*3.1. Sample*

We examined a sample of US firms listed on the S&P 500 observed from 2009 to 2019 initially. We excluded regulated firms as well as financial institutions (SIC codes between 4900 and 4999 and those between 6000 and 6999). Financial and accounting data were downloaded from Thomson Reuters's DataStream with some additional data that were manually retrieved from the firms' annual reports and different internet sites. For ESG scores, data were obtained from the Bloomberg data set. After merging the latter databases and due to missing observations, we retained a final sample of 430 firms observed from 2011 to 2019.

Industry classification was based on the Global Industry Classification Standard (GICS), which is an industry taxonomy developed by Standard and Poor's in 1999.

#### *3.2. Variable Measurement*

3.2.1. Dependent Variable: The Cost of Capital

The cost of capital (COK) is the expected return rate that market participants require to attract funds to a particular investment [66]. COK is considered an opportunity cost since it is incurred by any entity willing to invest against an alternative similar-risk-and-liquidity investment [67]. In simpler terms, the cost of capital is the reward that an investor expects to receive from a company in the future. Ref. [66] states that COK is a fundamental tool in pricing risk and it can only be measured indirectly. The authors of [68] considered a simple firm as a set of assets. These assets may be financed partly out of borrowed money (debt) and partly by shareholders (equity financing). Both fund providers are considered capital providers. The firm capital structure consists of debt capital and equity capital. Each of these components has its own cost related to its respective risk. Capital is a key input received by corporations; understandably, the more costly this input is, the harder it will be for firms to generate profits regardless of the revenues they make.

Several authors have defined the cost of capital as the weighted average cost of capital (COK), an average cost of both capital components, thus an average cost of ownership interest and debt interest. From investors' standpoints, El Mehdi [69] considers that investors are generally risk-averse entities; consequently, they require a certain return that depends on investment risk. Ibbotson et al., [67] states that COK represents investors' expectations which are divided into two: a free risk rate which is mainly assimilated to government bonds and a risk premium which is a return required by an investor for a perceived level of risk.

We follow previous research [21,44] and estimate the firm cost of capital through the weighted average cost of capital model, presented by [68] as follows:

$$\text{COK} = \text{COE} \times \frac{\text{Equity}}{\text{Debt} + \text{Equity}} + \text{COD} \times \frac{\text{Debt}}{\text{Debt} + \text{Equity}} \times (1 - \text{t})$$

where:

COK: the cost of capital estimated through the weighted average cost of capital model. COE: the cost of equity.

COD: the cost of debt.

Equity: the market value of firm equity.

Debt: the market value of firm debt.

t: the effective corporate tax rate.

#### 3.2.2. Independent Variable: ESG Disclosure

Empirically, to measure ESG disclosure, we use a panel dataset with environmental, social, and governance (ESG) disclosure scores obtained from the Bloomberg database. Bloomberg rates a firm's ESG disclosure level [8,70,71]. The scores assess companies' CSR

disclosures of their environmental, social, and governance activities. Each activity is given a score from 0 to 100 so that the score increases with an increase in disclosed information.

The environmental score (E) addresses many issues intrinsic to the business environment and the relationship between the business and society (CO2 emissions, energy consumption, energy efficiency policy, total waste, and emissions reduction policy). The environmental disclosure score (E) is used as a measure of environment-oriented CSR disclosure.

The social score (S) captures sensitive and salient concerns for society such as human rights, social equity, consumer safety, relationship with the community, etc. The social disclosure score (S) is used as a measure of social-oriented CSR disclosure.

Finally, the governance score (G) captures practices that do not primarily affect the public and take place primarily within the company. The governance disclosure score is used because it reflects information such as board diversity, anti-competitive practices, corruption within the company, cumulative voting, executive compensation, shareholders' rights, takeover defense, and staggered boards. The governance disclosure score (G) is used as a measure of governance-oriented CSR disclosure.

In this study, we examine the effect of CSR disclosure through each ESG individual dimension on the cost of capital.

We follow the methodology of both [14] and [72] and transform each ESG disclosure score into indicator variables (0, 1) (environmental Score (ENV\_SC), social score (SOC\_SC), and governance score (GOV\_SC)). We first calculate the median of each disclosure score every year, then we give the value of one if firm has a disclosure score higher than the median and zero otherwise. This methodology has two advantages [14]. It mitigates bias in data coding, and it is more suitable for a large sample which is beneficial in our case since Bloomberg's ESG scores presented several missing values for the firms listed on the S&P 500 during the 2011 to 2019 period.
