The Influence of Corporate Responsibility on the Cost of Capital

43 Pages Posted: 4 May 2007

See all articles by Alexander Bassen

Alexander Bassen

University of Hamburg; University of Reading - ICMA Centre

Katrin Meyer

University of Hamburg

Joachim Schlange

Schlange & Co. GmbH Consultants for Corporate Responsibility

Date Written: November 2006

Abstract

Corporate responsibility (CR) issues have gained importance within the financial community due to the exponential growth of specialized institutes, expansion of academic and research departments, increased launching of mutual funds allocated according to sustainability criteria, proliferation of online resources and other publications, and specialized corporate responsibility reports. A closer look at the literature concerning the relationship between CR issues and financial measures indicated three major fields for improvement in this area: (1) the development of a common understanding of CR issues; (2) the measurement of CR performance; and (3) the question of how CR issues affect the risk profile of a company.

We hypothesized that there is a relationship between CR and financial performance (H1) and that good CR performance reduces the risk to a company (H2). A clear relationship between CR and financial performance was not found, but CR and financial performance were indirectly linked throughout company risk. This research delivers evidence that CR performance is strongly linked to financial risk measures. There is also support for the assumption that CR issues are likely to be regulation-driven. Regulation seems to be a driver for CR engagement in the utility industry. It seems that a complete lack of CR engagement exposes a company to unnecessary high risk.

Keywords: Corporate Responsibility, Coroprate Social Responsibility, Cost of Capital, Corporate Social Performance, Corporate Financial Performance

JEL Classification: M14

Suggested Citation

Bassen, Alexander and Meyer, Katrin and Schlange, Joachim, The Influence of Corporate Responsibility on the Cost of Capital (November 2006). Available at SSRN: https://ssrn.com/abstract=984406 or http://dx.doi.org/10.2139/ssrn.984406

Alexander Bassen (Contact Author)

University of Hamburg ( email )

Von-Melle-Park 5
20146 Hamburg
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Katrin Meyer

University of Hamburg ( email )

Germany

Joachim Schlange

Schlange & Co. GmbH Consultants for Corporate Responsibility ( email )

Slomanhaus, Steinhöft 11
Hamburg D - 20459
Germany
+49 (40) 36 166 82 -11 (Phone)
+49 (40) 36 166 82 -19 (Fax)

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