Abstract
AbstractWe explore whether a greater amount of environmental disclosure can reduce a firm's ex ante cost of equity. This could occur because the quantity of environmental information changes investors' risk perception of the company, thereby influencing its ex ante cost of equity. Our study is a cross‐country analysis of 1481 multinational corporations (MNCs) across 43 countries and territories from 2013 to 2019. Firstly, we measure investors' risk perception as a firm's ex ante cost of equity by employing five different valuation models, all based on equity analysts' forecasted data. We then investigate whether large quantities of environmental information disclosed by an MNC affect its ex ante cost of equity. We find evidence that investors price the amount of environmental disclosure. More environmental disclosure decreases a firm's ex ante cost of equity because it lessens investors' information asymmetry. However, this relationship is non‐linear. Once the amount of environmental disclosure data exceeds a certain threshold level, a firm's ex ante cost of equity will rise again. Our empirical results also suggest that non‐financial factors at the country level play a role in shaping how investors perceive a firm's riskiness. Locating the firm in a country with better environmental performance and a higher score of the human development index can reduce investors' risk perception and result in a lower ex ante cost of equity. A policy implication of our findings is that a global standardised and effective corporate sustainability reporting is needed to provide investors a more holistic view for evaluating the riskiness of their investments.
Highlights
According to a recent survey (BAML, 2020), around 43% of global fund managers think that climate change is the factor among the environmental, social and governance (ESG) factors most likely to outperform in the 12 months following the survey
We investigate whether large quantities of environmental information disclosed by an multinational corporations (MNCs) affect its ex ante cost of equity
We argue that firms with greater greenhouse gas (GHG) intensity which disclose greater amount of environmental information to the public in the subsequent year can reduce information asymmetry and lower their investors' risk perception and their ex ante cost of equity
Summary
According to a recent survey (BAML, 2020), around 43% of global fund managers think that climate change is the factor among the environmental, social and governance (ESG) factors most likely to outperform in the 12 months following the survey. We argue that firms with greater GHG intensity which disclose greater amount of environmental information to the public in the subsequent year can reduce information asymmetry and lower their investors' risk perception and their ex ante cost of equity This leads to Hypothesis 2, which provides insight into whether large quantities of disclosed environmental data can change investors' perception of a firm's riskiness linked with its prior year's GHG emissions. We examine whether investors price the following two non-financial country factors into their investment decisions, ‘country environmental performance’ and ‘a country's human development progress (HDI)’, which may impact investors' risk perception These represent our key variables together with the environmental disclosure (ENVDIS) that we detail below. We observe an average environmental disclosure score of 33.35 across our sample firms worldwide, while the median is 34.88 out of 100
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