Sustainability Managed against Downside Risk and the Cost of Equity: Evidence in Korea

Truong Thi Thu Thuy and Jungmu Kim
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Truong Thi Thu Thuy: Department of Business Administration, School of Business, Yeungnam University, Gyeongsan 38541, Korea
Jungmu Kim: Department of Business Administration, School of Business, Yeungnam University, Gyeongsan 38541, Korea

Sustainability, 2018, vol. 10, issue 11, 1-18

Abstract: This study examines the relationship between sustainability managed against downside risk and the cost of equity in the Korean stock market during the 2000–2016 period. We employ downside co-skewness and downside beta as a measure of downside risk, to analyze the cross-sectional relationship between them and average portfolio stock returns. We have also carried out Fama–MacBeth regressions to find the required return for bearing downside risk. The results show that downside co-skewness can be used more effectively than downside beta to explain a cross-section of stock returns or cost of equity. The required premium for bearing downside risk, as measured by downside co-skewness, is approximately 19% per annum in the Korean stock market. This finding suggests that sustainable companies can raise their capital in the form of equity at 19% lower costs, and also implies that increasing sustainability can reduce the cost of capital.

Keywords: cost of capital; downside risk; Korean stock market; vulnerability; sustainable business (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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