Environmental, Social, and Governance Disclosure and Cost of Capital: Evidence from Mandatory Non‑Financial Reporting Reforms in the European Union during 2003-2013

Abstract

This study investigates the causal effect of mandatory Environmental, Social, and Governance (ESG) disclosure on firms’ cost of capital, exploiting the staggered adoption of non‑financial reporting directives across European Union member states between 2003 and 2013. Using a difference‑in‑differences (DiD) framework on a panel of 4,872 publicly listed firms from 15 EU countries, we find that mandatory ESG disclosure reduces the implied cost of equity by an average of 28 basis points and the effective interest rate on debt by 19 basis points. The effect is more pronounced for firms with high pre‑existing information asymmetry, firms in environmentally sensitive industries, and those with poor prior ESG performance. Mechanism tests suggest that improved disclosure reduces estimation risk and increases analyst coverage. Our results are robust to entropy balancing, placebo tests, and alternative cost‑of‑capital specifications. These findings provide critical evidence for regulators weighing the costs and benefits of mandatory non‑financial reporting and contribute to the management literature on strategic disclosure and capital market outcomes.