Does Corporate Social Responsibility Affect the Cost of Capital?
Sadok El Ghoul
University of Alberta - Campus Saint-Jean
University of South Carolina - Moore School of Business
Chuck C.Y. Kwok
University of South Carolina - Darla Moore School of Business
Dev R. Mishra
University of Saskatchewan - Edwards School of Business
July 1, 2010
Journal of Banking & Finance, Vol. 35, Issue 9, pp. 2388-2406, September 2011
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.
Number of Pages in PDF File: 63
Keywords: Cost of equity capital, Corporate social responsibility
JEL Classification: G32, G34, M14
Date posted: February 3, 2010 ; Last revised: November 29, 2014