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Non-financial information and cost Non-financial

information
of equity capital: an empirical and cost of
equity
analysis in the food and
beverage industry
Nicola Raimo and Elbano de Nuccio Received 1 April 2020
Revised 2 May 2020
LUM Jean Monnet University, Casamassima, Italy Accepted 15 May 2020
Anastasia Giakoumelou
Bocconi University, Milan, Italy, and
Felice Petruzzella and Filippo Vitolla
LUM Jean Monnet University, Casamassima, Italy

Abstract
Purpose – This study examines the effect that environmental, social and governance (ESG) disclosure
generates on the cost of equity capital in the food and beverage (F&B) sector.
Design/methodology/approach – This study analyses a sample of 171 international listed firms pertaining
to the F&B sector and headquartered in North America, Western Europe and Asia Pacific (developed), forming
an unbalanced panel of 1,316 observations, spanning the period 2010–2019. We run a fixed-effects panel
regression model to test the relationship between ESG disclosure and the cost of equity capital.
Findings – Our empirical outcomes suggest a significant negative relationship between ESG disclosure and
the cost of equity capital. We find support for the notion that increased levels of ESG disclosure are linked to an
improved access to financial resources for firms.
Originality/value – This is the first study that analyses the impact of ESG disclosure on the cost of equity
capital in the F&B sector, taking existing literature a step further into more detailed and specific aspects of the
relationship of focus.
Keywords ESG disclosure; Cost of equity; Non-financial disclosure; Food and beverage industry
Paper type Research paper

1. Introduction
Attention to corporate social responsibility (CSR) has grown considerably in recent decades,
coming to dominate the socio-economic scenario (Jones et al., 2005, 2007). Conducting their
business activity, firms are now increasingly pursuing objectives that move past mere profit
maximization and into ethical and sustainability issues (Nirino et al., 2019). This context leads
to a reconsideration of the various business models previously applied (Kim et al., 2018),
reengineering them in a manner that preserves the earth’ ecosystem and its natural
equilibrium (Franceschelli et al., 2019).
This scenario, characterized by greater attention to business ethics and responsibility
issues, poses considerable challenges for the F&B sector. The tightening of competitive
conditions and the growing sensitivity of consumers towards health, food safety and the
environment require a quest for new development strategies capable of combining
competitiveness, sustainability and ethics (Lazarides and Goula, 2018). Customers are
increasingly interested in the origin of their food, its ingredients and people behind its
processing. Furthermore, legislators, policy makers, financial institutions and influence
groups are increasingly urging companies to report on sustainability performance (Kolk,
2004). In this environment, the diffusion of CSR principles among companies operating in the British Food Journal
F&B sector represents a fundamental element for the definition of a new growth model, © Emerald Publishing Limited
0007-070X
which, by integrating social, economic, environmental and governance efficiency, is able to DOI 10.1108/BFJ-03-2020-0278
BFJ grant companies the ability to withstand competitive pressures and contribute to territorial
sustainability.
Focusing on health and food quality is leading both practitioners and researchers to
analyse sustainability issues in the F&B sector. In this regard, Deloitte (2015) underlined
customer concerns regarding the sustainability of food production and its impact on the
environment, while KPMG (2017) declined the sustainable development goals within the F&B
sector. In the meantime, many scholars have examined the application of responsible
practices and their impact on business performance (e.g. Bresciani et al., 2016; Cairns et al.,
2016; Carayannis et al., 2017; Souza-Monteiro and Hooker, 2017).
In the context of sustainable practices, non-financial disclosure assumes particular
importance (Cuganesan et al., 2010; Jackson et al., 2020). As a matter of fact, on one hand it
expands the content of disclosed information, and on the other, it amplifies the spectrum of
recipients of that information. In such regard and with respect to the first point, non-financial
disclosure allows firms to divulge information regarding practices on pollution, waste,
emissions, gender policies, human rights, labour standards as well as corporate governance.
As far as the second point goes, non-financial disclosure concerns a plurality of stakeholders,
varying from customers and workers to suppliers and the government (Raimo et al., 2019;
Vitolla et al., 2019a, 2019b). The aforementioned richness of content takes on significant value
for investors provided that non-financial aspects have a growing weight on investment
decisions. Financial information lacks, in fact, the ability to depict the value of intangibles,
placing more focus on short-term performance and capturing the past.
Opposite, non-financial disclosure has the potential to mitigate information asymmetries
between the firm and investors. The latter is associated with financial benefits (Vitolla and
Raimo, 2018), also translated into savings in cost of capital. Nevertheless, despite the presence
of studies on the impact of non-financial disclosure on the cost of capital, adequate attention
has not been paid to environmental, social and governance (ESG) disclosure. This type of
disclosure is becoming increasingly important in recognizing the impact that ESG issues
have on corporate image reputation, competitive advantage and investment decision-making
(Tamimi and Sebastianelli, 2017). In light of this, Eccles et al. (2011) underline that a wide
range of investors consider ESG disclosure as a proxy for management quality assessment.
The combination of all ESG dimensions favours investors’ assessment of the opportunities,
risks, transparency and future performance of the underlying companies (Albarrak et al.,
2019). This circumstance could behove companies also reducing the cost of equity capital.
However, despite theoretical support, the relationship between ESG disclosure and the cost of
equity capital is still vastly unexplored in current literature.
This study aims to bridge this gap in literature by analysing the impact of ESG disclosure
on the cost of equity. At this point, we need to specify that literature highlights the need to
focus attention on a specific sector, in order to account for industry specificities and
idiosyncrasies when assessing non-financial disclosure. Under this perspective, the Global
Reporting Initiative has, in fact, developed sector-specific guidelines for sustainability
disclosure (GRI, 2009), while policymakers have identified benchmarks for assessing
environmental performance (Commonwealth Department of Climate Change, 2008).
Academic research also points out to the need to recognize the effect of a firm’s industrial
sector when examining non-financial disclosure (e.g. Burritt and Welch, 1997; Aerts et al.,
2006; Jones et al., 2007; Guthrie et al., 2008a). Based on what has been said so far, this study
explores the relationship between ESG disclosure and the cost of equity capital in the F&B
sector.
The rest of this article is organized as follows: Section 2 offers an overview of relevant
literature; Section 3 develops our hypothesis; Section 4 introduces the selected research
methodology; Section 5 presents the empirical findings; Section 6 discusses model outcomes
and finally, Section 7 draws conclusions on what has been previously demonstrated.
2. Literature review Non-financial
2.1 CSR and disclosure in the F&B sector information
In line with the objectives of this study, the initial part of our literature review focuses on CSR
and disclosure in the F&B sector. Academic attention to CSR in the F&B sector has grown
and cost of
significantly in recent years. The F&B sector, in fact, faces specific challenges linked to CSR equity
for three main reasons (Hartmann, 2011). First, this sector has a strong environmental impact,
and its function is strictly connected to the availability of natural, physical and human
resources (Genier et al., 2009). The link with nature and human aspects makes it necessary to
develop sustainable business models (Franceschelli et al., 2018; Long et al., 2018).
Second, the F&B sector offers products that meet basic human needs and, as a
consequence, it is subject to continuous monitoring (Hartmann, 2011). The latter forces
companies to comply with a complex series of requirements and standards regarding the
production of raw materials, social and environmental conditions along the entire value
chain, as well as healthiness, safety and quality of the final product (Maloni and Brown, 2006;
Poetz et al., 2013; Engida et al., 2018).
Finally, the F&B chain has a unique and multifaceted structure. In this regard, since
companies have an approach to CSR heavily dependent on their size, conflicts regarding
CSR involvement in the F&B supply chain arise (Hartmann, 2011). Most relevant research
works have primarily analysed CSR in the F&B sector from the point of view of consumers
(e.g. Loose and Remaud, 2013; Kim, 2017) and the supply chain (e.g. Hamprecht et al., 2005;
Maloni and Brown, 2006). Other studies have, instead, identified factors capable of either
favouring the implementation of sustainable actions (e.g. Long et al., 2018) or avoiding
unethical production practices (e.g. Liu et al., 2018). Finally, another stream of studies
focuses on the representation of CSR practices through the analysis of non-financial
disclosure in the F&B sector. In this direction, Cuganesan et al. (2010), through the analysis
of CSR disclosure of Australian companies operating in the F&B sector, find evidence that
firms from industry sub-sectors with higher CSR profiles engage in more pronounced
symbolic disclosures. In addition, the authors verify that the relationship between a firm’s
CSR profile and its disclosure strategy is also influenced by the centrality of CSR in the
firm’s business. Guthrie et al. (2008b) analyse CSR disclosure of Australian companies
operating in the F&B sector and point out how these companies mainly employ annual
reports and corporate websites to divulge CSR-related information. Sommer et al. (2015),
on the other hand, examine German corporate websites in the F&B sector in order to
identify the determinants of CSR disclosure, suggesting firm size has a positive effect on
the level of information disclosed. In the meantime, Robkob and Ussahawanitchakit (2009)
focus on environmental disclosure in the Thai F&B sector by analysing its determinants
and effects. They come up with evidence that environmental disclosure is influenced by
corporate vision, environmental accounting policy and stakeholder force and has a
positive effect on corporate image and customer acceptance. Concluding, Guthrie et al.
(2008c) explore social and environmental disclosure in the F&B sector, finding that
companies report more extensively on industry-specific issues than general social and
environmental issues and that corporate websites are the prevalent channel over annual
reports to communicate relevant information.
Based on what has been said thus far, we realise that past research mainly studied CSR and
environmental and social disclosure in the F&B sector, while no attention was paid to
ESG disclosure (calculated through Bloomberg scores), which represents the topic of this study.

2.2 Disclosure and cost of equity capital

Another part of our literature review, in line with the objectives of this study, focuses on the
relationship between disclosure and the cost of equity capital.
BFJ Several empirical studies examine the effects of different types of disclosure on the cost
of equity capital. A first part of the literature focuses on the impact of voluntary disclosure.
In such regard, Botosan (1997) finds a significant negative relationship between the amount
of information provided by companies in their annual reports and the cost of equity for
companies with a low analyst following. Furthermore, Hail (2002) comes up with similar
results in an analysis of 73 annual reports of Swiss companies, underlining a negative effect
of voluntary information disclosure on the cost of equity. Francis et al. (2005) employ a
sample of international companies and still focus on voluntary information disclosure in
annual reports, confirming previous findings. Botosan and Plumlee (2002) find evidence
that the cost of equity decreases as information contained in annual reports increases but
increases as the level of timely disclosures increases. Espinosa and Trombetta (2007),
through an analysis of the annual reports of Spanish firms, add knowledge in the field,
highlighting the negative relationship between the level of disclosure and the cost of equity
for firms with an aggressive accounting policy. When it comes to financial disclosure, on
the other hand, Richardson and Welker (2001) suggest a negative effect of financial
information on the cost of equity.
Moving beyond financial information, part of the literature deals with the effects of
sustainability disclosure on the cost of equity. In this direction, Dhaliwal et al. (2011) point out
that the initiation of CSR disclosure involves a lower cost of equity. Dhaliwal et al. (2014)
confirm these results emphasizing that the negative effect of CSR disclosure on the cost of
equity is more pronounced for companies belonging to stakeholder-oriented countries.
Analysing environmental disclosure, Plumlee et al. (2015) come across a negative effect of the
level of environmental information disclosure on the cost of equity. In contrast, Clarkson et al.
(2013) posit that the relationship between environmental disclosure and the cost of capital is
not statistically relevant. Albarrak et al. (2019), instead, examine the impact of carbon
footprint disclosure, with their findings suggesting that the former contributes to reducing
equity costs. Delving into social disclosure, however, Richardson and Welker (2001) highlight
a positive relationship with the cost of equity, therefore suggesting that a higher level of
social disclosure increases the cost of capital.
Another part of literature analyses intellectual capital disclosure. In this regard, Kristandl
and Bontis (2007) classify intangibles-related information as forward-looking and historical
and discover a negative effect of historical information and a positive effect of forward-
looking information on the cost of capital. Orens et al. (2009) demonstrate that the disclosure
of information relating to intellectual capital mitigates information asymmetries and leads to
lower costs of equity. This result is further corroborated by Mangena et al. (2010), through a
study conducted on 126 British firms. Boujelbene and Affes (2013) study the effects of the
three components of intellectual capital (structural, human and relational), showcasing a
significant negative impact of information relating to structural and human capital on the
cost of equity but no impact of information relating to relational capital.
In recent years, researchers have also paid attention on another type of disclosure
represented by integrated reporting. Garc
ıa-S
anchez and Noguera-G
amez (2017) stress how
the adoption of this type of disclosure generates a negative impact on the cost of equity
capital. Zhou et al. (2017), instead, add that greater alignment of integrated reports with the
framework developed by the International Integrated Reporting Council reduces analyst
forecasting errors, leading to a reduction in the cost of equity. Finally, Vitolla et al. (2020a)
underline how a high quality of information contained in integrated reports reduces the cost
of equity.
The literature analysis carried out shows that past studies have analysed the effects of
several types of disclosure on the cost of equity. There is, however, an evident absence of
research into the impact of ESG information (calculated through Bloomberg scores) on the
cost of equity, which represents the objective of this study.
3. Hypothesis development Non-financial
Part of studies in the field analyses the ways in which disclosure influences the cost of information
equity. Past studies, first and foremost, highlight the ability of information dissemination to
reduce the level of investor uncertainty and the resulting risk valuations (Barry and Brown,
and cost of
1984, 1985; Coles et al., 1995; Brown and Dacin, 1997; Lambert et al., 2007). A second stream equity
of works stresses the ability of disclosure to mitigate information asymmetries between the
company and investors (Diamond and Verrecchia, 1991; Baiman and Verrecchia, 1996;
Verrecchia, 2001; Easley and O’Hara, 2004; Arvidsson, 2011; Giacosa et al., 2017; Garc
ıa-
S
anchez and Noguera-Gamez, 2017; Vitolla et al., 2020b). An additional channel suggested
by literature is associated with the ability of information to reduce monitoring costs borne
by investors, which results in a lower expected rate of return for their investments
(Lombardo and Pagano, 2002). Finally, divulging a greater volume of information has
been linked to a higher number of long-term investors (Merton, 1987; Lombardo and
Pagano, 2002).
Despite the broad theoretical support behind the negative impact of disclosure on the cost
of equity, results of empirical studies are less robust and consistent (Core, 2001; Healy and
Palepu, 2001; Kothari, 2001; Botosan, 2006; Zhou et al., 2017). Indeed, literature has outlined a
series of factors capable of affecting the relationship between information dissemination and
the cost of capital that include the following: (1) the frequency and type of information shared
(Botosan and Plumlee, 2002; Kothari et al., 2009), (2) the omission of relevant control variables
(Francis et al., 2005; Chen et al., 2009; Hail and Leuz, 2009; Zhou et al., 2017) and (3) the
presence of financial intermediaries (Botosan, 1997; Griffin and Sun, 2013).
We note that the ways outlined above in which disclosure influences the cost of equity
capital can be extended to ESG disclosure. A first channel for ESG disclosure to influence the
cost of equity lies in the reduction of information asymmetries between companies and
investors and the resulting lower investor uncertainty and improved risk valuations. Under
this perspective, it is evident that ESG disclosure can reduce asymmetries by providing
information that is not captured by financial disclosure. This is further corroborated by the
growing attention that investors grant to ESG disclosure in recent years (Tamimi and
Sebastianelli, 2017; Vitolla et al., 2019c; Raimo et al., 2020). Similarly, studies highlight how the
combination and representation of all ESG dimensions allow investors to assess the risks,
opportunities and corporate transparency of a firm (Ng and Rezaee, 2015; Yu et al., 2018;
Albarrak et al., 2019).
An additional beneficial effect of ESG disclosure on the cost of equity derives from the
involvement of a greater number of long-term investors. Amel-Zadeh and Serafeim (2018) use
survey data from mainstream investment organizations to demonstrate that a substantial
majority of investors incorporates ESG disclosure aspects in their investment decision-
making, considering them material for future investment performance. Furthermore,
Kotsantonis et al. (2016) posit that companies can increase the ratio of dedicated or long-term
investors compared to transient ones through ESG disclosure.
In light of all the above, we formulate the following hypothesis:
H1. There is a negative association between ESG disclosure and the cost of equity
capital.

4. Research methodology
4.1 Data and sample
Our sample comprises 171 international listed firms operating in the F&B sector. We begin to
select all listed firms operating in the “consumer staples” sector (4,274 firms) and, in
particular, companies pertaining to the “agricultural producers” (1,173 firms), “beverages
BFJ manufacturing” (679 firms) and “packaged food manufacturing” (1,128 firms) sectors (a total
of 2,980 firms). Proceeding, we apply a regional filter that considers North American, Western
European and Asian Pacific (developed) listed firms, in order to obtain a sample made
exclusively of firms operating in the majority of developed countries. More in detail, the North
American region includes Bermuda, Canada and United States; Western Europe includes
Andorra, Austria, Belgium, Cyprus, Denmark, Faroe Island, Finland, France, Germany,
Gibraltar, Greece, Guernsey, Iceland, Ireland, Isle of Man, Italy, Jersey, Liechtenstein,
Luxemburg, Malta, Monaco, Netherlands, Norway, Portugal, Reunion, San Marino, Spain,
Svalbard and Jan Mayen Islands, Sweden, Switzerland, United Kingdom and Asia Pacific
(developed) includes Australia, Hong Kong, Japan, New Zealand, Singapore, South Korea and
Taiwan.
At this stage, our initial sample includes 895 firms. This initial version is further
downsized to only consider firms operating in the F&B sector, as defined in the Bloomberg
database, obtaining a sample of 735 firms. Finally, we consider firms for which ESG
disclosure score and data necessary to compute the cost of equity capital are available,
reaching a final data set of 171 companies. The timeframe of our analysis spans from 2010 to
2019, generating an unbalanced data panel comprising 171 international listed firms and a
total of 1,316 observations. Table 1 summarizes the sample of this study, in terms of
geographical area.

4.2 Dependent variable

The dependent variable of this study is the cost of equity capital (Ke). It represents the
discount rate applied by markets on the firms’ expected cash flows in order to estimate
the stock price. The cost of equity capital, at the same time, represents the rate of return
demanded by investors in an equity valuation, as well as to maintain the underlying
investment in their portfolio (Reverte, 2012). Notwithstanding the importance of this
parameter, the cost of equity is not directly observable, and there is no consensus
among researchers as to the best way to compute it (Easton, 2004; Botosan and
Plumlee, 2005).
In this study, we compute the cost of equity capital using the PEG ratio method, developed
by Easton (2004) and deriving from the Ohlson and Juettner-Nauroth (2000) model. According
to this method, it is possible to compute the cost of equity using the formula reported below
(1):

rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
epsi;tþ2  epsi;tþ1
Ke ¼ (1)
P0;i

where:

Frequencies
Region Absolute Relative (%)

Asia Pacific (developed) 90 52.63

Table 1. North America 44 25.73
Sample distribution by Western Europe 37 21.64
region Total 171 100.00
epsi,tþ2 and epsi,tþ1 represent two-year- and one-year-ahead analyst consensus on the Non-financial
forecasted earnings per share for firm i; t represents the forecast date and P0,i represents the information
stock market price for firm i on the forecast date.
As previously stated, according to relevant finance literature, there is a lack of consensus
and cost of
around the best way to compute a reliable proxy for a firm’s cost of equity capital. To this equity
purpose, researchers agree that there are two main approaches to compute this parameter
(Reverte, 2012).
The first approach postulates that it is possible to obtain a reliable proxy for the cost of
equity capital using a large sample of average realized returns. Fama and French (1992),
criticize this approach, highlighting the absence of correlation between realized returns and
market beta, shedding light on the poor solidity of results obtained applying this method.
According to Elton (1999), a possible explanation lies in the fact that average realized returns
have been, for a long period of time, lower than the risk-free rate, invalidating results as a
consequence. The estimates of the cost of equity derived from the average realized returns
approach, thus, are disappointing in many regards (Gebhardt et al., 2001).
The second approach to compute the cost of equity capital is based on the residual income
valuation model (Ohlson, 1995) and is widely applied throughout finance literature (Botosan
and Plumlee, 2005; Reverte, 2012). Following this approach, it is possible to estimate the ex
ante implied cost of equity capital impounded in analysts’ earnings forecasts and market
prices. Botosan and Plumlee (2005) provided a comprehensive review on the robustness of
findings obtained using five different methods to compute the ex ante cost of equity capital.
The authors, after controlling for the most commonly used measures of risk (beta, firm size
and market-to-book ratio), postulate that the PEG ratio method (Easton, 2004) and the target
price method (Botosan and Plumlee, 2002) overperform the other methods considered in the
analysis. The PEG ratio method appears to be the method that best performs against others
due to its strong correlation with the most accepted firm risk measures (Easton and Monahan,
2005). In light of these considerations and following key studies in the field (Easton, 2004;
Botosan and Plumlee, 2005; Lee et al., 2006), we decide to employ the PEG ratio method to
estimate the dependent variable of this study.

4.3 Independent and control variables

The ESG disclosure score (ESG) constitutes the independent variable of this study. Following
Ioannou and Serafeim (2014) and Bernardi and Stark (2018) data on ESG disclosure are drawn
from the Bloomberg database. The selected independent variable measures a firm’s level of
transparency in reporting ESG information. The ESG disclosure score is calculated based on
the information that companies disclose through annual and sustainability reports, direct
communication, press releases, third party research and news items. It refers to
environmental (E), social (S) and governance (G) aspects of corporate practices. In particular,
the environmental pillar refers to emissions, water, waste, energy and operational policies
regarding environmental impact; the social pillar refers to employees, products and impact on
communities and the governance pillar, finally, refers to board structure and function, the firm’s
political involvement and executive compensation (Ioannou and Serafeim, 2014). The score is
based on 100 out of 219 raw data points that Bloomberg collects. It is then weighted to
emphasize the most commonly disclosed fields and normalized to range from 0 to 100. A score
equal to 0 is assigned to firms that do not provide information related to ESG practices, while a
score equal to 100 is assigned to firms that provide complete ESG information. Bloomberg
accounts for industry-specific disclosures by normalizing the final score based solely on a
selected set of fields applicable to the industry type.
We complete the econometric model with a set of control variables, selected following the
most relevant and recent literature in the field (Botosan and Plumlee, 2005; Botosan et al.,
BFJ 2011; Reverte, 2012; Mazzotta and Veltri, 2014; Salvi et al., 2018). More specifically, we
introduce variables that measure the firm size, market-to-book ratio, firm’s beta and financial
leverage.
Firm size (FS), calculated as the natural logarithm of the firm’s total assets, represents a
proxy of the firm’s dimensions. According to previous works, the cost of equity capital is
expected to be negatively affected towards the firm size (Botosan and Plumlee, 2005), given
that larger companies are perceived as less risky thanks to the higher flow of information
available (Cavaliere and Costa, 1999). Market-to-book ratio (MTBR) is obtained dividing fiscal
year-end market value of equity by fiscal year-end book value of equity. We expect a negative
relationship between this variable and the cost of equity capital because investors tend to
associate higher market-to-book ratios with companies that face higher earnings and
increased growth opportunities (Mazzotta and Veltri, 2014). Market beta is a proxy of firm
risk and is obtained comparing the firm’s stock volatility against that of the market. The
levered beta (BL) is a measure that absorbs both market and leverage risk (Hamada, 1972). In
this study, we employ the unlevered beta (BU) in order to isolate the effect of market and
leverage risk (Botosan and Plumlee, 2005). In particular, the unlevered beta is computed using
the following Formula (2):
B
BU ¼ L  (2)
1 þ equity
debt

where:
debt represents the long-term debt and equity is the stockholders’ equity.
The use of the unlevered beta in the econometric analysis makes it necessary to also
introduce the financial leverage variable (LEV) in our model so that we capture the effect of
financial risk on the cost of equity capital. To this purpose, financial leverage is calculated
dividing the firm’s total assets by its shareholders’ equity. Following Sharpe (1964), the cost
of equity capital should be positively affected by beta due to its sensitivity to market risk.
Furthermore, the degree of financial leverage should also positively affect the cost of equity
capital because firms with a higher leverage are perceived as riskier, ceteris paribus, by
markets and investors alike (Botosan and Plumlee, 2005). Concluding, accounting and market
data have been obtained from Bloomberg and IBES databases.

4.4 Model specification

In order to test the relationship between the ESG disclosure score and the cost of equity
capital, we apply a panel regression analysis based on a sample of 171 listed firms during a
time period spanning from 2010 to 2019. To conduct our analysis, we use the Stata software.
We conduct a Hausman test to select between random and fixed effects in order to obtain
more robust estimations. Results, consistent with previous studies in the field (Nikolaev and
Van Lent, 2005; Mui~no and Trombetta, 2009; Reverte, 2012), indicate a fixed-effects version of
the model as best fit for our examination. Our model is formed as follows (3):
Ke ¼ β0 þ β1 ESGit þ β2 FSit þ β3 MTBRit þ β4 BUit þ β5 LEVit þ εit (3)

5. Results
5.1 Descriptive analysis and correlation analysis
Table 2 summarizes the descriptive statistics of the variables employed in our model and the
Pearson’s correlation matrix.
 Concerning our dependent variable, the mean value of 8.22% (and a standard deviation of Non-financial
2.24) comes in line with prior studies (Claus and Thomas, 2001). In the meantime, the key information
independent variable measured by the ESG disclosure score, which varies between 0 and 100,
presents a mean value of 30.79. This value indicates that, on average, companies in the sample
and cost of
disclose limited ESG information. equity
The Pearson’s correlation matrix suggests that correlation coefficients among variables
are quite low (the highest value is 0.428 between the market-to-book ratio and financial
leverage), denoting the absence of multicollinearity issues. In addition, we conduct a variance
inflation factor (VIF) analysis. The outcomes confirm that results are not affected by
multicollinearity issues, being that the critical value of 10 is not exceeded (Myers, 1990).

5.2 Multivariate analysis

Results of the panel regression analysis are reported in Table 3. Our findings highlight a
negative and significant relationship between a firm’s level of ESG disclosure and its cost of
equity capital, confirming the research hypothesis. We therefore find evidence that a superior
level of non-financial disclosure, ESG in particular, can lead to lower costs of equity capital,
providing a better access to financial resources.
The regression outcomes concerning control variables in the model allow us to make
considerations on the robustness of the dependent variable. Our findings are in line with
those of prior studies highlighting that the cost of equity capital is positively influenced by
unlevered beta and financial leverage and negatively influenced by market-to-book ratio and
firm size, providing support for the robustness of our dependent variable. The PEG ratio
method generates a reliable proxy for the cost of equity capital, particularly useful for
researchers with a focus on the relationship between non-financial disclosure and cost of
equity (Easton, 2004).

Standard
Mean deviation KE ESG FS MTBR BU LEV

KE 8.22 2.24 1.00

ESG 30.79 14.52 0.011 1.00
FS 9.94 2.16 0.046* 0.310*** 1.00
MTBR 2.37 2.65 0.024 0.261*** 0.205*** 1.00
BU 0.47 0.99 0.096*** 0.074*** 0.072*** 0.031 1.00 Table 2.
LEV 2.48 1.27 0.159*** 0.216*** 0.031 0.428*** 0.101*** 1.00 Descriptive statistics
Note(s): *Significant at the 10% level; **Significant at the 5% level; ***Significant at the 1% level and correlation matrix

Expected sign Coefficient Robust standard error p value

Constant 25.607*** 2.033 0.000

ESG () 0.026*** 0.009 0.009
FS () 1.783*** 0.209 0.000
MTBR () 0.189*** 0.049 0.000
BU (þ) 0.137** 0.054 0.011
LEV (þ) 0.614*** 0.112 0.000
N. of obs. 1,316
R-Sq (within) 0.101 Table 3.
Prob > F 0.000 Panel regression
Note(s): *Significant at the 10% level; **Significant at the 5% level; ***Significant at the 1% level analysis
BFJ More in depth, the relationship between firm size and the cost of equity is negative and
statistically significant (1.783, p 5 0.000) confirming the notion that investors expect a
higher rate of return when they interact with smaller companies due to the higher information
asymmetries associated with them (Boujelbene and Affes, 2013). Market-to-book ratio and the
cost of equity form a negative and statistically relevant link (0.189 and p 5 0.000),
confirming our initial expectation. The reason behind this negative relationship is the
tendency investors have to undervalue firms with low market-to-book ratio: the lower the
market-to-book ratio, the lower the associated earnings and growth opportunities (Mazzotta
and Veltri, 2014). The unlevered beta and the cost of equity capital appear positively
associated (0.137, p 5 0.011). Our findings confirm the assumption that a reliable proxy for
the cost of equity capital increases as the level of market risk increases. Concluding, our
findings highlight a positive (0.614) and statistically relevant (p 5 0.000) relationship between
a firm’s financial leverage and the cost of equity, in line with prior studies suggesting equity
costs increase as the level of financial risk increases (Botosan and Plumlee, 2005).

6. Discussion
Empirical findings in this study indicate that a wide dissemination of ESG information allows
companies to benefit from a lower cost of equity capital. These results expand existing
literature by highlighting an additional type of non-financial information capable of
negatively influencing the cost of equity capital. Previous studies identified a negative impact
of voluntary disclosure (Botosan, 1997; Botosan and Plumlee, 2002; Hail, 2002; Francis et al.,
2005; Espinosa and Trombetta, 2007), of financial disclosure (Richardson and Welker, 2001),
of CSR disclosure (Dhaliwal et al., 2011, 2014), of environmental disclosure (Plumlee et al.,
2015), of carbon disclosure (Albarrak et al., 2019), of intellectual capital disclosure (Orens et al.,
2009; Mangena et al., 2010; Boujelbene and Affes, 2013) and of integrated reporting (Garc
ıa-
S
anchez and Noguera-G
amez, 2017; Zhou et al., 2017; Vitolla et al., 2020a) on the cost of equity
capital. The present examination expands current knowledge by pointing out that ESG
disclosure also has a negative effect on the cost of equity capital. Furthermore, our findings
extend previous research on the relationship between non-financial disclosure and the cost of
equity capital into the F&B sector, which has received limited academic focus.
ESG disclosure provides information regarding pollution, waste, emissions, gender
policies, human rights, labour standards as well as corporate governance practices, the
composition of the board of directors and control procedures, all of which play an
increasingly important role in investor decision-making. In the F&B sector, ESG disclosure
involves information linked to product safety, traceability, food and drink quality, health and
measures to solve problems related to world hunger. Information asymmetries between
companies and investors frequently regard the aforementioned issues as financial disclosure
is unable to collect and divulge data addressing them. More importantly, investors are paying
growing attention to such matters and regard them as an indicator that surpasses current
performance depicting a firm’s ability for value creation in the long run.
Findings reached in this study can be explained by the indirect mechanisms through
which ESG information influences the cost of equity. These mechanisms are essentially
attributable to the ability of ESG disclosure to increase the number of long-term investors and
to reduce information asymmetries. These circumstances, although valid in all company
contexts, are particularly relevant in the F&B sector.
With respect to the first point, the rationale behind results in this study should be sought
in the higher volume of long-term investors. A quality supply chain and the production of safe
and quality food and drinks are elements capable of validating and strengthening the
competitive advantage of companies. In this regard, the correct representation of these
elements through ESG disclosure is vital to convey to stakeholders in general, and investors
in particular, the company’s ability for value creation in the medium and long term. In fact, the Non-financial
need for long-term investors to obtain information on traceability, food and drink quality and information
safety is evident. Such factors, not communicated in financial disclosure, allow investors to
better comprehend the critical elements underlying the different business dynamics and
and cost of
favour more accurate decision-making processes. In light of this, it becomes clear that equity
adequate ESG disclosure increases firms’ potential to attract more long-term investors. The
latter appears less and less interested in short-term results and more focused in long-term
shared value growth. The circumstances set out explain why an adequate ESG disclosure
favours reductions in the cost of equity capital through an increase in long-term investors.
Moving on to the second point, findings are supported by the reduction of information
asymmetries deriving from greater transparency on fields such as traceability, food and
drink quality and safety, which, in turn, represent elements at the basis of success for
companies in the F&B sector and guarantee a robust advantage over competitors. This type
of information is not captured by financial disclosure, and therefore, the presence of
information asymmetries between F&B firms and investors on such aspects is highly
probable. Information asymmetries, however, heighten investors’ risk perception. Tackling
the latter, ESG disclosure enables more accurate forecasts and improves risk valuations by
investors, leading to a subsequent reduction in the cost of equity capital. The circumstances
set out explain why an adequate ESG disclosure favours the reduction of the cost of equity
capital through a reduction of the information asymmetry.

7. Conclusions
This study examined the impact of ESG disclosure on the cost of equity capital in the F&B
sector. Our findings highlighted the presence of a negative relationship between ESG
disclosure and equity costs. We extended existing literature already showcasing a negative
impact generated by other types of disclosure by exploring the potential of ESG disclosure to
influence equity costs, further enhancing new knowledge in the field by focusing on a specific
sector.
A series of managerial implications are to be drawn from the empirical outcome of this
analysis. In light of the benefits related to the reduction of the cost of equity, companies in the
F&B sector are called to pay particular attention to the transparency and disclosure of
information regarding ESG aspects. More specifically, managers should gather and share
information on critical matters for investors, such as traceability, food and drink quality,
health and product safety. In fact, such information cannot be deduced from financial
disclosure and therefore assumes significant value for investors.
The main takeaway remains that managers of firms operating in the F&B sector should
attend to the level and quality of information on ESG practices before conveying it to external
stakeholders. ESG information can be employed as an effective communication tool to
demonstrate the firm’s ability to build and maintain a competitive advantage in the long run
and attract a greater number of long-term investors, reducing potential information
asymmetries.
Furthermore, an increase of the communication channels through which ESG information
is disseminated can offer an extended and more direct reach of users. On this aspect,
managers should not limit themselves to divulging ESG data exclusively through corporate
documents, such as sustainability, annual and integrated reports but also should employ
alternative channels, such as direct communications, corporate websites and press releases.
Such tools allow investors to access ESG information in real time and to incur lower costs.
Finally, firms operating in the F&B sector, in light of the growing attention that investors
devote to ESG disclosure, should explore the benefits of investing resources in the health and
safety of food and drink products as well as in their supply chain, factors that have grown to
play a fundamental role in investor decision-making.
BFJ Concluding, we cannot fail to recognize limitations this study is subject to. The primary
limit to our study is linked to the nature of our sample, which only includes companies
operating in developed countries. This shortcoming represents a valuable starting point for
future research. In fact, future works may test the relationship of interest in alternative
sectors and/or in developing countries and also move further carrying out comparative
analyses. Additionally, new studies can examine further effects of ESG disclosure in the F&B
sector, such as its impact on market capitalization, firm value, cost of debt and weighted
average cost of capital.

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Corresponding author
Nicola Raimo can be contacted at: raimo.phdstudent@lum.it

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