Mandatory Disclosure, Greenhouse Gas Emissions and the Cost of Equity Capital: UK Evidence of a U-shaped Relationship

This paper examines the effects of disclosing greenhouse gas (GHG) information mandatorily on the cost of equity capital (COC) using a longitudinal unbalanced panel database of the UK’s FTSE 350 firms for the period 2011 – 2016. Following Powell (2016), we use a non-linear panel quantile regression (PQR) model to examine the relationship between GHG disclosure (GHGD) and COC in the UK. This technique was supplemented by conducting a two-step generalised method of moment (GMM) estimation to address any concerns related to the potential existence of endogeneity problems. Our findings suggest that high-level GHGD appeared to be negatively associated with COC up to a certain level, which is known as the turning point; then, any increase in GHGD is likely to increase the COC. This means that the non-linear association between GHGD and COC is evidenced in our study and takes a U shape. Likewise, our findings are associative of a moderating effect of the 2013 carbon disclosure regulation (CDR) on the GHGD-COC nexus. We argue that mandatory GHG disclosure and GHG risk are linked so that those companies that are associated with higher GHG risk have a tendency to be better disclosers. Consequently, we urge regulators to design GHG disclosure regulations in a way that mirrors corporate environmental risk and lead to a lower COC in order to align the interests of corporations with those of the society at large.