Prior studies argue that an analyst is an important mediator between a firm and investors, and has a significant influence on the cost of equity. However, how analyst following influences the cost of equity has not been studied in depth. In the Chinese setting, where environmental information has attracted much attention, we explore the interaction among analyst following, environmental information disclosure, and cost of equity. With two linear regression methods of ordinary least squares (OLS) and two-Stage least squares (2SLS), we establish regressions to verify the relationships among them by using empirical data from 2004 to 2011 in China. The results show that analyst following can improve environmental information disclosure and lower the cost of equity. This interaction is more significant in the heavy-pollution industry and after new environmental policy is issued. We also find that environmental disclosure has a mediating effect, which determines how analyst following influences the cost of equity. The results expand the research on environmental information’s motivations and economic consequences.
The Effect of Environmental Disclosure on Cost of Equity