Are ESG Disclosures Value Relevant? A Panel-Corrected Standard Error (PCSE) Approach

Abstract

Due to rising sustainability concerns across the globe, corporations are now offering voluntary environment, social, and governance (ESG) information to serve stakeholders’ interests. These voluntary ESG disclosures aid investors in making investment decisions by evaluating the firms’ sustainability. However, ESG reporting is still in its infancy and there are no regulatory standards; consequently, it is crucial to understanding the value relevance of ESG disclosures. Using panel corrected standard errors (PCSEs), the study investigates the impact of ESG disclosures on cost of capital. The sample of the study covers listed firms from NSE 500 from 2011 to 2020, that is, 10 years. The present analysis offers the value relevance of enhanced ESG disclosure in the form of reduced cost of capital through reduced information asymmetry. In this study, we employed voluntary disclosure theory and legitimacy theory to investigate disclosure level in emerging market. The study found a negative association between ESG disclosures and cost of capital, following the notion that non-financial disclosures reduce information asymmetry and ultimately cost of capital ( Chauhan & Kumar, 2018 ; Francis et al., 2008 ). However, individual E, S and G disclosure scores were not found significant.