Environmental Disclosure and the Cost of Capital: Evidence from the Fukushima Nuclear Accident

Abstract

We exploit the Fukushima nuclear disaster as a source of variation in the demand for environmental information to study the economic consequences of environmental disclosure. Using a large, hand-collected sample of Japanese firms, we find that firms that issue stand-alone environmental reports incur a less severe — although economically and statistically negligible — increase in the cost of capital after the disaster than non-disclosing firms. Most important, we document that, within disclosing firms, those reporting verifiable information on their expected environmental performance experience a lower increase in the cost of capital compared to both non-disclosing firms and to firms that do not report information on their expected performance. Finally, firms react to the disaster by increasing the disclosure of forward-looking information, with a larger effect for firms with histories of forward-looking guidance. Taken together, our results help to clarify the circumstances under which the disclosure of non-financial and unregulated information affects the cost of capital.