Does more voluntary environmental information disclosure cut down the cost of equity: heavy pollution industries in China

Examining the coexisting policies for mandatory and voluntary disclosure of environmental information, this paper focuses on the unique background for such disclosure in the context of domestic companies in heavy pollution industries (EHPIs), a topic thus far overlooked by the literature. We aim to identify, in regard to compulsory environmental information disclosure in financial reports, whether adding further voluntary information disclosure to corporate social responsibility (CSR) results in an extra discount from investors during an equity financing. We evaluate a sample of 4390 A-share listed companies in EHPIs operating in China between 2010 and 2018. Specifically, linguistic analysis and image recognition are conducted with Python, and a regression model is applied to test our hypotheses. The positive impact of the following variables on the cost reduction in equity capital is thus demonstrated: (a) CSR disclosure, (b) higher quality CSR reports, (c) increased environmental information disclosure in CSR reports ( CSR_E ), (d) more accurate environmental investment information, and (e) additional graphs and text. Moreover, the degree of CSR_E disclosure’s reduction in the cost of equity is 30 times that of CSR disclosure, while charts have specific positive effects that text does not. Therefore, we identify a new path for remitting information asymmetry in a financial market by extending information manipulation research, especially studies of nonfinancial information. Overall, information disclosure should be taken seriously by both firms and supervisors. Hence, this study offers guidelines for regulatory authorities to explore the coordination effect of mandatory and voluntary disclosure policies, i.e., to achieve environmental governance and the sustainable development of enterprises by improving corporate governance.