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The impact of corporate social and environmental practices on the cost of equity capital: UK evidence

Ahmed H. Ahmed (School of Business, University of Dundee, Dundee, UK and Faculty of Commerce, South Valley University, Qena, Egypt)
Yasser Eliwa (School of Business and Economics, Loughborough University, Loughborough, UK and Faculty of Commerce, Cairo University, Egypt)
David M. Power (School of Business, University of Dundee, Dundee, UK)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Article publication date: 5 August 2019

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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, 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.

Keywords

Acknowledgements

The authors would like to thank Prof Mike Brown and his team for their great efforts to conduct the BMAC survey and making the data available. The authors would also like to thank the anonymous referees for detailed and constructive comments.

Citation

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 & Information Management, Vol. 27 No. 3, pp. 425-441. https://doi.org/10.1108/IJAIM-11-2017-0141

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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