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Business sustainability performance and cost of equity capital

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  • Ng, Anthony C.
  • Rezaee, Zabihollah

Abstract

Business sustainability has emerged as the theme of the 21st century. We examine whether and how different components of economic sustainability disclosure (ECON), as well as environmental, social, and governance (ESG) dimensions of sustainability performance affect cost of equity, individually and in aggregate. In addition, we investigate whether and how ECON and ESG sustainability interactively affect cost of equity capital. Costs of equity are calculated using industry adjusted earnings–price ratios and finite horizon expected return model. Using a sample of more than 3000 firms during 1990–2013, we find that ECON (ESG) is negatively associated with cost of equity, but only growth and research (environmental and governance) sustainability performance dimensions contribute to this relationship. Operation efficiency is positively, while social sustainability performance is only marginally, related to cost of equity. We also find that ECON and ESG sustainability performance interactively affect cost of equity. In general, the relationship between ECON (ESG) and cost of capital is strengthened when ESG (ECON) performance is strong.

Suggested Citation

  • Ng, Anthony C. & Rezaee, Zabihollah, 2015. "Business sustainability performance and cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 128-149.
  • Handle: RePEc:eee:corfin:v:34:y:2015:i:c:p:128-149
    DOI: 10.1016/j.jcorpfin.2015.08.003
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    Cited by:

    1. Zabihollah Rezaee & Ling Tuo, 2019. "Are the Quantity and Quality of Sustainability Disclosures Associated with the Innate and Discretionary Earnings Quality?," Journal of Business Ethics, Springer, vol. 155(3), pages 763-786, March.
    2. Junnan Hu & Shujing Wang & Feixue Xie, 2018. "Environmental responsibility, market valuation, and firm characteristics: Evidence from China," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 25(6), pages 1376-1387, November.
    3. Rezaee, Zabihollah, 2016. "Business sustainability research: A theoretical and integrated perspective," Journal of Accounting Literature, Elsevier, vol. 36(C), pages 48-64.
    4. Madden, Laura & McMillan, Amy & Harris, Oneil, 2020. "Drivers of selectivity in family firms: Understanding the impact of age and ownership on CSR," Journal of Family Business Strategy, Elsevier, vol. 11(2).
    5. Schreder, Max, 2018. "Idiosyncratic information and the cost of equity capital: A meta-analytic review of the literature," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 142-172.
    6. Claudio Nuber & Patrick Velte & Jacob Hörisch, 2020. "The curvilinear and time‐lagging impact of sustainability performance on financial performance: Evidence from Germany," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(1), pages 232-243, January.
    7. Szennay, Áron, 2018. "Nagyvállalatok pénzügyi teljesítményének és társadalmi felelősségvállalásának összefüggései Magyarországon [Relations between financial and non-financial performance in Hungary]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1281-1298.
    8. Hui-Ching Hsieh & Viona Claresta & Thi Minh Ngoc Bui, 2020. "Green Building, Cost of Equity Capital and Corporate Governance: Evidence from US Real Estate Investment Trusts," Sustainability, MDPI, Open Access Journal, vol. 12(9), pages 1-21, May.
    9. Rezaee, Zabihollah & Dou, Huan & Zhang, Huili, 2020. "Corporate social responsibility and earnings quality: Evidence from China," Global Finance Journal, Elsevier, vol. 45(C).
    10. Truong Thi Thu Thuy & Jungmu Kim, 2018. "Sustainability Managed against Downside Risk and the Cost of Equity: Evidence in Korea," Sustainability, MDPI, Open Access Journal, vol. 10(11), pages 1-18, October.
    11. Y. Y. Yip* & H. H. Lee, 2018. "Does ESG Disclosure Create Value to Firms? The Malaysian Case," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 515-521:6.
    12. Arouri, Mohamed & Gomes, Mathieu & Pukthuanthong, Kuntara, 2019. "Corporate social responsibility and M&A uncertainty," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 176-198.
    13. Benlemlih, Mohammed, 2017. "Corporate social responsibility and firm financing decisions: A literature review," Journal of Multinational Financial Management, Elsevier, vol. 42, pages 1-10.
    14. Jaime Guerrero-Villegas & Leticia Pérez-Calero & José Manuel Hurtado-González & Pilar Giráldez-Puig, 2018. "Board Attributes and Corporate Social Responsibility Disclosure: A Meta-Analysis," Sustainability, MDPI, Open Access Journal, vol. 10(12), pages 1-22, December.
    15. Samira Demaria & Sandra Rigot, 2020. "Taking on Board the Long-term Horizon in Financial and Accounting Literature," GREDEG Working Papers 2020-01, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    16. Sheikh, Shahbaz, 2019. "Corporate social responsibility and firm leverage: The impact of market competition," Research in International Business and Finance, Elsevier, vol. 48(C), pages 496-510.
    17. Su-In Kim & Hyejeong Shin & Heejeong Shin & Sorah Park, 2019. "Organizational Slack, Corporate Social Responsibility, Sustainability, and Integrated Reporting: Evidence from Korea," Sustainability, MDPI, Open Access Journal, vol. 11(16), pages 1-17, August.
    18. Zabihollah Rezaee, 2018. "Supply Chain Management and Business Sustainability Synergy: A Theoretical and Integrated Perspective," Sustainability, MDPI, Open Access Journal, vol. 10(1), pages 1-17, January.
    19. Rezaee, Zabihollah & Tuo, Ling, 2017. "Voluntary disclosure of non-financial information and its association with sustainability performance," Advances in accounting, Elsevier, vol. 39(C), pages 47-59.
    20. Fafaliou, Irene & Giaka, Maria & Konstantios, Dimitrios & Polemis, Michael, 2020. "Revisiting the sustainability-innovation nexus: Lessons learned from the US," MPRA Paper 99834, University Library of Munich, Germany.
    21. Hans B. Christensen & Luzi Hail & Christian Leuz, 2019. "Adoption of CSR and Sustainability Reporting Standards: Economic Analysis and Review," NBER Working Papers 26169, National Bureau of Economic Research, Inc.
    22. Boubakri, Narjess & El Ghoul, Sadok & Wang, He & Guedhami, Omrane & Kwok, Chuck C.Y., 2016. "Cross-listing and corporate social responsibility," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 123-138.
    23. Juan Camilo Mejia-Escobar & Juan David González-Ruiz & Eduardo Duque-Grisales, 2020. "Sustainable Financial Products in the Latin America Banking Industry: Current Status and Insights," Sustainability, MDPI, Open Access Journal, vol. 12(14), pages 1-25, July.
    24. Lucia Maciková & Marián Smorada & Peter Dorčák & Benjamin Beug & Peter Markovič, 2018. "Financial Aspects of Sustainability: An Evidence from Slovak Companies," Sustainability, MDPI, Open Access Journal, vol. 10(7), pages 1-15, July.
    25. Bhandari, Avishek & Javakhadze, David, 2017. "Corporate social responsibility and capital allocation efficiency," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 354-377.

    More about this item

    Keywords

    Sustainability performance; Cost of equity; Financial sustainability; Corporate governance; Corporate social responsibility; Environmental initiatives;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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