ESG DISCLOSURE AND DIGITAL FINANCIAL TRANSPARENCY AS DETERMINANTS OF FIRMS’ COST OF CAPITAL: EVIDENCE FROM PAKISTAN

Abstract

This study examined the impact of Environmental, Social, and Governance (ESG) disclosure and digital financial transparency on firms’ cost of capital in Pakistan. Grounded in signaling theory, agency theory, and stakeholder theory, the research investigated how enhanced corporate transparency influences financing costs in an emerging capital market context. A quantitative, cross-sectional research design was employed, using data from 230 non-financial firms listed on the Pakistan Stock Exchange (PSX). ESG disclosure was measured through a structured disclosure index, while digital financial transparency was assessed based on firms’ adoption of digital reporting and information accessibility practices. The cost of capital was proxied by the weighted average cost of capital (WACC), and panel regression analysis was applied to test the hypotheses.

The empirical results revealed that both ESG disclosure and digital financial transparency have a significant negative effect on firms’ cost of capital. ESG disclosure exhibited a stronger impact, indicating that sustainability reporting plays a critical role in reducing investor risk perception and improving access to external financing. Digital financial transparency also significantly reduced financing costs by enhancing information accessibility and reducing uncertainty. The findings further confirm that transparency mechanisms collectively improve market efficiency and financial decision-making in emerging economies.

The study contributes to the literature by integrating ESG and digital transparency within a unified framework to explain variations in cost of capital. It also provides practical implications for corporate managers, investors, and regulators seeking to enhance financial efficiency through improved disclosure practices.