The impact of corporate social and environmental practices on the cost of equity capital: UK evidence
Purpose
There has been an ongoing call from various groups of stakeholders for social and environmental practices to be integrated into companies’ operations. A number of companies have responded by engaging in socially and environmentally responsible activities, while others choose not to participate in these activities, which incur additional costs. The absence of consensus regarding the economic implications of social and environmental practices provides the impetus for this paper. This study aims to examine the association between corporate social and environmental practices (CSEP) and the cost of equity capital measured by four ex ante measures using a sample of UK listed companies.
Design/methodology/approach
First, we undertake a review of the extant literature on CSEP. Second, using a sample of 236 companies surveyed in “Britain’s most admired companies” in terms of “community and environmental responsibility” during the period 2010-2014, we estimate four implied a cost of equity capital proxies. The relationship between a companies’ cost of equity capital and its CSEP is then calculated.
Findings
The authors find evidence that companies with higher levels of CSEP have a lower cost of equity capital. This finding determines the significant role played by CSEP in helping users to make useful decisions. Also, it supports arguments that firms with socially responsible practices have lower risk and higher valuation.
Practical implications
The finding encourages companies to be more socially and environmentally responsible. Furthermore, it provides up-to-date evidence of the economic consequences of CSEP. The results should, therefore, be of interest to managers, regulators and standard-setters charged with developing regulations to control CSEP, as these practices are still undertaken on a voluntary basis by companies.
Originality/value
To the best of the authors’ knowledge, this is the first study to investigate the association between CSEP of British companies and their cost of equity capital. The study complements Ghoul et al. (2011), who examine the relationship between CSR and the cost of equity capital of the US sample. The authors extend Ghoul et al. (2011) by using a sample of the UK market after applying International Financial Reporting Standards.
History
School
- Business and Economics
Department
- Business
Published in
International Journal of Accounting and Information ManagementVolume
27Issue
3Pages
425-441Citation
AHMED, A.H., ELIWA, Y. and POWER, D.M., 2019. The impact of corporate social and environmental practices on the cost of equity capital: UK evidence. International Journal of Accounting and Information Management, 27 (3), pp.425-441.Publisher
Emerald Publishing LimitedVersion
- AM (Accepted Manuscript)
Rights holder
© Emerald Publishing LimitedPublisher statement
This paper was accepted for publication in the journal International Journal of Accounting and Information Management and the definitive published version is available at https://doi.org/10.1108/IJAIM-11-2017-0141.Acceptance date
2018-05-04Publication date
2019-08-05Copyright date
2019ISSN
1834-7649Publisher version
Language
- en