The Effect of Mandatory ESG Disclosure on the Cost of Equity Capital around the World

We examine the impact of mandatory ESG disclosure around the world on the cost of equity capital. Using a sample of firms in 62 countries and a difference-in-difference setting, we document that, on average, the ESG disclosure mandate significantly reduces the cost of equity for mandatory adopters by 44 basis points. This reduction is present only in countries with strong legal enforcement and social norms and in countries where the implementation mandates are issued by government institutions. Our further analysis suggests two mechanisms behind the cost of equity reduction: (1) the regulation leads to increased disclosure and enhanced information comparability and thus firms with weaker information environments experience a larger drop in equity-financing cost, (2) firms react to the mandate by improving their ESG performance and witness significant demand from ESG-conscious investors. Collectively, our findings support the view that the ESG disclosure mandate improves the information environments and generates positive ESG externalities