Environmental transparency and investors' risk perception: Cross‐country evidence on multinational corporations' sustainability practices and cost of equity

• Published in: Business strategy and the environment 2021-12, Vol.30 (8), p.3975-4000
• Main Authors: Yu, Ellen Pei‐yi, Tanda, Alessandra, Luu, Bac Van, Chai, Dominic H.
• Format: Article
• Language: English
• Subjects: Asymmetric information; Cost analysis; cost of equity; country environmental performance; Empirical analysis; environmental disclosure; Environmental information; Environmental management; Environmental performance; environmental policy; Equity; Human development; human development index; Multinational corporations; Perception; Risk perception; Risk reduction; Sustainability; Sustainability reporting; Sustainable practices; Transparency; Valuation
• ISSN: 0964-4733; 1099-0836
• DOI: 10.1002/bse.2852

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 (MNCs) 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 an 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.