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1. Introduction
The pursuit of corporate environmental, social and governance (ESG) criteria to improve a company’s sustainable performance has become increasingly crucial in recent years (Bassen et al., 2006). Publicly listed companies are progressively taking more responsibility towards ESG performance and its related risks. Additionally, investing in companies with higher ESG performance is increasingly preferred by institutional investors (Guenster et al., 2011). An increasing number of multinational corporations have integrated their ESG performance into their strategies (Jo and Harjoto, 2011). The introduction of the Australian corporate ESG disclosure guideline in 2011 by the Australian Council of Superannuation Investors (ACSI, 2011), one of the country’s largest institutional investors, is only an example of the importance of ESG performance.
The recent rise in corporate ESG performance or corporate social responsibility (CSR) [1] has motivated researchers to investigate whether corporate ESG performance disclosure leads to value creation. The extant research has investigated the association between corporate ESG performance and operational, financial and equity market performance but reports inconclusive answers (Margolis et al., 2009; Jiao, 2010). Additionally, only a few research investigate the capital market perception of corporate ESG performance disclosure (Sharfman and Fernando, 2008; El Ghoul et al., 2011; de Klerk and de Villiers, 2012; de Klerk et al., 2015). The inconsistencies in findings and the paucity of research that directly examines how corporate ESG performance disclosure impact a company’s cost of capital (COC) motivate investigating this association. Therefore, this study seeks to answer whether the debt and equity markets consider the corporate ESG performance disclosure. This study seeks to both extend the understanding of the economic implications of corporate ESG performance disclosure and respond to the prior literature’s call for further investigation (Kempf and Osthoff, 2007; Sharfman and Fernando, 2008) [2].
This study refers to the corporate disclosure strategies and the market imperfection concept that may impact a company’s COC and idiosyncratic risk. This study reviews prior research and articulates that a better corporate ESG performance disclosure has a range of outcomes. First, it results in mutual trust and a more efficient social contracting with stakeholders (Jones, 1995). If corporate ESG performance disclosure impacts the perceived riskiness of a company, then better ESG performance disclosure should result in lower COC. Second, companies...