Corporate Social Responsibility and the Cost of Capital: Is CSR priced in the Swedish capital market?

Sammanfattning: This study aims to investigate whether corporate social responsibility (CSR) could increase firm value by lowering the cost of equity capital. Data is collected from firms on the Stockholm Stock Exchange (OMX Stockholm) between 2006 and 2014. The results show a significant negative relationship between CSR and the cost of equity capital obtained through accounting-based valuation models; thus implying that firms with higher CSR rating have lower cost of equity capital. However, by including firm fixed effects and using an instrumental variable method to test the causality between CSR and cost of equity capital, the result indicates that endogeneity seems to drive the relationship. Furthermore, the results also show a curvilinear relationship where the majority of firms in our sample that have not reached the tipping point can enjoy lower cost of equity capital associated with an increase in CSR activities, especially in environmental efforts as these are more valued by the Swedish capital market than social efforts.