Corporate Environmental Responsibility and the Cost of Capital: International Evidence

Ghoul, Sadok El; Guedhami, Omrane; Kim, Hakkon; Park, Kwangwoo

doi:10.2139/ssrn.2470853

Cited by 37 publications

(71 citation statements)

References 57 publications

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“…Therefore, we correct for potential endogeneity biases using the instrumental variable technique. Pursuant to earlier studies, we use the initial firm-level CSR score (denoted First_CSR) and the industry average CSR value (denoted Ind_CSR) as instruments (see Attig, Cleary, El Ghoul, & Guedhami, 2014;Attig, El Ghoul, Guedhami, & Suh, 2013;El Ghoul, Guedhami, Kim, & Park, 2016;El Ghoul et al, 2011). The rationale is that these instruments are highly correlated with contemporaneous CSR investment because CSR is path-dependent, and are likely to be exogenous given that they are predetermined.…”

Section: Endogeneitymentioning

confidence: 99%

Corporate social responsibility and the wealth gains from dividend increases

2018

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This study examines whether corporate social responsibility (CSR) influences the stock price response to dividend increase announcements and changes in subsequent operating performance. We find that dividend increasing firms with lower CSR scores elicit higher abnormal announcement returns and greater improvements in industry‐adjusted operating performance. These findings support the argument in the literature that socially responsible firms are more transparent and commit to higher ethical standards than other firms, suggesting that they suffer fewer agency and informational problems (Kim, Park, & Wier, 2012). Consequently, larger dividend payouts reduce agency costs in firms with lower CSR commitments, thereby generating higher wealth gains for shareholders.

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Section: Endogeneitymentioning

confidence: 99%

Corporate social responsibility and the wealth gains from dividend increases

2018

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“…12 In a subsequent analysis of 7,122 firm-year observations, representing 2,107 manufacturing companies spanning 30 countries (including the U.S.), between 2002-2011, the same researchers found that companies with lower environmental costs (higher corporate environmental responsibility scores) have equity costs that are 39 basis points lower, on average, than those companies with higher environmental costs. 13 In a review of more than 29 academic studies, Clark et al found that 26 showed an inverse relationship between a company's sustainability practices and its cost of capital.14 The analysis included the 'G'overnance dimension as well as both the 'E'nvironmental and 'S'ocial dimensions of ESG, and both the cost of debt and of equity. Across the studies assessing the cost of debt, companies with fewer CSR concerns (better ESG performance) pay 7-18 basis points less than companies with greater CSR concerns.15 Across studies assessing cost of equity, companies exhibiting good sustainability/CSR practices had a cost of equity as much as 136-180 basis points lower than companies with poorer sustainability/ CSR practices.…”

Section: Figurementioning

confidence: 99%

Using the Return on Sustainability Investment (ROSI) Framework to Value Accelerated Decarbonization

Eckerle

Whelan

DeNeve

et al. 2020

J Applied Corp Finance

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A major barrier to companies' more effective integration of sustainability into their corporate strategies is finding ways to estimate and communicate the full value of their business cases. In the authors' experience in working with or for companies, they find that most do not track the value sustainability delivers for an organization. And when companies do track and measure their returns on investments in sustainability, the estimates tend to be focused almost exclusively on those benefits that are most direct and tangible, and show up on the corporate P&L, as opposed to other benefits like employee commitment and regulatory forbearance, which are more likely to show up in a lower cost of capital. To help companies quantify the expected value of their sustainability programs, the authors have developed a Return on Sustainability Investment (ROSI™) framework. The study presented here describes the outcomes of a recent analysis in which the NYU Stern Center for Sustainable Business in collaboration with ALO Advisors worked with Capital Power Corporation, a North American power producer, to estimate the value likely to be created by accelerating its transition to clean energy. Through their work with the Chief Sustainability Officer, Chief Financial Officer, and senior managers from several key business functions, the authors identified seven major sources of benefits, and quantified the expected effects on value of four of them, to produce an estimated contribution to the value of the company of about $30 million. The ROSI™ framework and methodology has since been incorporated into CPX's investment decision‐making process, and played an important role in management's decision to commit to the operating changes required to accelerate the company's transition away from coal‐generated electricity.

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“…Empirically, a large body of studies shows that CSR performance could have, in general, a favourable effect on various dimensions of corporate performance and information environment. More specifically, these studies find that better CSR performance is associated with better accounting performance or higher profitability, higher market valuation, less earnings management, more earnings persistence, more accounting transparency, higher credit ratings, better access to financial capital, better investment efficiency, greater investment, better analyst forecast accuracy, lower cost of equity capital, and lower cost of private debt (Alan, Julie, & Xiaojuan, 2016;Andreas, Ioannis, Bert, and Michael, 2016;Attig, Cleary, El Ghoul, & Guedhami, 2014;Attig, El Ghoul, Guedhami, & Suh, 2013;Cheng et al, 2014;Dhaliwal et al, 2011;Dhaliwal, Radhakrishnan, Tsang, & Yang, 2012;El Ghoul et al, 2011;El Ghoul et al, 2018;El Ghoul et al, 2017;Ernest, Reza, Fang, 2016;Flammer, 2015;Galema et al, 2008;Goss & Roberts, 2011;Hong & Kacperczyk, 2009;Kim, Park, & Wier, 2012;Lev, Petrovits, & Radhakrishnan, 2010;Oikonomou et al, 2014;Russo & Fouts, 1997;Waddock & Graves, 1997). In a related vein, Hart (1995) and Clarkson, Li, Richardson, and Vasvari (2011) advance a resource-based theory, which suggests that firms adopting environmental strategies can gain a competitive advantage in the form of improved manufacturing efficiency, enhanced reputation, and raising rival's costs by influencing industry environmental standards in the future.…”

Section: Impact Of Csr Performance On Breadth Of Ownershipmentioning

confidence: 99%

“…Our results strongly support our expectation that better CSR firms have higher stock liquidity. 19 Second, following El and El Ghoul et al (2018), we test the impact of CSR performance on cost of equity capital. We calculate an average cost of equity capital based on cost of equity estimated from four different models: Claus and Thomas (2001), Gebhardt, Lee, and Swaminathan (2001), Ohlson and Juettner-Nauroth (2005) and Easton (2004).…”

Section: Impact Of Csr Performance On Stock Liquidity Cost Of Equitymentioning

confidence: 99%

“…Consistent with our expectation, we find a significant positive association between CSR performance in the current year and stock liquidity in the following year. Second, following El Ghoul, Guedhami, Kwok, and Mishra (2011) and El Ghoul, Guedhami, Kim, and Park (2018), we test the impact of CSR performance on firms' equity financing costs and find that better CSR firms have lower cost of equity capital. Third, similar to El Ghoul, Guedhami, and Kim (2017), we show that better CSR performance allows firms to be better able to access to external capital.…”

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confidence: 99%

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Does social performance influence breadth of ownership?

Kim

Liu

2018

Business Fin & Account

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This study examines the hitherto unexplored question of whether and how a firm's social performance influences the breadth of that firm's share ownership. We predict and find that firms with higher corporate social responsibility (CSR) ratings attract more institutional investors (especially long‐term, low‐stake and green institutional investors) and more individual investors. This finding is consistent with the notion that investors are more interested in firms with higher CSR ratings and thus prefer to hold stocks of such firms. We also find that firms with higher CSR ratings are associated with higher stock liquidity, lower cost of equity capital, more equity and debt issuance, and greater investment, and that sin stocks are associated with a lower investor base, which further corroborates our prediction. Our results are robust to potential endogeneity, the use of alternative model specifications, and an alternative proxy for CSR performance.

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Corporate Environmental Responsibility and the Cost of Capital: International Evidence

Cited by 37 publications

References 57 publications

Corporate social responsibility and the wealth gains from dividend increases

Corporate social responsibility and the wealth gains from dividend increases

Using the Return on Sustainability Investment (ROSI) Framework to Value Accelerated Decarbonization

Does social performance influence breadth of ownership?

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