Interactive Paper Explorer
Sample Construction
Goal of the sample
To assemble a large panel of U.S. publicly traded firms with both sustainability performance data and financial-market data, allowing the study to test whether sustainability performance is associated with the cost of equity capital.
U.S. publicly traded firms with available sustainability and financial data.
1991 to 2010
Firm-year observations, using panel data.
Final sample
Sample coverage
| Years | 1991 to 2010 |
|---|---|
| Firm-year observations | 4,525 |
| Unique firms | 1,016 |
| Industries | Broad coverage across major industries |
Panel coverage over time Illustrative
Model and Results
Regression model
The study estimates whether sustainability performance predicts the cost of equity capital after controlling for firm characteristics, market risk, and time effects.
| COEit | Cost of equity capital for firm i in year t |
|---|---|
| SPit | Sustainability performance for firm i in year t |
| Controlsit | Firm-level financial and risk controls |
| μi | Firm fixed effects |
| λt | Year fixed effects |
| εit | Error term |
Panel OLS regression with firm and year fixed effects, using robust standard errors clustered at the firm level.
Sustainability Performance, measured using KLD strengths minus concerns and standardized.
Firm size, leverage, profitability, market-to-book ratio, sales growth, beta, R&D intensity, advertising intensity, industry indicators, and year indicators.
Key empirical results
Firms with stronger sustainability performance tend to have lower required equity returns.
A one standard deviation increase in sustainability performance is associated with a lower cost of equity capital.
The negative association is consistent across alternative specifications.
Final takeaway
Whether firms with higher sustainability performance have a lower cost of equity capital, after accounting for other firm characteristics and market risk factors.
The core idea is that sustainability performance may reduce perceived investor risk, lowering the return investors require to hold the firm's equity.