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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

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

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

Date Written: July 1, 2010

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 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

El Ghoul, Sadok and Guedhami, Omrane and Kwok, Chuck C.Y. and Mishra, Dev R., Does Corporate Social Responsibility Affect the Cost of Capital? (July 1, 2010). Journal of Banking & Finance, Vol. 35, Issue 9, pp. 2388-2406, September 2011. Available at SSRN: https://ssrn.com/abstract=1546755

Sadok El Ghoul

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami (Contact Author)

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Chuck C.Y. Kwok

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-777-3606 (Phone)
803-777-3609 (Fax)

Dev R. Mishra

University of Saskatchewan - Edwards School of Business ( email )

Department of Finance and Management Science
Saskatoon, Saskatchewan S7N 5A7
Canada
306-966-8457 (Phone)
306-966-2515 (Fax)

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