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Modeling The Effects Of Sustainable Development On The Equity Risk Premium

Author

Listed:
  • GHITA, George Aurelian
  • BALICA, Daniel Andrei
  • SOARE, Nicolae

    (School of Advanced Studies of the Romanian Academy, Doctoral School of Economic Sciences, National Institute for Economic Research "Costin C. Kirițescu", Institute of National Economy, Romanian Academy, Romania
    School of Advanced Studies of the Romanian Academy, Doctoral School of Economic Sciences, National Institute for Economic Research "Costin C. Kirițescu", Institute of National Economy, Romanian Academy, Romania
    School of Advanced Studies of the Romanian Academy, Doctoral School of Economic Sciences, National Institute for Economic Research "Costin C. Kirițescu", Institute of National Economy, Romanian Academy, Romania)

Abstract

This paper is a secondary data analysis regarding the relationship between sustainable development and the cost of equity (Equity Risk Premium — ERP) in the European context, with the main objective of providing a panel econometric model with country and time-specific effects for ERP estimation. The study adopts a quantitative methodology, combining panel regression and secondary data analysis of a sample from 28 European countries over the period 2000–2023. The findings reveal a generally negative correlation between the Sustainable Development Index (SDG Index) and ERP. Moreover, it was observed that most individual SDG indicators did not show statistical or economic significance; out of the 17 components of the aggregate SDG Index, only 6 proved to be significant. The study emphasizes that the panel econometric model employed can estimate ERP values with high accuracy, average estimation errors being small. Thus, the choice of long-term bond yields and the aggregate Sustainable Development Index (SDG Index) as independent variables generated significant results, indicating that these variables can be used in models for estimating the cost of equity.

Suggested Citation

  • GHITA, George Aurelian & BALICA, Daniel Andrei & SOARE, Nicolae, 2025. "Modeling The Effects Of Sustainable Development On The Equity Risk Premium," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 13(1), pages 53-64, October.
    • Handle: RePEc:vls:rojfme:v:13:y:2025:i:1:p:53-64
    DOI: https://doi.org/10.65672/jfme.2025.1.4
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    References listed on IDEAS

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    1. Gunnar Friede & Timo Busch & Alexander Bassen, 2015. "ESG and financial performance: aggregated evidence from more than 2000 empirical studies," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 5(4), pages 210-233, October.
    2. Faias, José Afonso, 2023. "Predicting the equity risk premium using the smooth cross-sectional tail risk: The importance of correlation," Journal of Financial Markets, Elsevier, vol. 63(C).
    3. World Bank, 2000. "World Development Indicators 2000," World Bank Publications - Books, The World Bank Group, number 13828, April.
    4. Goss, Allen & Roberts, Gordon S., 2011. "The impact of corporate social responsibility on the cost of bank loans," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1794-1810, July.
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    Keywords

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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