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

Gholami, Amir and Sands, John ORCID: https://orcid.org/0000-0003-0934-921X and Shams, Syed ORCID: https://orcid.org/0000-0001-9209-0418 (2022) Corporates’ sustainability disclosures impact on cost of capital and idiosyncratic risk. Meditari Accountancy Research. pp. 1-26. ISSN 2049-372X


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.


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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Additional Information: Files associated with this item cannot be displayed due to copyright restrictions.
Faculty/School / Institute/Centre: Current - Faculty of Business, Education, Law and Arts - School of Business (18 Jan 2021 -)
Faculty/School / Institute/Centre: Current - Faculty of Business, Education, Law and Arts - School of Business (18 Jan 2021 -)
Date Deposited: 10 May 2022 05:44
Last Modified: 26 Oct 2022 04:23
Uncontrolled Keywords: Environmental, Social and governance (ESG), Weighted average cost of capital cost of capital (WACC), Idiosyncratic risk
Fields of Research (2020): 35 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 3502 Banking, finance and investment > 350201 Environment and climate finance
Identification Number or DOI: https://doi.org/10.1108/MEDAR-06-2020-0926
URI: http://eprints.usq.edu.au/id/eprint/48288

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