ESG and the cost of capital, Does disclosure of ESG performance affect the cost of equity and cost of debt?

Abstract

This thesis investigates how the disclosure of ESG performance affect the cost of capital, segregated into the cost of equity and cost of debt to find the appreciation of two distinct providers of the capital – the shareholders and debt holders. Using a large global panel dataset from 70 countries, this study intends to provide a better understanding on how the increasing discussion of sustainability have affected globally the cost of capital for the firms. We retrieve an unbalanced dataset of 53,831 firm-year observations from 3,511 firms during the period of 2005-2020 collected from the Thomson Reuters database Eikon. Our results indicate that equity providers generally penalize the firms disclosing higher ESG performance by demanding a higher cost of equity. Our results are inconsistent with previous research, but in line with the shareholder theory. From a debt holder perspective, we find that disclosing higher ESG performance is rewarded by a lower cost of debt offered to the firms. This is consistent with previous research and the stakeholder theory. Furthermore, our results indicate that size of the board is irrelevant for both cost of equity and cost of debt. In addition, we find a difference in appreciation of board gender diversity as debt holders reward firms with a higher percentage of females on the board, while equity providers seemingly find it irrelevant. In line with the agency theory, we find CEO duality to have a moderating effect of ESG disclosure on the cost of debt. Inconsistent with the agency theory we do not find a significant result on the cost of equity, indicating that equity providers do not penalize firms with an entrenched CEO. We aim to contribute with new and relevant information on sustainable investments for managers, investors, debt holders, stakeholders, and governments. Our results indicate some policy implications.