The Effect of CSR Performance on the Cost of Capital in Nordic Firms

Klaus Winther Erlendsson

Student thesis: Master thesis

Abstract

In the past 20 years the focus on Corporate Social Responsibility has been on an increasing rise. In 2017 a new EU directive governing the CSR reporting of the largest companies in the EU took effect, specifying the minimum amount of information regarding their CSR policies that these companies must include in their annual reports. For the companies striving to improve their CSR performance, this can often be associated with a number of extra costs. However, the question is whether it is actually possible for these firms to improve their financial performance by improving their CSR performance. The overall objective of this thesis is to investigate whether Nordic listed companies can lower their cost of capital by improving their CSR performance. Previous studies from the United States have largely shown a negative relationship between CSR performance and the cost of capital. This thesis investigates whether the same results apply to companies operating in the Nordic countries of Denmark, Sweden, Norway and Finland. Furthermore, this thesis examines whether a company’s environmental, social or governance performance plays a bigger role in determining its cost of capital. Lastly it is examined whether these results differ, depending on which sector a company operates in. By using the Stakeholder- and Asymmetric Information theories, this thesis predicts that by improving their CSR performance, companies should be able to lower the asymmetric information that naturally exists between a company and its stakeholders. In doing so, the investors’ perceived risk of investing in the company should fall, leading to a lower cost of capital. Using a sample of 149 Nordic listed companies, with data collected from the year 2017 to ensure that all of the companies are reporting using the same laws regarding CSR, this thesis uses a multiple linear regression to examine the relationship between CSR performance and cost of capital. The results of the study show no statistically significant relationship between the CSR performance and the cost of capital. Furthermore, no statistically significant relationship is found between any of the individual components of CSR and the cost of capital. The same result is found when studying the differences between companies in different sectors. Thus, in conclusion, against the theoretical predictions, this thesis has not been able to show a negative relationship between CSR performance and the cost of capital for Nordic listed companies.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages102
SupervisorsCaroline Aggestam Pontoppidan