The Relationship Between ESG Disclosure, Information Asymmetry, Cost of Capital, and Earnings Management

Abstract

The study investigates the relationship between ESG disclosure, information asymmetry, cost of capital and earnings management in an emerging economy, India. The study uses PLS-SEM for a sample of 183 companies listed in BSE 500 index for a period of ten years from 2014 to 2023. The study finds that higher ESG disclosure leads to decrease in information asymmetry. While ESG disclosure increases the firm's cost of capital. The result also shows that firms with higher ESG disclosure have more social commitment and less chance for doing earnings management. An increase in information asymmetry increases the chance for managers to manipulate earnings. Similarly, higher information asymmetry leads to increase investor risk which results in increased cost of capital. Finally, earnings management practice reduces the firm cost of capital.