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Does sustainability performance affect the price of equity
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School of Business |
Master's thesis
Electronic archive copy is available via Aalto Thesis Database.
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en
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50+5
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Abstract
Although dating back to the 1960s, corporate sustainability has been more widely studied since the 1990s. (Bergquist, 2017) Some studies have indicated corporate sustainability leads to significant benefits for capital price and elevated financial performance, but the overall academic results have been inconclusive. This study investigates the relationship between sustainability performance and the cost of equity in the Nordic markets. The investigation is done by observing the overall relationship and comparing the relationship through different ESG performance levels. The study is conducted with companies under Directive 2014/95/EU mitigating the effect of voluntary disclosures. This paper interchangeably uses the terms corpo-rate sustainability, corporate social responsibility (CSR), and ESG performance.
The OLS multiple regression model is used to study the relationship between the independent and dependent variable. Highly referenced 2000s and 2010s ESG studies are closely followed when defining the model variables. The dependent variable (cost of equity) is estimated with ex ante implied cost of equity model. MSCI ESG rating is the proxy for the independent variable (ESG performance). The study follows the article by Ghoul et al. (2010) selecting the control variables excluding the long-term forecast and including analyst count from Botosan (1997). The method to compare the difference in the relationship with different ESG performance levels is done by following the basics of Dhaliwal (2011).
The results indicate a negative relationship between the cost of equity and the corporate sustainability performance in the Nordic market. Sustainability performance is seen to cause a lower cost of equity through an elevated investor base and lower perceived risk. This negative effect is at its strongest when the firm’s ESG level is near the market’s median value. The cause of this is multi-dimensional. Study shows that significantly exceeding the market’s median level brings no financial benefit.