Research On The Relation Between The First-time Disclosure Of CSR Report And The Cost Of Equity Capital

There are many reasons for corporations to disclose their social responsibility reports,such as to improve its relationship with investors, to ease the trust crisis, to enhance investors’confidence; to establish a good corporate image, to enhance the corporate value; to abide statelaws and so on. This thesis mainly studies their relationship between them from theperspective of the cost of equity capital.The reason to consider the cost of equity capital is because the level of the cost of equitycapital is related to the level of corporate financing and its general business strategy. Too highcost of equity capital would lead to the corporations to encounter cash flow problems, evenseriously affect their own operation situation. In addition, the cost of corporate equity capitalcan be controlled to some extent.The mechanism between them is as follows: the disclosure of the corporate socialresponsibility information can reduce the information asymmetry between the corporation andthe investors, and thus may reduce the corporate cost of equity capital. This is because on theone hand, the disclosure of the corporate social responsibility information can enhance theinvestors’ understanding of the corporation, which can help the investors to predict thecorporation’s future earnings and allocation probability more accurately, thereby reducing theinvestor’s predicting risk that can not be dispersed, and its return on capital raised foradditional information risk premium, then reducing the cost of equity capital finally. On theother hand, investors prefer to invest the corporations that they have more understanding, sothe disclosure of corporate social responsibility information can also increase the transactionvolumes, enhance capital market liquidity and reduce the transaction cost.As a result of these considerations, the corporations with higher cost of equity capital aremore likely to disclose their corporate social responsibility reports. This thesis puts forwardits contents just from this idea: reducing the cost of equity capital was a factor to promotecorporations to voluntarily disclose their corporate social responsibility report. Next, thisthesis studies the changes of the cost of equity capital when the corporations disclosed theircorporate social responsibility reports one year after, in order to prove whether the cost ofequity capital was reduced after the corporations disclosed their corporate social responsibility reports.Therefore, owing to the disclosure system of modern corporate social responsibilityreports is stricter, this thesis studies the relationships between the social responsibility reportsthat the corporations first disclosed and the cost of equity capital. This thesis uses thecorporations that in the Shanghai Stock Exchange from2007to2010, including215corporations that disclosed their corporate social responsibility reports and341corporationsthat did not, to examine how the disclosure of corporate social responsibility reports influencethe cost of equity capital. Through research and analysis, the results are as follows: First, thecorporations that first disclosed their social responsibility reports generally have higher costof equity capital before they disclose their reports one year before, this means that higher costof equity capital may indeed be one factor to promote the corporations to disclose their socialresponsibility reports. Second, only the corporations that well performed social responsibilitycan reduce their cost of equity capital after they first disclosed their social responsibilityreports.