Corporate Environmental Responsibility and the Cost of Capital: International Evidence

53 Pages Posted: 25 Jul 2014

See all articles by Sadok El Ghoul

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Hakkon Kim

KAIST College of Business

Kwangwoo Park

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

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Date Written: July 16, 2014

Abstract

In this paper we examine how corporate environmental responsibility (CER) affects the cost of equity capital for manufacturing firms in 30 countries. Using several approaches to estimate firms’ ex ante equity financing costs, we find in regressions that control for firm-level characteristics as well as industry, year, and country effects that the cost of equity capital is lower when firms have higher CER. This finding is robust to addressing endogeneity through instrumental variables, to using alternative specifications and proxies for the cost of equity capital, to accounting for noise in analyst forecasts, and to employing alternative samples. We conclude that investment in CER reduces firms’ equity financing costs worldwide.

Keywords: Corporate environmental responsibility; Firm risk; Cost of equity capital

JEL Classification: G32; M14

Suggested Citation

El Ghoul, Sadok and Guedhami, Omrane and Kim, Hakkon and Park, Kwangwoo, Corporate Environmental Responsibility and the Cost of Capital: International Evidence (July 16, 2014). KAIST College of Business Working Paper Series No. 2014-008, Available at SSRN: https://ssrn.com/abstract=2470853 or http://dx.doi.org/10.2139/ssrn.2470853

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

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

Omrane Guedhami

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

Columbia, SC
United States

Hakkon Kim

KAIST College of Business ( email )

Korea, Republic of (South Korea)

Kwangwoo Park

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro
Seoul 02455
Korea, Republic of (South Korea)
82-2-958-3540 (Phone)
82-2-958-3604 (Fax)

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