oxford-study-pdf

(*) In the last column of the table, we state the effect of better ESG on the cost of capital of firms. ‘Lower’ indicatesthat better ESG lowers cost of capital. ‘Mixed’ indicates that better ESG has a mixed effect on the cost of capital. ‘None’indicates that better ESG has no effect on the cost of capital.Notes to Table 4:(1) More-stable boards indicate lower spreads. Mixedfindings regarding several other governance attributes.We count it as ‘lowering cost of capital’ because morestable boards decrease cost of debt financing.(2) We count this as lowering costs of capital becausebad environmental behaviour is penalized by lenders(i.e., they charge more). However, through exhibitinga better environmental quality, firms can get relativelybetter lending conditions.(3) The effect is positive when firms are exposed totakeovers. Conversely, firms which are protectedfrom takeovers pay lower spreads (as in Klock, Mansi,and Maxwell (2005), who use the conventionalG-index). Hence, Chava et al. (2009) support the ideathat low takeover vulnerability decreases the costof debt financing. We therefore count this study asdocumenting a reducing effect of proper ESG qualityon the cost of capital.(4) Especially for firms with sound sustainability policiesand practices.(5) Quality on employee relations, environment, andproduct strategies were particularly highlighted.(6) Sustainability concerns increase loan spreads. Betterenvironmental performance is therefore valuedby lenders. They enjoy relatively better lendingconditions. Therefore, counted as better ESG quality‘lowers’ cost of capital.(7) Only one model shows significant results.(8) Especially for industries in environmentally sensitivesectors.(9) The negative correlation between disclosure qualityand credit spreads persists only if shareholder rightsare low.(10) Hence, good environmental performance reducesyield spread.(11) The authors find that good environmental riskmanagement increases the cost of debt and decreasesthe cost of equity. Hence, we count this study asdelivering ‘mixed’ results.24