Corporate environmental, social and governance (ESG) performance disclosure and company's capital cost, idiosyncratic risk and market value

Corporate environmental, social and governance (ESG) performance disclosure and company's capital cost, idiosyncratic risk and market value

Purpose: This study investigates the impact of corporate environmental, social and governance (ESG) performance disclosure on the company's capital costs, idiosyncratic risk and market value. Further, this study investigates the economic implications of corporate greenhouse gas emissions (GHG) on the company's idiosyncratic risk and capital costs. The Investigation for these relationships has been conducted through undertaking three individual studies. The findings are reported in three articles, which form the basis of chapters 3, 4, and 5 of this PhD by publication.

Design/Methodology: Employing an extensive Australian sample for the 2007–2017 period from the Bloomberg database, this study conducts a panel (data) regression analysis longitudinally to examine the above associations. The results of this study are consistent after performing sensitivity and robustness checks, including alternative assumptions and model specifications. Following previous literature, this study uses the simultaneous equation model to test the robustness of findings. This model provides an appropriate alternative for the corporate ESG performance disclosure to evaluate the associations. This study also controls the potential endogeneity issue of the primary model. This study follows prior literature and utilises an instrumental variable (IV) approach to re-examine the main estimation models to address the potential endogeneity issues. This study rigorously addresses the methodological, sample selection, endogeneity, and causality issues of corporate ESG performance disclosure and provides unbiased results with clear implications and future research directions.

Findings: The first study provides evidence of a favourable association between a higher corporate ESG performance disclosure and a cheaper cost of capital (COC). Additionally, the evidence supports the mitigating impact of corporate ESG performance disclosure on the company's idiosyncratic risk as a strong complement for access to a cheaper source of funds. The second study's findings show a tangible improvement in Australian corporate ESG performance disclosure, which is associated favourably with their financial performance (measured by market value). The second study also shows that while the corporate ESG performance disclosure improvements are linked to higher financial performance, this relationship is heterogeneous across industries. Lastly, the third study provides evidence of a positive association between the corporate carbon emissions performance disclosure and the company's idiosyncratic risk and COC, indicating that the capital market is pricing corporate carbon emissions and penalising polluting companies.

Implications: The findings of this thesis extend the current body of knowledge addressing these associations. While pressure by stakeholders to address ESG concerns is substantial, the improvement in corporate ESG performance disclosure should enhance the company's financial performance. The results encourage companies to strategically manage their carbon emissions performance level or consider an emissions reduction plan for risk management purposes and the associated costs. Corporate exposure to carbon emissions differs depending on managing the associated risks, which eventually impact the capital cost. The findings show that the capital market applies higher interest rates due to future uncertainty related to carbon emissions and their implication for companies. This study's findings propose a robust argument for the appropriateness of mandatory and standard disclosure of corporate carbon emissions performance, which could improve market efficiency and better resource allocation in the economy.

Originality/ value: An extensive literature review suggests that this study is the first that simultaneously evaluates the impact of corporate ESG performance disclosure on a company's COC and idiosyncratic risk. Additionally, it appears that no published research has holistically examined the improvement in the company's ESG performance disclosure and potential variations in the relationship between corporate ESG performance disclosure and financial performance across industries.

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