The Impact of Corporate Social and Environmental Practices on the Cost of Equity Capital: UK Evidence

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    Abstract

    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, a review of the extant literature on CSEP is undertaken. Second, using a sample of 236 companies surveyed in ‘Britain’s Most Admired Companies’ (BMAC) in terms of ‘Community and Environmental Responsibility’ during the period 2010-2014, four implied cost of equity capital proxies are estimated. The relationship between a company’s cost of equity capital and its CSEP is then calculated.

    Findings: We 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 to help 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 voluntary in nature by companies.
    Originality/value: To the best of authors’ knowledge, this is the first study to investigate the association between CSEP of British companies and their cost of equity capital. Our study complements Ghoul et al. (2011), who examine the relationship between CSR and the cost of equity capital of US sample. We extend Ghoul et al. (2011) by using a sample of UK market after applying IFRS.
    Original languageEnglish
    Pages (from-to)425-441
    Number of pages16
    JournalInternational Journal of Accounting and Information Management
    Volume27
    Issue number3
    DOIs
    Publication statusPublished - 5 Aug 2019

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    Costs
    Industry
    Environmental practices
    Cost of equity capital
    Social practice
    Economics
    Managers

    Keywords

    • CSEP
    • the cost of equity capital
    • the UK

    Cite this

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    title = "The Impact of Corporate Social and Environmental Practices on the Cost of Equity Capital: UK Evidence",
    abstract = "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, a review of the extant literature on CSEP is undertaken. Second, using a sample of 236 companies surveyed in ‘Britain’s Most Admired Companies’ (BMAC) in terms of ‘Community and Environmental Responsibility’ during the period 2010-2014, four implied cost of equity capital proxies are estimated. The relationship between a company’s cost of equity capital and its CSEP is then calculated.Findings: We 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 to help 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 voluntary in nature by companies.Originality/value: To the best of authors’ knowledge, this is the first study to investigate the association between CSEP of British companies and their cost of equity capital. Our study complements Ghoul et al. (2011), who examine the relationship between CSR and the cost of equity capital of US sample. We extend Ghoul et al. (2011) by using a sample of UK market after applying IFRS.",
    keywords = "CSEP, the cost of equity capital, the UK",
    author = "Ahmed, {Ahmed Hassan} and Yasser Eliwa and David Power",
    year = "2019",
    month = "8",
    day = "5",
    doi = "10.1108/IJAIM-11-2017-0141",
    language = "English",
    volume = "27",
    pages = "425--441",
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    }

    TY - JOUR

    T1 - The Impact of Corporate Social and Environmental Practices on the Cost of Equity Capital

    T2 - UK Evidence

    AU - Ahmed, Ahmed Hassan

    AU - Eliwa, Yasser

    AU - Power, David

    PY - 2019/8/5

    Y1 - 2019/8/5

    N2 - 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, a review of the extant literature on CSEP is undertaken. Second, using a sample of 236 companies surveyed in ‘Britain’s Most Admired Companies’ (BMAC) in terms of ‘Community and Environmental Responsibility’ during the period 2010-2014, four implied cost of equity capital proxies are estimated. The relationship between a company’s cost of equity capital and its CSEP is then calculated.Findings: We 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 to help 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 voluntary in nature by companies.Originality/value: To the best of authors’ knowledge, this is the first study to investigate the association between CSEP of British companies and their cost of equity capital. Our study complements Ghoul et al. (2011), who examine the relationship between CSR and the cost of equity capital of US sample. We extend Ghoul et al. (2011) by using a sample of UK market after applying IFRS.

    AB - 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, a review of the extant literature on CSEP is undertaken. Second, using a sample of 236 companies surveyed in ‘Britain’s Most Admired Companies’ (BMAC) in terms of ‘Community and Environmental Responsibility’ during the period 2010-2014, four implied cost of equity capital proxies are estimated. The relationship between a company’s cost of equity capital and its CSEP is then calculated.Findings: We 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 to help 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 voluntary in nature by companies.Originality/value: To the best of authors’ knowledge, this is the first study to investigate the association between CSEP of British companies and their cost of equity capital. Our study complements Ghoul et al. (2011), who examine the relationship between CSR and the cost of equity capital of US sample. We extend Ghoul et al. (2011) by using a sample of UK market after applying IFRS.

    KW - CSEP

    KW - the cost of equity capital

    KW - the UK

    U2 - 10.1108/IJAIM-11-2017-0141

    DO - 10.1108/IJAIM-11-2017-0141

    M3 - Article

    VL - 27

    SP - 425

    EP - 441

    JO - International Journal of Accounting and Information Management

    JF - International Journal of Accounting and Information Management

    SN - 1834-7649

    IS - 3

    ER -