Environmental Disclosure and the Cost of Capital: Evidence from the Fukushima Nuclear Accident, Pietro Bonetti, University of Padova; Charles H. Cho, ESSEC Business School; Giovanna Michelon; University of Exeter; University of Padova; Yuki Tanaka, Hosei University, December 1, 2013.
“Our study is motivated by the lack of overall consensus in the debate about whether and how capital market participants capture and value the disclosure of environmental information. Using a large hand-collected sample of environmental information disclosed by Japanese firms over the period 2003-2011, we examine the heterogeneity in the cost of capital changes after the Fukushima nuclear disaster that has caused widespread damage and severe problems in Japan, and investigate whether systematic differences in the pre-shock environmental disclosure behaviors explain firm-level heterogeneity in cost of capital changes. We report that (1) firms issuing a stand-alone environmental report experience a lesser increase in the cost of capital than their non-issuing counterpart firms; (2) firms providing more precise, verifiable and hard environmental information on CO2 emissions levels experience a less severe shock to the cost of capital than firms not reporting this type of information; and (3) higher commitment to disclosure is associated with a lower cost of capital shock, suggesting that for firms that credibly commit to disclose environmental information, environmental disclosures are a mechanism to reduce information asymmetries between the firm and investors of across investors regardless of the favorableness of the news. Taken together, these results and potential contributions help increase our understanding, in a more insightful and nuanced way, about whether and how capital market participants capture and value disclosure of environmental information.”