The Effect of Voluntary Corporate Social Responsibility Disclosure on the Cost of Capital: The Moderating Role of CEO Overconfidence in Firms Listed on the Tehran Stock Exchange

Document Type : Original Article

Authors

1 Master of Business Administration, Finance, Department of Economics, Management and Accounting, University of Tabriz, Tabriz, Iran,

2 Assistant Professor, Department of Economics, Management and Accounting, University of Tabriz, Tabriz, Iran

3 Associate Professor, Department of Economics, Management and Accounting, University of Tabriz, Tabriz, Iran

Abstract

Objective: Overconfident chief executive officers (CEOs) tend to overestimate their abilities, make riskier decisions, and direct corporate resources toward short-term profitable projects. This behavior often leads them to pay less attention to long-term and non-financial initiatives such as corporate social responsibility (CSR). On the other hand, CSR disclosure—especially voluntary disclosure—can improve a company’s image, increase investor confidence, reduce information asymmetry, and consequently lower the cost of capital. However, CEO overconfidence may play a dual role in this relationship by either amplifying or weakening the influence of CSR disclosure. Therefore, the present study aims to investigate the effect of voluntary CSR disclosure on the cost of capital with an emphasis on the moderating role of CEO overconfidence in firms listed on the Tehran Stock Exchange (TSE).
Methods: This study is applied in purpose and descriptive-correlational in method. The statistical population included all companies listed on the Tehran Stock Exchange from 2016 to 2023. After applying screening criteria, 135 companies (equivalent to 1,080 firm-year observations) were selected as the final sample. Data were collected from audited financial statements and management commentary reports published on the Codal database. CSR disclosure was measured using the Kinder, Lydenberg, and Domini (KLD) framework across four dimensions: employee relations, community involvement, product responsibility, and environmental protection. These activities were divided into voluntary and non-voluntary categories based on managerial discretion. CEO overconfidence was measured using the degree of overinvestment, following the asset growth-to-sales growth model. The cost of capital was calculated as the weighted average cost of debt and equity. The hypotheses were tested using multiple regression and panel data analysis, controlling for industry and year effects to ensure robustness.
Results: The results indicate a significant and negative relationship between CSR disclosure and the cost of capital. Firms with higher levels of CSR disclosure experience lower financing costs, primarily because CSR transparency reduces information asymmetry and perceived investment risk among investors. When CSR is divided into voluntary and non-voluntary disclosure, both types show a negative association with the cost of capital; however, the effect of voluntary CSR disclosure is stronger and statistically more significant. Moreover, the moderating role of CEO overconfidence was confirmed. Overconfidence strengthens the negative effect of voluntary CSR disclosure on the cost of capital, implying that this behavioral trait enhances the positive influence of transparency on reducing financing costs. In contrast, CEO overconfidence does not significantly affect the relationship between non-voluntary CSR disclosure and the cost of capital. These findings suggest that managerial behavioral traits can magnify the effectiveness of voluntary CSR disclosure in improving financing conditions.
Conclusion: According to the results, companies that voluntarily and transparently disclose their CSR activities tend to face lower capital costs. Broader CSR disclosure builds investor trust and reduces their required rate of return, thereby decreasing firms’ financing expenses. CEO overconfidence plays an essential role in this relationship. Although overconfidence can lead to risky decisions, it may also convey a signal of managerial assurance and long-term commitment when accompanied by transparent CSR reporting—ultimately reducing perceived risk and the cost of capital.
Innovation: The main innovation of this study lies in highlighting the behavioral characteristics of managers, particularly CEO overconfidence, as a moderating factor that explains differences in the impact of voluntary CSR disclosure on the cost of capital. By combining insights from behavioral finance and non-financial disclosure research, this study provides a novel understanding of how managerial traits affect corporate financing outcomes. Practically, companies are encouraged to adopt proactive CSR disclosure strategies emphasizing clarity, social engagement, and accountability to strengthen investor confidence and reduce financing costs. Furthermore, regulators and institutional investors can use behavioral indicators such as CEO overconfidence to assess the credibility of corporate disclosures and predict financing risks. This study offers a new perspective for future research in emerging markets by integrating managerial psychology with financial and non-financial disclosure mechanisms.

Keywords

References

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Journal of Finance and Corporate Sustainability
Volume 1, Issue 2 - Serial Number 2
February 2026
Pages 1-26

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History

  • Receive Date: 20 June 2024
  • Revise Date: 21 February 2025
  • Accept Date: 01 November 2025
  • First Publish Date: 21 January 2026
  • Publish Date: 21 January 2026

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