Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting

Abstract

We examine a potential benefit associated with the initiation of voluntary disclosure of corporate social responsibility (CSR) activities: a reduction in firms’ cost of equity capital. We find that firms with a high cost of equity capital in the previous year tend to initiate disclosure of CSR activities in the current year and that initiating firms with superior social responsibility performance enjoy a subsequent reduction in the cost of equity capital. Further, initiating firms with superior social responsibility performance attract dedicated institutional investors and analyst coverage. Moreover, these analysts achieve lower absolute forecast errors and dispersion. Finally, we find that firms exploit the benefit of a lower cost of equity capital associated with the initiation of CSR disclosure. Initiating firms are more likely than non-initiating firms to raise equity capital following the initiations; among firms raising equity capital, initiating firms raise a significantly larger amount than do non-initiating firms.

Corporate Social Responsibility and Financial Constraints: Evidence from Korean Firms

“…Secondly, firms with superior CSR performance are likely to disclose their CSR activities through sustainability reports (Dhaliwal et al, 2011) and also are likely to allow confirmation of such reports by third parties. As a result, CSR reporting increases the transparency and credibility of information, leads to a sound internal control system, reduces information asymmetry and reduces financial constraints.…”

Exploring the Sustainable Shareholder Value of Corporate Social Responsibility Activities

“…Current Earning (LABA) is measured by net income before extraordinary item divided by average total assets (Holbrook, 2010;Dhaliwal et al, 2011).…”

Corporate Social Responsibility Reports: A Review of the Recent Accounting Literature

“…Two of the studies were by Dhaliwal and co-authors. Dhaliwal, et al (2011) reported their findings that "firms with a high cost of capital in the previous year tend to initiate disclosure of CSR activities in the current year and that initiating firms with superior social responsibility performance enjoy a subsequent reduction in the cost of equity capital. Further, initiating firms with superior social responsibility performance attract dedicated institutional investors and analyst coverage.…”