Sustainable Reporting, Integrated Reporting, Analyst Coverage and the Cost of Equity Capital. A quantitative study on the effect of Information Asymmetry on the Cost of Equity Capital

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This study examines whether superior disclosure of information on sustainability performance and integrated reporting can be associated with a financial benefit: a reduction in an organizations’ costs of equity capital. Better disclosure reduces information asymmetry and, subsequently, the cost of equity capital. Financial analysts are expected to strengthen the effects by increasing understandability and credibility of sustainability disclosures. The combined environmental, social and governance score from the ASSET4 database was used as proxy for quality of information on sustainability performance and the format of sustainability disclosure was determined for a sample of organizations from five European countries during the period 2013-2015. The results show that superior quality of information on sustainability performance as well as integrated reporting play no significant role in decreasing the cost of equity capital. Furthermore, the results show that organizations with superior disclosure on sustainability performance in combination with a high level of analyst coverage have a significantly lower cost of equity capital. The findings suggest organizations can use voluntary sustainability disclosure as a legitimation tactic because the actual quality of those disclosures is insignificant or unobservable to shareholders. When analysts act as information intermediaries this adds credibility to the quality of disclosure. The findings further indicate that the impact of integrated reporting is not as big as previously predicted.
Faculteit der Managementwetenschappen