From Mandate to Market across the Globe: The Impact of Mandatory ESG Disclosure on the Cost of Equity Capital

72 Pages Posted: 28 Apr 2023 Last revised: 16 Apr 2024

See all articles by Tung Lam Dang

Tung Lam Dang

The University of Danang

Duc Trung Do

Bangor University

Thang Ho

University of Bradford School of Management

Cameron Truong

Monash University; Financial Research Network (FIRN)

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Date Written: April 16, 2023

Abstract

We investigate the impact of mandatory environmental, social, and governance (ESG) disclosures on the cost of equity capital across the globe. Utilizing a dataset including firms from 62 countries and a difference-in-differences framework, we document a significant reduction of 50 basis points in the cost of equity capital for firms compelled to adopt ESG disclosure requirements. This reduction is particularly pronounced in jurisdictions with robust legal enforcement and well-defined social norms, as well as in countries where implementation mandates originate from government entities. Our analysis highlights two underlying mechanisms contributing to the decline in equity capital costs: (1) heightened disclosure and enhanced information quality, and (2) increased institutional ownership stemming from E&S-conscious investors. Furthermore, firm value rises through the change in the cost of equity capital, rather than the change in the cash flow channel, after the disclosure mandates. Collectively, our findings lend support to the notion that disclosing non-financial ESG information not only enhances information environments but also materially impacts the cost of equity capital.

Keywords: mandatory ESG disclosure, cost of equity capital, information environment, institutional investors

JEL Classification: G14, G15, G18, G28, G30

Suggested Citation

Dang, Tung Lam and Do, Duc Trung and Ho, Thang and Truong, Cameron, From Mandate to Market across the Globe: The Impact of Mandatory ESG Disclosure on the Cost of Equity Capital (April 16, 2023). Available at SSRN: https://ssrn.com/abstract=4420160

Tung Lam Dang

The University of Danang ( email )

41 Le Duan street
Danang
Vietnam

Duc Trung Do

Bangor University

BANGOR, Wales LL57 1AU
United Kingdom

Thang Ho (Contact Author)

University of Bradford School of Management ( email )

Bradford, Bradford
United Kingdom

Cameron Truong

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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