oxford-study-pdf

Studies also show that credit ratings are positivelyaffected by superior sustainability performance. Bettersustainability policies lead to better credit ratings. 89 Inparticular, it has been demonstrated that employee wellbeingleads to better credit ratings 90 and in turn lowercredit spreads. 913.2 Sustainability andthe Cost of Equity3.2.1 Cost of Equityand the ‘G’ DimensionStudies show that good corporate governance influencesthe cost of equity by reducing the firm’s cost of equity. 92“Firms with socialresponsibility concerns paybetween 7 and 18 basis pointsmore than firms that aremore responsible.”Goss and Roberts, 2011This is not surprising, as good corporate governancetranslates into lower risk for corporations, reducesinformation asymmetries through better disclosure, 93and limits the likelihood of managerial entrenchment. 94Conversely, research also shows that firms with highermanagerial entrenchment due to more anti-takeoverdevices in place, exhibit significantly higher cost of equity. 95International evidence on Brazil and emerging marketcountries also supports the view that superior corporategovernance reduces a firm’s cost of equity significantly. 96‘Companies with better governance scores exhibit a 136 basis pointslower cost of equity’.Ashbaugh-Skaife, et al., 200489 Attig, El Ghoul, Guedhami, Suh (2013) study firms from 1991-2010 and use MSCI ESG STATS as their source for CSR information. Additional evidence is provided byJiraporn, Jiraporn, Boesprasert, and Chang (2014, forthcoming): after correcting for endogeneity, the authors conclude that firms with a better CSR quality tend tohave better credit ratings, pointing towards a risk-mitigating effect of CSR.90 See Verwijmeren and Derwall (2010: 962): ‘Firms with better employee relations have better credit ratings, and thus a lower probability of bankruptcy’.91 See, for example, Bauer, Derwall, and Hann (2009).92 See, for example, Ashbaugh-Skaife, Collins, and LaFond (2004) who show that well governed firms exhibit a cost of equity financing 136 basis points lowerthan their poorly governed counterparts. Even after adjusting for risk, the difference between well-governed and poorly-governed firms is still 88 basis points.Furthermore, Derwall and Verwijmeren (2007) also present evidence that better corporate governance on average led to lower cost of equity capital in the period2003-2005.93 See, for example, Barth, Konchitchki, and Landsman (2013). They show that greater corporate transparency with respect to earnings significantly lower the firm’scost of capital. Their study sample is comprised of US firms over 1974-2000.94 Derwall and Verwijmeren (2007).95 See, for example, Chen, Chen, and Wei (2011). They show that the governance index of Gompers et al. (2003) is significantly and positively related with a firm’scost of equity. This implies that relatively better governed firms can benefit from lower cost of equity, relative to poorly-governed firms.96 See, for example, Lima and Sanvicente (2013) for evidence from Brazil. Chen, Chen, and Wei (2009) provide evidence on the relation between corporategovernance and cost of equity for a sample of firms from emerging markets. They also show that good corporate governance leads to lower cost of equity capital.20