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Corporate sexual orientation equality policies and the cost of equity capital

Mostafa Monzur Hasan, Adrian (Wai Kong) Cheung () and Trevor Marwick

Journal of Behavioral and Experimental Finance, 2022, vol. 34, issue C

Abstract: We investigate how corporate sexual orientation equality policies (i.e., how a firm addresses the lesbian, gay, bisexual, and transgender (LGBT) issues in the workplace) affect the cost of equity capital. We develop two competing hypotheses. On the one hand, firms with supportive corporate sexual orientation equality policies are expected to generate a higher positive cash flow, labor productivity and return as these policies attract talented people and create an open, tolerant and comfortable workplace for employees. Investors are likely to view these results positively, reducing firms’ risk and the cost of equity. On the other hand, these firms may be perceived to be riskier owing to stakeholders’ divided views regarding sexual orientation equality, implying that such policies increase firms’ risk and the cost of equity capital. We find strong evidence that firms with supportive sexual orientation equality policies are related to a lower cost of equity capital. Our main findings are robust to different measures of sexual orientation equality and cost of equity, sample selection bias and the endogeneity problem. Additional analyses show that sexual orientation equality policies affect the cost of capital through the systematic risk channel. Finally, we show that a lower cost of equity capital stemming from corporate sexual orientation equality policies results in higher firm value and operating performance. Overall, the findings from our analysis suggest that corporate sexual orientation equality policies have an important bearing on corporate financing costs.

Keywords: Corporate sexual equality policies; Cost of equity capital; Systematic risk; Idiosyncratic risk (search for similar items in EconPapers)
JEL-codes: G11 G12 J70 M14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:beexfi:v:34:y:2022:i:c:s2214635022000247

DOI: 10.1016/j.jbef.2022.100664

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