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

Posted: 5 Oct 2010 Last revised: 1 Dec 2014

Dan S. Dhaliwal

University of Arizona - Department of Accounting

Oliver Zhen Li

National University of Singapore (NUS)

Albert Tsang

Schulich School of Business

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Date Written: October 4, 2010

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 and among firms raising equity capital, initiating firms raise a significantly larger amount than do non-initiating firms.

Keywords: Corporate Social Responsibility, Cost of Capital, Voluntary Disclosure

Suggested Citation

Dhaliwal, Dan S. and Li, Oliver Zhen and Tsang, Albert and Yang, Yong George, Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting (October 4, 2010). Accounting Review, Vol. 86, No. 1, 2011. Available at SSRN: https://ssrn.com/abstract=1687155 or http://dx.doi.org/10.2139/ssrn.1687155

Dan S. Dhaliwal

University of Arizona - Department of Accounting ( email )

McClelland Hall
PO Box 210108
Tucson, AZ 85721
United States

Oliver Zhen Li (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Albert Tsang

Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin, N.T.
Hong Kong

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