Study On Relationship Between Carbon Disclosure And Cost Of Equity

As to a company, capital is the source of its operation. One of the main approachto abtain capital is the equity financing. What we should pay for equity financing iscalled the cost of equity. From the investor’s point of view, the cost of equity is therate of return. Because of the information asymmetry, investors should consider lotsof factors to make decisions whether to invest or not. Besides financial information,investors think over non-financial information more and more.With the process of the industrialization, the emissions of greenhouse gas arebecoming more and more. Greenhouse effect has attracted the attention of the globalcommunity, and companies should be responsible for it. With the creation of CarbonDisclosure Project, investors will consider firm’s carbon disclosure when they makedecisions.Based on these, this article studies the relationship between carbon disclosure andthe cost of equity. First, review the literature and propose the first hypothesis, namelythe negative relationship between carbon disclosure and the cost of equity. Second,select samples from S&P500, and analyze their carbon disclosure. In the empiricalpart, according to the first hypothesis and the structure of CDP questionnaire, thispaper raises four related hypotheses. Given the information disclosure lag, substitutedata with year2009and2010in the first model. All the regression results verify theassumptions of this paper.On the results of previous studies, this paper combines the carbon disclosure andthe cost of equity creatively. In view of the negative relationship between carbondisclosure and the cost of equity, companies can reduce the cost of equity if theyimprove the carbon disclosure level. At last, this article puts forwards somesuggestions on improving carbon disclosure level.