*2.1. Environmental Disclosure and Firm Risk*

Environmental disclosure reports on many issues related to the company's impact on its natural living and non-living environment (including air, land, and water). It addresses many issues representing a company's commitment and effectiveness towards reducing environmental emissions, supporting research and development of eco-efficient products or services, and achieving an efficient use of natural resources in its production process [43]. Firms with good environmental disclosure policies tend to reduce the probability of lawsuits against them from regulators or NGOs and support fewer ecological fines and litigation

costs. These saved funds would be strategically converted into potential investment opportunities [44].

*First*, Freeman [45] states that through CSR commitment, firms might assimilate economic achievements with social, environmental, and ethical commitments. Stakeholder theory encourages environmental disclosure, since by addressing issues about, for example, CO2 emissions, the amount of waste, the use of nuclear energy, the amount of environmental R&D expenditures, total water withdrawal, and environmental supply chain, firms would build long-term trust with all their stakeholders, which would help in creating a basis for a sustainable business model and an environment where companies would be ethical and profitably evolve with fewer conflicts of interest between stakeholders. In addition, with greater compliance to environmental regulations and the credibility of the reporting mechanisms, firms would enhance their stakeholders' engagement and reduce the information asymmetry and ultimately agency costs. Therefore, and bearing on stakeholder theory, environmental disclosure is associated with a convenient and meaningful way with which firms develop their relationships with different groups of stakeholders, which contributes to reducing their risk [45,46].

*Second*, based on signaling theory, several companies have decided to report environmental information to receive good reactions from investors who perceive this engagement as a "good signal". In this line of thought, much environmental information can be hidden by firms (such as CO2 emissions, energy consumption, and energy efficiency policy) to avoid the negative reactions of investors. Therefore, and according to signaling theory, there are different measures to be taken to reduce information opacity. These actions could take the form of a premium that the agent would offer to the company to disclose hidden attributes through signals. In this regard, firms with good environmental disclosure policies would use reports to convey a positive signal and act as "good citizens" [47]. Credibility and inimitability attributes stated in signaling theory have a fundamental role in considering environmental disclosure as a signaling tool since firms would benefit from a positive valuation from all stakeholders. Meanwhile, firms with poor environmental disclosure policies would be punished by their stakeholders. The latter would support more social and fiduciary costs and consequently access to capital is more expensive and therefore the cost of capital is high.

As for legitimacy theory, good environmental disclosure provides a favorable opportunity for companies facing global campaigns criticizing their operations. Therefore, environmental disclosure may be perceived as a mechanism for repairing or maintaining legitimacy, which in return will increase profitability in the long run and reduce firm risk [25].

However, from an opposite point of view, the extent of the disclosure may vary depending on society's perception of companies' products (non-sinful or sinful such as tobacco and alcohol) [48]. In this line of thought, facing environmental scrutiny, "sinful" companies (persecuted companies) tend to increase their environmental disclosure by reporting positive information about their environmental engagements to offset the negative consequences of the scrutiny [49]. In this regard, managers may use environmental disclosure as a cover tool to hide their unethical reporting activities or to respond to their narcissistic behavior [50].

Environmental disclosure in this case does not satisfy stakeholders, thus increasing firm risk and subsequently the cost of capital. This argument is attributed to the authors of [51,52], who argued that engaging in CSR activities would be a threat to the foundations of a free society. Social disclosure and especially environmental issues should be dealt with by the government. This highlights the divergence between both shareholder theory and environmental disclosure objectives.

Finally, the effect of regulatory pressures and the role of image tend to amplify expectations about environmental disclosure over time, resulting in a dynamic environmental disclosure strategy to meet those expectations.

**Hypothesis 1a (H1a).** *Over time, corporate environmental disclosure increases the cost of capital*.

**Hypothesis 1b (H1b).** *Over time, corporate environmental disclosure decreases the cost of capital*.

### *2.2. Social Disclosure and Firm Risk*

Social disclosure represents "a company's capacity to generate trust and loyalty with its workforce, customers, and society [ ... ]. It is a reflection of the company's reputation and the health of its license to operate" [43]. Social disclosure refers to customer safety, the preservation of human rights, the maintenance of diversity and equal opportunity in the workforce, high-quality working conditions, a healthy and safe workplace, and training and development opportunities [8]. However, social disclosure does not respond to companies' moral obligations to report about this issue but to companies' concerns with sustainability. Social disclosure has become a judgmental criterion used by investors to foresee companies' prospects.

According to stakeholder theory, social disclosure remains a fundamental asset in increasing firm competitiveness, since internal and external stakeholders have direct relationships with firms, through social engagement. It enables the better anticipation of firms' overall risk and allows businesses to take advantage of the variability of social expectations. Thus, the social disclosure of key factors, such as employee well-being and enriched relationships with the community and especially between the firm and its capital providers, can lead lending institutions and shareholders to better appreciate firm value, building a long-term trust between these parties [53]. This would result in a low cost of capital. Consequently, firms improving such relationships with their capital providers create an intangible asset that supports their competitiveness and encourages their sustainable financial performance [54–56], which decreases firm risk. Moreover, by focusing on all stakeholders' welfare, firms enhance their social disclosure by reporting information on salient concerns for society such as fair-trade policies, the amount of donations, human rights, flexible working schemes, and trade union representation. Thus, firms showcase their credibility to their stakeholders and consequently gain attraction, leading to positive evaluations by investors and cheaper capital access. In this regard, proponents of value creation achieved through the relationship between social disclosure and stakeholder theory assume that such disclosure leads to a better firm image [57] and improved productivity resulting from improved employers' concern with the working environment [58,59]. This will gradually be reflected in stock prices leading to positive future returns and therefore less risk.

From the point of view of legitimacy theory, firms need to seek approval from communities. To do so, they align themselves with social values. This approval is fundamental since it would ensure corporations' existence and continuity. Then, noncompliance with social expectations would be severely sanctioned by the community, which may even lead to their failure [60]. Consequently, business continuity is guaranteed through good social disclosure and without jeopardizing the values of the society in which it operates. In this line of thought, achieving a better image through an enhancement of legitimacy holds the promise of reducing the cost of capital.

However, according to agency theory, engaging in CSR disclosure leads to conflicts between social and shareholders' interests and may undermine the ethical principles recognized in Friedman's free-market economy [61,62] and which may lead to expensive capital access. Therefore, any social contribution should be covered by the corporate tax, meaning that shareholder theory prohibits the use of firm funds to engage in unprofitable investments such as charitable projects or social disclosure practices.

The environmental dynamic is forcing companies to focus on key social disclosure topics. Some companies are doing better than others in this dynamic environment [13] because they consider social disclosure as a moving target.

**Hypothesis 2a (H2a).** *Over time, corporate social disclosure increases the cost of capital*.

**Hypothesis 2b (H2b).** *Over time, corporate social disclosure decreases the cost of capital.*
