Journal ArticleDOI
Environmental Externalities and Cost of Capital
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TLDR
Barber et al. as discussed by the authors analyzed the impact of a firm's environmental profile on its cost of equity and debt capital using implied cost of capital derived from analysts' earnings estimates and found that investors demand significantly higher expected returns on stocks excluded by environmental screens such as hazardous chemical, substantial emissions, and climate change concerns compared to firms without such environmental concerns.Abstract:
Ianalyze the impact of a firm's environmental profile on its cost of equity and debt capital. Using implied cost of capital derived from analysts' earnings estimates, I find that investors demand significantly higher expected returns on stocks excluded by environmental screens such as hazardous chemical, substantial emissions, and climate change concerns compared to firms without such environmental concerns. Lenders also charge a significantly higher interest rate on the bank loans issued to firms with these environmental concerns. I provide evidence that the environmental profile of a firm is not simply proxying for an omitted component of its default risk. Further, firms with these environmental concerns have lower institutional ownership and fewer banks participate in their loan syndicate than firms without such environmental concerns. These results suggest that exclusionary socially responsible investing and environmentally sensitive lending can have a material impact on the cost of equity and debt capital of affected firms.
This paper was accepted by Brad Barber, finance.read more
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Corporate goodness and shareholder wealth
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The Importance of Climate Risks for Institutional Investors
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The effect of pro-environmental preferences on bond prices: Evidence from green bonds
TL;DR: In this paper, the authors used green bonds as an instrument to identify the effect of non-pecuniary motives, specifically pro-environmental preferences, on bond market prices.
Journal ArticleDOI
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TL;DR: The authors reviewed the financial economics-based research on Environmental, Social, Social and Governance (ESG) and Corporate Social Responsibility (CSR) with an emphasis on corporate finance.
Journal ArticleDOI
Sustainable investing in equilibrium
TL;DR: In this article, the authors model investing that considers environmental, social, and governance (ESG) criteria and find that green assets have low expected returns because investors enjoy holding them and because green assets hedge climate risk.
References
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A Simple Model of Capital Market Equilibrium with Incomplete Information
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Journal ArticleDOI
Does Corporate Social Responsibility Affect the Cost of Capital
TL;DR: This paper examined the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of US firms and found that firms with better CSR scores exhibit cheaper equity financing.
Journal ArticleDOI
Toward an Implied Cost of Capital
TL;DR: In this paper, the authors use a discounted residual income model to generate a market implied cost of capital, and examine firm characteristics that are systematically related to this estimate of cost-of-capital.
Journal ArticleDOI
The price of sin: The effects of social norms on markets
Harrison Hong,Marcin Kacperczyk +1 more
TL;DR: For example, this paper found that sin stocks are less held by norm-constrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs, and they receive less coverage from analysts than do stocks of otherwise comparable characteristics.