduction in the cost of equity capital after they initiate CSR reports. Further, firms initiating CSR disclosure with superior CSR performance attract dedicated institutional investors and analyst coverage, and these analysts achieve lower absolute forecast errors and dispersion following such disclosure. Finally, CSR disclosure initiators appear to exploit this potential benefit of a reduction in the cost of equity capital. They are more likely than non-disclosing firms to conduct SEOs to raise capital in the two years following the disclosure. In addition, among firms conducting SEOs, CSR disclosure initiators raise a significantly larger amount of equity capital than non-initiators.

This study adds to the voluntary disclosure literature by extending the traditional research on voluntary disclosure beyond the narrow focus of financial disclosure. Our analyses enhance our understanding of the rationales behind and the consequences of the recent trend in voluntary CSR disclosure. These results have important implications for companies, regulators, and investors.

The full paper is available for download here.