Abstract
This study analyzes the effect of corporate social responsibility activities on the cost of equity in Korea. We find that firms with better corporate social responsibility (CSR) performance generally exhibit cheaper equity financing. Considering three dimensions of CSR separately, we find that a higher “socially responsible management” significantly reduces the cost of equity by 1.13%-1.37% per annum and “Corporate governance” activity also marginally affects the cost of equity, while “environmental management” has no impact. Our result is robust in controlling for systematic risk, size, leverage ratio, and the number of analysts. These results imply that enhancing socially responsible management and corporate governance can increase firm value in Korea, but environmental management is not relevant for firm values. Putting differently, investors tolerate a lower return from firms with more CSR activities, because they expect them to provide sustainable incomes. Future researches can extend our approach to examining the effect on the cost of debt and cost of capital.
Highlights
Over the last decade, corporate social responsibility (CSR) has emerged as a dominant paradigm in business and scholarship as the growth in the number of indices, institutional investors, and mutual funds, make investment decisions depending on firms’ CSR performance [1]
This study contributes to the recent literature on the relationship between CSR performance and firm value, by focusing on whether CSR performance reduces the cost of equity in the Korea stock market
Performance, we find that firms with higher performance in socially responsible management or better corporate governance can finance the cost of equity at costs 1.36% to 1.89% lower than those paid by firms with lower performance
Summary
Corporate social responsibility (CSR) has emerged as a dominant paradigm in business and scholarship as the growth in the number of indices, institutional investors, and mutual funds, make investment decisions depending on firms’ CSR performance [1]. This study contributes to the recent literature on the relationship between CSR performance and firm value, by focusing on whether CSR performance reduces the cost of equity in the Korea stock market. After dividing firms into “high” and “low”, according to CSR performance, we find that firms with higher performance in socially responsible management or better corporate governance can finance the cost of equity at costs 1.36% to 1.89% lower than those paid by firms with lower performance. This indicates that investors are willing to invest even if these firms have lower expected returns. Sustainability 2019, 11, 2947 socially responsible management and better corporate governance play more important roles than environmental performance plays in the Korean stock market
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