ESG and cost of capital components: Does the legal system matter?

Andreas Koutoupis, Athanasios Fassas, Michail Nerantzidis, Antonios Persakis and Panayiotis Tzeremes

Journal of Accounting & Organizational Change, 2025, vol. 22, issue 1, 193-210

Abstract: PurposeThis study aims to explore the relationship between environmental, social and governance (ESG) scores and the components of cost of capital in two distinct legal systems, while also examining the unique effect of each ESG pillar on these components.Design/methodology/approachUsing a sample of 4,846 firms across 60 countries, categorized into either civil law or common law systems, the authors test this study’s hypotheses using ordinary least squares and instrumental variables two-stage least squares.FindingsThe findings reveal a negative relationship between ESG and the components of the cost of capital for firms operating in civil law systems, whether measured by the cost of debt or the cost of equity. In contrast, firms in common law systems exhibit a negative relationship only with the cost of equity. Furthermore, the findings indicate that the influence of each ESG pillar on the components of the cost of capital varies across these two legal systems.Originality/valueTo the best of the authors’ knowledge, this study represents the first investigation into the relationship between ESG scores and the components of cost of capital across two distinct jurisdictions. Additionally, it provides evidence regarding the distinct impact of each pillar of ESG on the components of cost of capital.

Keywords: ESG scores; Cost of debt; Cost of equity; Civil law; Common law (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jaocpp:jaoc-03-2024-0090

DOI: 10.1108/JAOC-03-2024-0090

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