Impact of ESG Performance on Cost of Equity in Eastern Europe

René Achim Ralph Heymann

Master's thesis

The Impact of ESG Performance on Cost of Equity in Eastern Europe

Abstract:

Integrating ESG factors into business operations has become an ever-increasing part of corporate value-creation strategies in recent decades. However, little is known about how ESG engagement relates to corporate financial performance in Eastern Europe. Therefore, this thesis attempts to answer the question of how ESG ratings affect the implied cost of equity of Eastern European companies. Several fixed-effect regression models were used to examine this relationship for a panel consisting of firm data over the period from 2010 to 2020. The empirical results confirm a negative relationship with the environmental score, while governance and social ratings have a positive relationship with implied cost of equity. In particular, the results suggest that investing in pollution prevention can reduce firms' cost of equity. Conversely, the cost of equity is increased by higher management, community, human rights and product responsibility scores. This study makes an important contribution to both academia and practice by providing initial evidence on the relationship between ESG performance and cost of equity in Eastern Europe.

Abstract:

Integrating ESG factors into business operations has become an ever-increasing part of corporate value-creation strategies in recent decades. However, little is known about how ESG engagement relates to corporate financial performance in Eastern Europe. Therefore, this thesis attempts to answer the question of how ESG ratings affect the implied cost of equity of Eastern European companies. Several fixed-effect regression models were used to examine this relationship for a panel consisting of firm data over the period from 2010 to 2020. The empirical results confirm a negative relationship with the environmental score, while governance and social ratings have a positive relationship with implied cost of equity. In particular, the results suggest that investing in pollution prevention can reduce firms' cost of equity. Conversely, the cost of equity is increased by higher management, community, human rights and product responsibility scores. This study makes an important contribution to both academia and practice by providing initial evidence on the relationship between ESG performance and cost of equity in Eastern Europe.

Keywords

Eastern Europe, Environmental social governance (ESG), corporate social responsibility (CSR), cost of equity

Keywords

Environmental social governance (ESG), corporate social responsibility (CSR), cost of equity, Eastern Europe

Language used: English

Date on which the thesis was submitted / produced: 21. 5. 2023

Thesis defence

• Date of defence: 16. 6. 2023
• Supervisor: Viktar Dudzich
• Reader: Naděžda Blahová

Vysoká škola ekonomická v Praze

Master programme:
Finance and Accounting