Does corporate social responsibility affect the cost of capital?

Abstract

We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of U.S. firms. Using several approaches to estimate firms' ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms' cost of equity. Our results also show that participation in two "sin" industries, namely, tobacco and nuclear power, increases firms' cost of equity. These findings support arguments in the literature that firms with socially responsible practices have higher valuation and lower risk. July 2010 JEL classification: G32, G34, M14 Abstract We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of U.S. firms. Using several approaches to estimate firms' ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms' cost of equity. Our results also show that participation in two "sin" industries, namely, tobacco and nuclear power, increases firms' cost of equity. These findings support arguments in the literature that firms with socially responsible practices have higher valuation and lower risk. July 2010 JEL classification: G32, G34, M14

Corporate Governance and Corporate Social Responsibility Disclosure: Evidence from the US Banking Sector

“…As banks' risk exposure can not only be reduced via finance and investment strategies (Pathan, 2009), but also via CSR activities aimed at engaging key stakeholders (Gill, 2008;Scholtens, 2008;Kolk and Pinkse, 2010;Ghoul et al, 2011;Salama et al, 2011), powerful CEOs might have an interest to increase the bank's CSR activities and reporting.…”

“…Research by Ghoul et al (2011) on US firms indicates that investment in employee relations, environmental policies and CSR product strategies helps lower firms' costs of capital. Investors, therefore, increasingly require boards and managers to engage in CSR and report on this engagement (Scholtens, 2008;Kolk and Pinkse, 2010).…”

“…This suggests that managers' typical inclination to limit their risk exposure to protect their human capital has been eroded by the structure of their executive pay packages. As CSR engagement and disclosure tend to reduce firms' risk profiles (Simpson and Kohers, 2002;Scholtens, 2008;Salama et al, 2011;Ghoul et al, 2011), CEOs might view CSR reporting as detrimental to maximising their remuneration.…”

“…Extensive prior research suggests that CSR reporting can impact positively on stakeholders' perceptions of firm performance, firm value and firm risk, and thereby on firms' profitability, cost of capital and share price (Gray, Kouhy and Lavers, 1995b;Simpson and Kohers, 2002;Scholtens, 2008;Godfrey, Merrill and Hansen, 2009;Salama, Anderson and Toms, 2011;Ghoul, Guedhami, Kwok and Mishra, 2011;Cormier, Ledoux and Magnan, 2011;Lourenco, Branco, Curto and Eugenio, 2012). Moreover, as CSR reporting contributes to the reduction of information asymmetry between managers and investors as well as other stakeholders, comprehensive CSR reporting aids the supervision and control of managers.…”

Which proportion of SR investments is enough? A survey-based approach

“…However, from the viewpoint of an entity approach, the value of a company's assets is attributed partly to debt and partly to equity capital. The CSP can be seen as an additional non-monetary asset, which is appreciated by the investors through lower cost of capital (Goss and Roberts 2011;Ghoul et al 2011). However, since debt as well as equity costs of capital are lowered by a strong CSP, one can argue that both forms of capital share a part of the non-monetary asset.…”