Firms with strong corporate social responsibility (CSR) scores enjoy consistently lower costs of capital financing than firms with weaker CSR track records, according to a study that has won the 2011 Moskowitz Prize for Socially Responsible Investing (SRI).
The Moskowitz Prize, awarded annually by the Haas School's Center for Responsible Business in cooperation with the Social Investment Forum, went to four co-authors of the study:
- Sadok El Ghoul, University of Alberta, Canada
- Omrane Guedhami, Moore School of Business, University of South Carolina
- Chuck C. Y. Kwok, Moore School of Business, University of South Carolina
- Dev Mishra, University of Saskatchewan, Canada
Their winning study, “Does Corporate Social Responsibility Affect the Cost of Capital,” was published in the Journal of Banking and Finance (Vol. 35, Issue, 9, Sept. 2011).
Using a sample of 2,809 U.S. firms over the period 1992 to 2007, the researchers found that firms with better CSR scores (based on data from SRI analytics firm KLD) exhibited lower cost of equity financing. Their findings remained consistent under a large number of robustness tests. In particular, their findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms’ cost of equity.
They also show that participation in two so-called “sin” industries, namely, tobacco and nuclear power, increases firms’ cost of equity. The authors conclude that CSR activities not only contribute to society at large, but also benefit firms by lowering their financing costs.
This was an exceptionally competitive year for the Moskowitz Prize, with dozens of academic studies submitted to be considered for the $5,000 prize. For the first time in the competition's 15-year history, two studies received honorable mention: "Environmental Externalities and Cost of Capital" by Sudheer Chava of the Georgia Institute of Technology and "Do Corporations Invest Enough in Environmental Responsibility?" by Yongtae Kim and Meir Statman of Santa Clara University.
“The quality of academic work done in the field of social investing each year has become really exceptional," says Lloyd Kurtz, Moskowitz Prize administrator and lecturer at Berkeley-Haas. "We believe this sustained, serious analysis will ultimately bring great benefits?not just for social investors, but for society as well."
The Moskowitz Prize is the only global award recognizing outstanding quantitative research in the field of sustainable and responsible investing. It was named for Milton Moskowitz, one of the first investigators to publish comparisons of the financial performance of screened and unscreened portfolios.