The Impact of Better Corporate Social Responsibility Disclosure on the Cost of Equity Capital

TLDR: In this paper, the authors provide evidence on the impact of the quality of corporate social responsibility (CSR) reporting on the cost of equity capital for a sample of Spanish listed firms.

Abstract: In this paper, we provide evidence on the impact of the quality of corporate social responsibility (CSR) reporting on the cost of equity capital for a sample of Spanish listed firms. We aim to verify whether firms with higher CSR disclosure ratings enjoy significantly lower costs of equity capital, after controlling for the well-known Fama and French risk factors (i.e. beta, market-to-book, and size). Consistent with our main hypothesis, we find a significant negative relationship between CSR disclosure ratings and the cost of equity capital. We also obtain that the negative relationship between CSR reporting quality and the cost of equity capital is more pronounced for those firms operating in environmentally sensitive industries. Our findings contribute to the debate on whether CSR activities are value-enhancing or value-neutral by showing that improved CSR can enhance firm value by reducing the firm's cost of equity capital. This implies that CSR reporting is a part of a firm's communication tools in order to decrease information asymmetries between managers and investors. In other words, mandatory social responsibility reporting is called for in order to produce a more precise valuation of a firm. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.