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RESEARCH BRIEF: Companies with high CSR ratings had lower cost of equity


Takeaway: Recent study finds efforts to improve employee relations, product sustainability, and environmental policies have a significant and positive impact on lowering the cost of equity for companies.

Suggested audience: citizenship leaders and managers; top leadership, particularly chief financial officers; investors

Quantifying the tangible, financial benefits of corporate social responsibility (CSR) is important to making the business case for initial and continued investment in CSR programs.

This study employed data for 2,809 US firms between 1992-2007 for a total of 12,915 firm year observations. Forty-eight industries were represented with more than 5% of the sample in: banking, business services, retail, electronic equipment, and utilities industries. The researchers used Compustat North America data for industry and financial information. Analyst forecast data came from Thompson Institutional Brokers Earnings Services (I/B/E/S) and stock return information was from CRSP monthly return files.

The researchers looked at various dimensions of CSR separately and together in their statistical analyses. Aggregate variables were created for firms using KLD’s CSR data on the following dimensions: Community, Diversity, Employee Relations, Environment, Human Rights, and Product Characteristics.  The researchers also looked at whether or not companies were involved in six potentially controversial business issues. These issues are alcohol, gambling, tobacco, firearms, the military, and nuclear power.

Key findings:

Companies with high CSR ratings had lower cost of equity.

  • Investment in employee relations, the environment, and product strategies contributes significantly to reducing firms’ cost of equity.
  • Participation in two industries that are considered controversial - tobacco and nuclear power - increases firms’ cost of equity.

 Keywords: Equity capital, corporate social responsibility, CSR, US, companies, KLD data, stakeholders

If citing, please refer to the original article: “Does corporate social responsibility affect the cost of capital?”, 2011, Journal of Banking & Finance, Volume 35, Pages 2388–2406, Sadok El Ghoul,  Omrane Guedhami,  Chuck C.Y. Kwok, and Dev R. Mishra

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