Corporate social responsibility disclosure level, external assurance and cost of equity capital

This study contributes to the accounting literature on corporate social responsibility (CSR) reporting by analyzing whether CSR report characteristics, including CSR disclosure level and the external assurance of CSR disclosures, explain variation in cost of equity capital for CSR disclosers. I find that among firms with good CSR performance, those reporting at a high CSR disclosure level have lower cost of equity capital than those reporting at a low CSR disclosure level. Among firms with poor CSR performance, I find the opposite: firms reporting at a high CSR disclosure level have higher cost of equity capital than firms reporting at a low CSR disclosure level. This result is consistent with investors imposing a penalty on firms for "greenwashing". I find that only firms with poor CSR performance benefit from the external assurance of CSR disclosures. Specifically, poor CSR performers that obtain external assurance of their CSR disclosures have lower cost of equity capital than those that do not. This result only holds for poor CSR performers that obtain external assurance of their entire CSR report as opposed to those that obtain external assurance of only specific CSR disclosures within their report. This result is consistent with investors requiring a high degree of credibility to distinguish poor CSR performers disclosing actual improvements in performance from "greenwashers".