Environmental Disclosure and the Cost of Equity: The French Case

Abstract

What is the impact of voluntary corporate environmental disclosures on the cost of equity? The present study will attempt to answer this question. The empirical research is based on companies listed in the French SBF 120 stock market index. In 2006, most of these companies devoted a section of their annual report to environmental actions, yet fewer than 20% of them actually published a separate report dedicated to the issue of sustainable development. Regardless of the selected medium, the environmental topics receiving the most attention in corporate reporting are pollution, natural resources and recycling. The determinants associated with environmental disclosure are: company size, financial leverage, and the number of financial analysts monitoring company stock. This study does not lead to concluding that companies disclosing environmental information necessarily lower the cost of equity.

Notes

For a more detailed literature review, see Clarkson et al. (2007).

For an in-depth presentation of the various conceptual frameworks, see Oxibar (2003).

The work undertaken by Richardson and Welker (2001) led, on a sample of Canadian businesses, to a result that refutes the postulate in Richardson et al. (1999). A positive correlation was demonstrated between the social communication score and the cost of share capital.

Richardson and Welker (2001) did not however confirm this influence in the case of social information.

The magazine Challenges (the January 10, 2008 issue - No. 106) reveals that the ‘Big Four’ (KPMG, PWC, Ernst & Young and Deloitte) hold a quasi-monopolistic position over companies listed on France's CAC40 stock market index (over 80% of work orders and over 90% of all fees generated).

http://fr.finance.yahoo.com

French acronym for Modèle d'Equilibre des Actifs Financiers (Financial Asset Equilibrium Model).

A firm had to be excluded from the sample due to the unavailability of reports (either sustainable development or annual report) on its website.

t-test for the equality of averages (hypothesis of unequal variances): t = –2.357* (Sign. 0.023).

The number of financial analysts tracking the stock could serve as an approximation of company size since as a firm expands, a greater number of analysts issue recommendations regarding its stock.

Several regressions were estimated in compliance with the principle of explanatory variable independence (in order to avoid encumbering the presentation, neither the results nor the correlation matrix have been reproduced herein, yet they may be requested from the authors).

Given their lack of significance, the results of these regressions have not been reproduced herein.