Better CSR = lower cost of equity capital
March 14, 2012
Using a sample of 2,809 U.S. firms over the period 1992 to 2007, the researchers
found that firms with better CSR scores (based on data from SRI analytics firm KLD)
exhibited lower cost of equity financing. “We find that firms with a better CSR score exhibit lower cost of equity capital after controlling for other firm-specific determinants as well as industry and year fixed effects,” say the authors in the abstract for the
paper. “Moreover, we find that CSR investment in improving responsible employee
relations, environmental policies, and product strategies substantially contributes to
reducing firms’ cost of equity. We also show that firms related to two ‘sin’ business
sectors, namely, tobacco and nuclear power, appear to observe higher equity financing
costs,” they say. The paper, which was published in in the Journal of Banking and
Finance (Vol. 35, Issue, 9, Sept. 2011), provides evidence that is “robust to a battery
of sensitivity tests…Our finding support arguments in the literature that CSR enhances
firm value,” say the authors.
This study was awarded the 2011 Moskowitz Prize (awarded by the Center for Responsible Business at the
Haas School of Business, in cooperation with the Social Investment Forum, the Moskowitz Prize promotes the concept, practice, and growth of socially responsible investing).