Priced for Transparency - Does Mandatory Non-Financial Disclosure Impact the Cost of Debt in Europe?

Abstract

This thesis investigates the impact of mandatory non-financial disclosure on firms’ cost of debt under the European Union’s Non-Financial Reporting Directive (NFRD). Using a difference-in-differences estimation with propensity score matched samples of European and U.S. firms, we analyze whether the introduction of mandated non-financial reporting influences the cost of debt. The findings show that firms subject to the NFRD experience a significant reduction in borrowing costs compared to other firms, suggesting that increased ESG transparency mandated by regulation reduces lenders’ perceived credit risk. Furthermore, firms that engaged in voluntary non-financial reporting prior to the directive experienced an even greater decline in their cost of debt, although the reduction is moderate, it remains consistent with signaling theory. These findings imply that non-financial disclosure regulation not only improves information availability but also generates tangible financial benefits, reinforcing the materiality of non-financial information in debt markets. The results provide policy-relevant insights into the design of future non-financial reporting frameworks, such as the Corporate Sustainability Reporting Directive (CSRD), and highlight for firms the strategic importance of credible and proactive non-financial disclosure.