Carbon Disclosure and the Cost of Capital

We examine the relation between carbon disclosure and the cost of capital and explore a potential benefit associated with carbon disclosure: a reduction in firm's cost of capital. Employing a sample of U.S. S&P 500 corporations that present their CDP reporting on the websites of CDP organization, we find that the cost of capital is significantly negative associated with carbon disclosure. However, the negative relation can be mitigated among the firms with superior carbon performance. We also find that the level of carbon disclosure is higher among poor carbon performers than good carbon performers, which can provide some preliminary evidences for legitimacy theory. Our results provide evidence on the rationales behind and the consequences of the recent trend in voluntary carbon disclosure.