The Moderating Role of CEO Sustainability Reporting Style in the Relationship between Sustainability Performance, Sustainability Reporting, and Cost of Equity

Journal of Business Economics

Posted: 4 Aug 2018 Last revised: 22 Mar 2022

See all articles by Kerstin Lopatta

Kerstin Lopatta

University of Hamburg - Faculty of Business, Economics, and Social Sciences

Thomas Kaspereit

Universite du Luxembourg

Sebastian A. Tideman

University of Exeter Business School - Department of Accounting

Anna Rudolf

University of Hamburg

Date Written: March 21, 2022

Abstract

This paper explores the role of individual managers in the relationship between sustainability performance, sustainability reporting, and cost of equity. Based on prior research showing that both sustainability performance and reporting reduce the risk premium, this paper contributes to the literature by acknowledging that the true motives behind a manager’s corporate sustainability engagement are not apparent to investors. Thus, investors need to rely on further information to assess the relationship between sustainability performance and risk. We argue that CEOs’ values and preferences drive their decisions regarding sustainability activities. Thus, their fixed effect on sustainability reporting conveys a signal to investors about the motives behind corporate sustainability engagement and the extent of reporting. In the first step of our empirical analysis, we document that a CEO’s specific reporting style indeed has significant statistical power in explaining a company’s level of sustainability reporting. In the second step, we find that improved sustainability performance is associated with increased cost of equity when the CEO exerts a strong personal influence on sustainability reporting. However, cost of equity declines if the CEO’s influence on the reporting of improved sustainability performance is low. Our results are consistent with the argument that investors interpret CEO’s fixed-effect on sustainability reporting as a signal. That is, for a high CEO fixed-effect, increases in sustainability engagement are conflated with the CEO's self-interested values. In further tests, we show that the signal seems to be particularly important for normative sustainability activities (vs. legal sustainability activities).

Keywords: CEOs’ Style, Sustainability Reporting, Sustainability Reporting Score, CEOs’ Sustainability Reporting Style, Sustainability Performance, CEO Fixed Effects, CFO Fixed Effects, Cost of Equity Capital, CEO-Firm Matched Panel Analysis

JEL Classification: M40, M41, M49, M50, M51, Q56, Q59

Suggested Citation

Lopatta, Kerstin and Kaspereit, Thomas and Tideman A., Sebastian and Rudolf, Anna, The Moderating Role of CEO Sustainability Reporting Style in the Relationship between Sustainability Performance, Sustainability Reporting, and Cost of Equity (March 21, 2022). Journal of Business Economics, Available at SSRN: https://ssrn.com/abstract=3214321

Kerstin Lopatta

University of Hamburg - Faculty of Business, Economics, and Social Sciences ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

Thomas Kaspereit

Universite du Luxembourg ( email )

Université du Luxembourg
Campus Kirchberg
Luxembourg, 1359
Luxembourg
+352 466644 6728 (Phone)

HOME PAGE: http://https://wwwen.uni.lu/research/fdef/dem/people/thomas_kaspereit

Sebastian Tideman A. (Contact Author)

University of Exeter Business School - Department of Accounting ( email )

Exeter, EX4 4QJ
United Kingdom

Anna Rudolf

University of Hamburg

Allende-Platz 1
Hamburg, 20146
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
1,280
PlumX Metrics