Abstract
The relationship between sustainable practices and a firm’s financial performance is an open debate among academics, managers and investors worldwide. Despite large literature in the field of corporate social responsibility (CSR) and corporate financial performance (CFP), there is still a lack of unanimous consensus around the impact of sustainability on a firm’s economic achievements. This study aims to analyse this relationship and fill some of the gaps within existing literature using two geographical samples, a European and a global one, proceeding to compare obtained results. Such analysis was performed employing an ex ante implied proxy for the cost of equity, which has been selected in order to overcome methodological weaknesses of previous studies. Results show that sustainability can reduce the cost of equity due to lower firm riskiness, as perceived by markets and investors. Geographical specificities, on the other hand, do not play a significant role. CSR practices have the potential to create a type of goodwill or moral capital for more sustainable firms that acts as protection when negative events occur, preserving shareholder value and reducing the firms’ cost of equity. Key words: Cost of equity, Price Earnings Growth (PEG) ratio method, corporate social responsibility (CSR), EPS forecasts, riskiness.
Highlights
The relationship between corporate social responsibility (CSR) and firm performance is a strongly debated topic among academics, managers and policy-makers
CSR practices have the potential to create a type of goodwill or moral capital for more sustainable firms that acts as protection when negative events occur, preserving shareholder value and reducing the firms’ cost of equity
This study aims to tackle the aforementioned methodological issue and fill the gap within existing literature that leaves European firms, as well as comparative data uncovered (Reverte, 2012)
Summary
The relationship between corporate social responsibility (CSR) and firm performance is a strongly debated topic among academics, managers and policy-makers. According to majority of CEOs worldwide, for example, CSR is considered an “important” or “very important” task for their firms (UN Global Compact-Accenture, 2010). The idea that stronger environmental, social and governance (ESG) practices and improved financial performance are positively related is not yet universally endorsed (Di Giulio et al, 2011; Endrikat, 2015; Margolis and Walsh, 2003; Margolis et al, 2007; Murphy, 2002; Perrini et al, 2011).
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