Does Corporate Social Responsibility Affect the Cost of Capital?
Journal of Banking & Finance, Vol. 35, Issue 9, pp. 2388-2406, September 2011
63 Pages Posted: 3 Feb 2010 Last revised: 29 Nov 2014
Date Written: July 1, 2010
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 rankings 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.
Keywords: Cost of equity capital, Corporate social responsibility
JEL Classification: G32, G34, M14
Suggested Citation: Suggested Citation