The Impact of Better Corporate Social Responsibility Disclosure on the Cost of Equity Capital

Abstract

In this paper, we provide evidence on the impact of the quality of corporate social responsibility (CSR) reporting on the cost of equity capital for a sample of Spanish listed firms. We aim to verify whether firms with higher CSR disclosure ratings enjoy significantly lower costs of equity capital, after controlling for the well-known Fama and French risk factors (i.e. beta, market-to-book, and size). Consistent with our main hypothesis, we find a significant negative relationship between CSR disclosure ratings and the cost of equity capital. We also obtain that the negative relationship between CSR reporting quality and the cost of equity capital is more pronounced for those firms operating in environmentally sensitive industries. Our findings contribute to the debate on whether CSR activities are value-enhancing or value-neutral by showing that improved CSR can enhance firm value by reducing the firm's cost of equity capital. This implies that CSR reporting is a part of a firm's communication tools in order to decrease information asymmetries between managers and investors. In other words, mandatory social responsibility reporting is called for in order to produce a more precise valuation of a firm. ; Lambert et al., 2007). Second, information transparency can help to mitigate the adverse selection problem by means of a reduction of transaction costs and/or information asymmetries, which increases the overall liquidity of stocks (Verrecchia, 2001;Graham et al., 2005;Leuz and Wysocki, 2008).Our paper also closely relates to the literature on sustainable investing (Schäfer et al.). As indicated by Sullivan (2011), one of the recurring themes in corporate responsibility debates is whether investors pay attention to companies' corporate responsibility performance. As better quality environmental and social performance data are now available, an increasing number of investors are making commitments to integrate consideration of social and environmental issues into their investment decision-making processes. Current examples include investor interest in the implications of emissions trading for the electricity sector, and the renewed focus on safety and environmental risk in the oil and gas sector stemming from the BP oil disaster. For these issues, investors will generally expect firms to provide an assessment of the financial implications (e.g. increased costs and contingent liabilities) and details of the actions undertaken to manage these risks. Krosinsky and Robins (2008) analyse the rise of sustainable investing and the value in long-term investing that incorporates ESG factors into the investment decision-making process. They document that social, ethical, and sustainable investment strategies are positively correlated with financial returns. Specifically, they show that sustainable investing funds have significantly outperformed mainstream indices, returning 18.7%, on average, 254C. Reverte

Corporate Social Responsibility and Financial Performance: The Spanish Case

“…Godos-Díaz, Fernández-Gago, & Cabeza-García, 2012;Griffin & Mahon, 1997;López et al, 2007;Martínez-Campillo et al, 2012;Reverte, 2009Reverte, , 2011Waddock & Graves, 1997) and the market value of shares (Black, Carnes, & Richardson, 2000;Callado & Utrero, 2008;Fernández et al, 2009;McGuire et al, 1988;Nieto, Fernández, & Cabeza, 2012;Prado et al, 2008;Roberts & Dowling, 2002).…”

“…The CSR indicators used come from the Observatorio de Responsabilidad Corporativa and have been previously used in studies of Spanish firms (Nieto et al, 2012;Reverte, 2009Reverte, , 2011. Size has usually been positively associated with CSR practices due to the greater exposure of large firms to the public opinion, the socio-economic impact on the environment in which they carry out their activities, and the fact that large firms can pay greater attention to the interests of stakeholders and respond to their demands.…”

Human Capital Reporting and its Linkage with Key Performance Indicators of Companies: Evidence from Estonian Companies Listed on Nasdax OMX Baltic

“…The results revealed a negative relationship between CSR disclosure ratings and the cost of equity capital. The study also conÞ rmed that CSR reporting is a vital tool for communication with stakeholders, but in order to use CSR reporting to evaluate performance of company it should be mandatory (Reverte, 2012).…”

“…The study of Reverte (2012) provided the evidence of the quality of CSR reporting on the cost of equity capital for a sample of Spanish listed Þ rms. The results revealed a negative relationship between CSR disclosure ratings and the cost of equity capital.…”

The Reporting and Sustainable Business Marketing

“…The corporate social performance, the performance achieved by CSR in the competitive environment, has a negative effect on the risk of disinvestment [38]. Recent studies have shown how CSR negatively relates with the cost of capital [39], especially for the companies that operate in industries facing environmental problems.…”