Environmental, Social, and Governance Disclosure, Ownership Structure and Cost of Capital: Evidence from the UAE

Abstract

The capital structure decision is one of the most vital financial decisions of the corporation that consists of determining the optimal combination of equity and debt for the companies that would reduce the cost of capital. The examination of the capital structure has always gained importance especially in the theoretical and empirical studies while there is no study of the relationship between the environmental, social, and governance (ESG), the ownership structure, and the cost of capital. In this context, this paper aims to examine the potential impacts of the ESG disclosure and ownership structure on the cost of capital by using a sample of 30 companies listed on the UAE financial markets (Abu Dhabi Stock Exchange and Dubai Financial Market) during the period 2010–2019. The data show that there is an increasing trend in the different non-financial corporate disclosures. The empirical results of various models show that the ESG disclosure, the insider and the institutional ownerships have negative and significant impacts on the cost of capital. Furthermore, the environmental and the governance disclosures reduce the cost of capital. This paper demonstrates the strong role played by the ESG disclosure and the ownership structure in reducing the cost of capital for the companies. These results would encourage the companies in implementing the best practices of the non-financial disclosures and regulating their corporate governance mechanisms.

Does ESG Affect the Stability of Dividend Policies in Europe?

“…Therefore, a cross-comparison of other ratings of ESG scores should enhance understanding of our findings. Furthermore, the growing importance of investment funds with a focus on sustainability may promote the study of other finance related decisions and implications such as M&A, IPO, cost of capital [36], capital structure, and market returns [52]. Finally, future research should account for potential differences among European countries and between developed and developing economies.…”

“…From the perspective of the stakeholder view, firms are expected to allocate fewer financial resources for their shareholders through the reduction of short-term cash flows available for dividend distribution. However, managers also appear to increase ESG indicators and reduce the cost of equity [35][36][37] and the cost of debt [38,39] are less constrained by financial resources [40] and can, therefore, pay higher dividends.…”

“…Benlemlih [23] used both of the approaches mentioned above when studying a sample of 3040 US firms from 1991 to 2012 and concluded there exists a positive association between high CSR levels, higher dividends and increased stability of dividend policies, where value is a combination of cash flows, risks, and growth. Cheung et al [24] also concluded that firms with high CSR scores exhibit higher dividend levels because higher CSR scores increase earnings through lower levels of perceived risk [36,39] and better relationships with stakeholders, especially for non-financial firms. Samet and Jarboui [26] find that firms with high CSR performance increase payout levels.…”

The Impact of CSR/ESG on the Cost of Capital: A Case Study of US Companies

“…Legitimacy theory posits that an organization would voluntarily report its actions, such as disclosing certain ESG information, if management believed the organization's societies desired those actions. Researchers who use the legitimacy framework suggest that ESG disclosure responds to public pressure (Ellili, 2020;Hahn and Kühnen, 2013;Rahman and Alsayegh, 2021).…”

“…Also, the problems faced by traders in the wake of the prevailing COVID-19 pandemic are causing growing uncertainty and a lack of investor confidence, which can be countered by increasing the quantity, transparency, and quality of disclosures. Disclosures that contribute to this are critical factors that increase stakeholder and shareholder confidence (Ellili, 2020).…”