The moderating role of CEO sustainability reporting style in the relationship between sustainability performance, sustainability reporting, and cost of equity

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).