CSR Performance, Disclosure Tone, and Cost of Capital: Evidence from European Non-Financial Reporting

This study examines how corporate social responsibility (CSR) performance relates to firms’ disclosure tone in CSR reports and their resulting cost of capital. Our empirical analysis reveals that firms with superior CSR performance exhibit systematic patterns in their disclosure tone, characterized by increased usage of positive language and decreased usage of negative language. In contrast, firms with lower CSR performance show no significant strategic communication patterns. Our analysis reveals a complex relationship between CSR performance, disclosure tone, and cost of capital. While CSR performance and optimistic disclosure tone individually have positive associations with cost of capital, their interaction exhibits a significant negative relationship. This finding suggests that the impact of CSR performance on cost of capital is contingent on the optimistic tone employed in CSR disclosures. Firms with strong CSR performance can enhance the favorable impact on their financing costs by adopting a more optimistic disclosure tone, potentially offsetting the standalone positive association between CSR performance and cost of capital. Further analysis reveals that these effects are more pronounced in the pre-NFRD period, indicating that the transition from voluntary to mandatory reporting altered the economic consequences of CSR disclosure strategies.