The Price of Corporate Social Irresponsibility at Seasoned Equity Offerings: International Evidence

Abstract

We examine the impact of poor corporate social responsibility engagement signaled through negative environmental and social (E&S) incidents on equity financing via seasoned equity offerings (SEOs) across 25 countries. The results show that negative E&S incidents significantly aggravate SEO underpricing, thereby increasing the cost of raising equity capital. Further analysis shows that such adverse pricing effects are stronger for firms that are prone to social reputational damages and are subject to significant regulatory penalties for their E&S misconducts, consistent with negative E&S incidents resulting in corporate reputational losses and elevated regulatory risk. Additionally, the adverse pricing effects are driven by the social awareness of institutional and retail investors but mitigated by the presence of block shareholders, indicating the increasing awareness of corporate social responsibility among market investors. Managers appear to pre-empt the adverse effects by reducing the likelihood of equity financing in the wake of negative E&S incidents. Finally, there are rich cross-country variations in the SEO pricing effects of E&S risks with legal investor protection and national culture playing an important role in influencing the pricing of E&S risk.

Keywords: Corporate Social Responsibility; ESG Risk; Seasoned Equity Offerings; Event Study