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Sustainability 2017, 9(5), 717; doi:10.3390/su9050717

Effect of Entry into Socially Responsible Investment Index on Cost of Equity and Firm Value

College of Business, Hankuk University of Foreign Studies, 107, Imun-ro, Dongdaemun-gu, Seoul 130-791, Korea
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Academic Editor: Yongrok Choi
Received: 22 April 2017 / Revised: 22 April 2017 / Accepted: 25 April 2017 / Published: 29 April 2017
(This article belongs to the Section Economic, Business and Management Aspects of Sustainability)
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Abstract

The purpose of this study was to identify the effect of a company’s incorporation into the Socially Responsible Investment (SRI) index on its cost of equity (COE) and corporate value. The study collected and analyzed data about the four-year long changes of the component stocks of the Korea Exchange (KRX) SRI index from September 2010 to September 2013 to verify the correlation between the incorporation of the SRI index and the cost of equity or corporate value by using the Price-Earnings Growth (PEG), Modified PEG (MPEG) and Gode and Mohanram (GM) models for estimation of the implied costs of equity capital, as well as Tobin’s Q ratio. The analysis results failed to show any significant relation between the incorporation of the SRI index and the cost of equity capital. Also, no statistically significant correlation between the incorporation of the SRI index and corporate value was observed. However, at an early phase of introduction of the SRI index, the included companies revealed a negative correlation with the cost of equity. However, after changing the listed stocks, they showed a positive correlation with the cost of equity capital. All in all, this can be ascribed to a mixed presence of optimistic and pessimistic investors about CSR activities, or there is a possibility that the KRX SRI index might not correctly reflect the CSR activities of companies. View Full-Text
Keywords: CSR (corporate social responsibility); SRI(socially responsible investment); cost of capital; Tobin’s Q CSR (corporate social responsibility); SRI(socially responsible investment); cost of capital; Tobin’s Q
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

Eom, K.; Nam, G. Effect of Entry into Socially Responsible Investment Index on Cost of Equity and Firm Value. Sustainability 2017, 9, 717.

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