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

The file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.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