Does corporate social responsibility affect the cost of capital?

Abstract

does corporate social responsibility affect the cost of capital? sadok el ghoula, omrane guedhamib, chuck c. y. kwokb,*, dev r. mishrac auniversity of alberta, edmonton, ab t6c 4g9, canada bmoore school of business, university of south carolina, columbia, sc 29208, usa cedwards school of business, university of saskatchewan, saskatoon, sk s7n 4m5, canada journal of banking & finance volume 35, issue 9, september 2011, pages 2388-2406 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 scores 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. jel classification: g32; g34; m14 keywords: corporate social responsibility; cost of equity capital *corresponding author. tel.: +1 803 777 3606; fax: +1 803 777 3609. e-mail addresses: elghoul@ualberta.ca (s. el ghoul), omrane.guedhami@moore.sc.edu (o. guedhami), ckwok@moore.sc.edu (c. kwok), …

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