Better CSR = lower cost of equity capital

A team of North American scholars have determined that firms with strong corporate social responsibility (CSR) scores enjoy consistently lower costs of capital financing than firms with weaker CSR track records. The paper “Does corporate social responsibility affect the cost of capital?”, written by Sadok El Ghoul (University of Alberta), Dev Mishra (Edwards School of Business Saskatchewan University), Chuck C.Y. Kwok and Omrane Guedhami (both from Moore School of Business, University of South Carolina) was awarded the prestigious Moskowitz Prize for 2011.

Using a sample of 2,809 U.S. firms over the period 1992 to 2007, the researchers found that firms with better CSR scores (based on data from SRI analytics firm KLD) exhibited lower cost of equity financing. “We find that firms with a better CSR score exhibit lower cost of equity capital after controlling for other firm-specific determinants as well as industry and year fixed effects,” say the authors in the abstract for the paper. “Moreover, we find that CSR investment in improving responsible employee relations, environmental policies, and product strategies substantially contributes to reducing firms’ cost of equity. We also show that firms related to two ‘sin’ business sectors, namely, tobacco and nuclear power, appear to observe higher equity financing costs,” they say. The paper, which was published in in the Journal of Banking and Finance (Vol. 35, Issue, 9, Sept. 2011), provides evidence that is “robust to a battery of sensitivity tests…Our finding support arguments in the literature that CSR enhances firm value,” say the authors.

This study was awarded the 2011 Moskowitz Prize (awarded by the Center for Responsible Business at the Haas School of Business, in cooperation with the Social Investment Forum, the Moskowitz Prize promotes the concept, practice, and growth of socially responsible investing).


This article may be reproduced according to our terms of use with attribution (and link, if online) to To be cited as: “Better CSR = lower cost of equity capital”, El Ghoul, Mishra, Kwok and Guedhami,, March 14, 2012.