University of Oulu

The effect of environmental, social, governance (ESG) on cost of equity capital (COEC) : evidence from Finnish listed companies

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Author: Zakariaee, Mojtaba1
Organizations: 1University of Oulu, Oulu Business School, Department of Accounting, Accounting
Format: ebook
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 1.8 MB)
Pages: 93
Persistent link:
Language: English
Published: Oulu : M. Zakariaee, 2023
Publish Date: 2023-09-12
Thesis type: Master's thesis
Tutor: Kallunki, Juha-Pekka
Reviewer: Kallunki, Juha-Pekka
Sahlström, Petri


The importance of corporate social responsibility (CSR) and non-financial disclosures to investors and other stakeholders has grown in recent years. Companies acknowledge that ESG (environmental, social, and governance) disclosure has a substantial impact on brand recognition, investment choices, the company’s public image, and stakeholders’ understanding of environmental, social, and governance concerns. By offering ESG ratings and sharing pertinent information, businesses may show their commitment to responsible business practices and increase their openness. This improved openness not only encourages investor and stakeholder confidence, but also reduces organizations’ exposure to risk. Investors and stakeholders increasingly see ESG performance as a crucial determinant of a company’s long-term resilience and sustainability. Understanding the link between ESG disclosure, transparency, and risk is essential for businesses looking to develop trust, attract investments, and navigate the rapidly changing environment of sustainable business practices.

This study examines the association between ESG as a type of non-financial company information and COEC for listed Finnish firms from 2003 to 2022. In addition, we attempt to determine whether the relationship between ESG and COEC differs between industrial and non-industrial units. Furthermore, we seek an answer to the question, "Is this relationship growing stronger over time?"

This thesis sample consists of 405 observations of Finnish listed firms collected from the Refinitive database. These listed companies were gathered from the Helsinki Stock Exchange. The ESG score is the independent variable, whereas the COEC is the dependent variable (cost of equity capital). In addition, control variables such as firm size, represented by the natural logarithm of total assets (LN TA), leverage, and market-to-book ratio (MTBR), as well as dummy variables including industry and annual dummy variables for every three years, were added to the original models.

The regression results indicate that there is a negative association between ESG and COEC, however this relationship is not significantly stronger among industrial enterprises. Although the results for our last hypothesis were not statistically significant, we can observe that the influence of ESG on the cost of equity capital (COEC) grew larger before 2018 and then reversed. The first result is consistent with existing studies; however, there is no comparable research for our second and third results.

To be able to draw broad conclusions about ESG and the standardization of ESG measurement and impact among non-listed or small- and medium-sized businesses, additional research is required. In addition, it is possible that future research will investigate the ways in which companies that have high ESG ratings are affected by stock market shocks like the one that was brought on by the epidemic.

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Copyright information: © Mojtaba Zakariaee, 2023. This publication is copyrighted. You may download, display and print it for your own personal use. Commercial use is prohibited.