Environmental transparency and investors’ risk perception: cross-country evidence on multinational corporations’ sustainability practices and cost of equity

Yu, Ellen Pei-yi and Tanda, A. and Luu, B.V. and Chai, D.H. (2021) Environmental transparency and investors’ risk perception: cross-country evidence on multinational corporations’ sustainability practices and cost of equity. Business Strategy and the Environment 30 (8), pp. 3975-4000. ISSN 1099-0836.

Abstract

We explore whether a greater amount of environmental disclosure can reduce a firm’s ex-ante cost of equity. This could occur because the quantity of environmental information changes investors’ risk perception of the company, thereby influencing its ex-ante cost of equity. Our study is a cross-country analysis of 1481 multinational corporations across 43 countries and territories from 2013 to 2019. Firstly, we measure investors’ risk perception as a firm's ex-ante cost of equity by employing five different valuation models, all based on equity analysts’ forecasted data. We then investigate whether large quantities of environmental information disclosed by a multinational corporation (MNC) affect its ex-ante cost of equity. We find evidence that investors price the amount of environmental disclosure. More environmental disclosure decreases a firm's ex-ante cost of equity because it lessens investors' information asymmetry. However, this relationship is non-linear. Once the amount of environmental disclosure data exceeds a certain threshold level, a firm’s ex-ante cost of equity will rise again. Our empirical results also suggest that non-financial factors at the country level play a role in shaping how investors perceive a firm’s riskiness. Locating the firm in a country with better environmental performance and a higher score of the human development index can reduce investors’ risk perception and result in a lower ex-ante cost of equity. A policy implication of our findings is that a global standardised and effective corporate sustainability reporting is needed to provide investors a more holistic view for evaluating the riskiness of their investments.

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