Corporates’ sustainability disclosures impact on cost of capital and idiosyncratic risk

Abstract

Purpose

This study aims to investigate not only the association between corporate environmental, social and governance (ESG) performance and the cost of capital (COC) but also its impact on the company’s idiosyncratic risk. Further, it highlights that companies could manage their risk through sustainability initiatives to achieve a cheaper cost of financing.

Design/methodology/approach

Using an extensive Australian sample for the 2007–2017 period from the Bloomberg database, this study conducts a panel (data) regression analysis to examine the impact of the corporate ESG performance disclosure score on the COC and idiosyncratic risk. The robustness of the findings is tested and confirmed in several ways, including a sensitivity test. Furthermore, the instrumental variable approach is used to address potential endogeneity issues.

Findings

A favourable association was found between a higher corporate ESG performance disclosure score and cheaper resources financing. The evidence also supports the mitigating impact of corporate ESG performance disclosure score on the company’s idiosyncratic risk as a strong complement for access to a cheaper source of funds. The findings strongly support both hypotheses of this study.

Research limitations/implications

This study extends the current body of knowledge addressing these associations. Further studies should expand the investigation to non-listed or small and medium-sized companies. Additionally, future studies could contribute to the literature by including other moderating variables, such as a country’s cultural environment and diverse economic situations.

Originality/value

An extensive literature review suggests that this study, to the best of the authors’ knowledge, is the first that simultaneously evaluates the impact of corporate ESG performance disclosure on a company’s COC and idiosyncratic risk.

Citation

Gholami, A., Sands, J. and Shams, S. (2023), "Corporates’ sustainability disclosures impact on cost of capital and idiosyncratic risk", Meditari Accountancy Research, Vol. 31 No. 4, pp. 861-886. https://doi.org/10.1108/MEDAR-06-2020-0926