Dhaliwal (2009)

Dhaliwal, Dan, Oliver Zhen Li, Albert Tsang, and Yong George Yang. "Voluntary Non-Financial Disclosure and the Cost of Equity Capital: The Case of Corporate Social Responsibility Reporting." Working Paper, University of Arizona and The Chinese University of Hong Kong, April 2009.

This paper examines the relationship between CSR reporting and firms' equity cost of capital. "We investigate four related questions: (1) whether firms' desire to reduce the cost of equity capital motivates them to publish CSR reports; (2) whether the publication of CSR reports leads to a lower cost of equity capital; (3) the potential underlying mechanisms that cause CSR disclosure to be associated with a lowering of the cost of equity capital; and (4) whether reporting firms exploit the benefit of a reduction in the cost of equity capital by issuing equity capital after CSR reporting."

Using a variety of sources including Corporate Responsibility Newswire networks, CorporateRegister.com, internet searches, and company websites, the authors compile a database of 679 CSR reports from 196 unique U.S. firms, covering the 1993-2008 time period. This data is then cross-referenced against KLD social ratings and used, along with a variety of other variables (e.g., firm size, beta, leverage), as the basis for a series of regressions in which firm cost of equity is the dependent variable.

Key findings:
  • "The cost of equity capital in year t-1, is significantly positively associated with firm's likelihood of voluntarily issuing stand-alone CSR reports in year t."
  • "A higher past level of the cost of equity capital is associated with a greater likelihood that the report is assured by an independent third party."
  • "CSR disclosure itself does not have any direct effect on reducing firms' future cost of equity capital."
  • However, "...voluntary reporting firms with relatively superior CSR performance [vs. industry] enjoy a reduction in the cost of equity capital ranging from about 0.8% to 1.7%, depending on model specifications."

Additional analysis finds that "voluntary CSR disclosures appear to attract dedicated institutional investors," and this effect strengthens if social performance is good. CSR disclosure is also positively associated with increased analyst coverage, reduced forecast errors, and reduced estimate dispersion. Companies issuing reports are also found to have significantly greater equity issuance.