The Effect of Sustainability Reporting through IR Departments on Corporate Cost of Capital

Abstract

[Purpose] This paper aims to provide empirical evidence on the effects of sustainability activities on the cost of capital, with a focus on the role of the department that discloses a sustainability report. [Methodology] This study analyzes data from companies listed on the Korea Stock Exchange (KSE) and KOSDAQ between 2013 and 2017, focusing on the interaction term between a dummy variable indicating whether the Investor Relations (IR) department disclosed the sustainability report and a variable measuring ESG performance. [Findings] The analysis revealed that sustainability activities generally have a negative impact on the cost of capital. However, when the interaction with the IR department is considered, this effect disappears, and the coefficient estimate of the interaction term with the IR department is found to be significantly negative at a high level. [Implications] These findings indicate that the negative impact of ESG activities on the cost of capital appears only when such activities are disclosed by the IR department. They also provide practical implications by suggesting that ESG activities are more effective in reducing the cost of equity when they are actively promoted to investors and analysts through appropriate disclosure channels.