Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting Dan S. Dhaliwal The University of Arizona and Korea University Oliver Zhen Li The University of Arizona Albert Tsang Yong George Yang The Chinese University of Hong Kong ABSTRACT: We examine a potential benefit associated with the initiation of voluntary disclosure of corporate social responsibility CSR activities: a reduction in firms’ cost of equity capital. We find that firms with a high cost of equity capital in the previous year tend to initiate disclosure of CSR activities in the current year and that initiating firms with superior social responsibility performance enjoy a subsequent reduction in the cost of equity capital. Further, initiating firms with superior social responsibility performance attract dedicated institutional investors and analyst coverage. Moreover, these analysts achieve lower absolute forecast errors and dispersion. Finally, we find that firms exploit the benefit of a lower cost of equity capital associated with the initiation of CSR disclo- sure. Initiating firms are more likely than non-initiating firms to raise equity capital fol- lowing the initiations; among firms raising equity capital, initiating firms raise a signifi- cantly larger amount than do non-initiating firms. Keywords: corporate social responsibility; cost of capital; voluntary disclosure. Data Availability: The data are publicly available from the sources identified in the paper. We appreciate the valuable comments from Ying Cao, Zhaoyang Gu, Michel Magnan, Morton Pincus, Suresh Radhakrish- nan, T. J. Wong, and seminar participants at the City University of Hong Kong, Singapore Management University, Tsinghua University and 2009 AAA Annual Meeting, and especially the detailed constructive suggestions from Steven Kachelmeier editor and two anonymous referees. We thank Brian Bushee for generously sharing his classifications of institutional investors. We also thank CorporateRegister.com and KLD Research & Analytics, Inc. for providing the corporate social responsibility data, and I/B/E/S for the analyst following data. We are grateful to Xuemei Hao and Guangqing Li for their excellent research assistance. The work described in this paper was fully supported by a grant from the Research Grants Council of the Hong Kong SAR, China Project No. CUHK451409. Editor’s note: Accepted by Steven Kachelmeier. THE ACCOUNTING REVIEW American Accounting Association Vol. 86, No. 1 DOI: 10.2308/accr.00000005 2011 pp. 59–100 Submitted: April 2009 Accepted: May 2010 Published Online: January 2011 59