CHAPTER VI
significant to these proxies of cost of equity. The conclusion of this group is unclear and cannot interpret.
The results of ESG factors on both groups of cost of equity show that ESG factors do not have any significant relationship to cost of equity. The results mean that ESG factors have not effected to cost of equity in Japanese firm yet. The reason may be Japanese firms have not considered ESG factors into a firm’s operations thus cost of equity could not be reduced. According to ESG factors is not significant to cost of equity thus interaction between ECON factors and ESG factors are not significant to each other.
Japanese firms have only economic sustainability performances is a negative relationship to cost of equity in CAPM and beta. Japanese firm should invest and consider two factors which are operation effort and equity effort. The non-economic sustainability performances or ESG do not have any effect on cost of equity in Japanese firms.
The industry sector and year effect and lead-lag regression are added to all models to solve statistic fixed effect and endogeneity problems. Results of sector effect show that some of business sectors are significant to cost of equity but results are different on each proxy of cost of equity. These results mean different industrial sectors effect on different proxies of cost of equity. When applying year effect to models, this study finds that during economic crisis period both subprime in 2008 and Eurozone crisis during 2011 to 2012 effect cost of equity increase. Lead-lag regression is used for all models to eliminate endogeneity problems.
The robustness test studies individual, multiple and combined economic and non-economic sustainability variables on cost of equity. This robustness test consists of two parts. The first part is individual ECON variables. The second part is individual, multiple and combined ESG factors.
The effect of individual ECON variables on cost of equity results from section 5.2.5, show ECON variables that significant to cost of equity are volatility of sale growth and advertisement expense which effect follow expectations. The volatility of sale growth has a positive relation to cost equity that means when firms have higher volatility of sale growth, cost of equity of firm will increase. These results conclude that Japanese firms with a stable of sale growth that firms can lower cost of equity. The advertisement expense affects cost of equity in Japanese firms in negative relation which
different from American firms from the prior study of Ng and Rezaee (2015) that do not relate to cost of equity capital. This result means Japanese firm can reduce cost of equity when increase advertisement expense. The other variables such as sale growth, R&D expense, and dividend omission do not have any effect on cost of equity in Japanese firms. If firms need to reduce their cost of equity and create value of firm, firms shall focus on the stability of sale growth and investing in advertisement to be a sustained firm. In Investor side, investors shall pay attention to firms with lower sale growth volatility and higher advertisement expense for sustainability firms.
The effect of ESG on cost of equity results show that only environment score has significant to cost of equity but a coefficient is a small number which means that cost of equity does not economically significant to individual and combined ESG score in Japan market.
6.2 Implication
This study uses Japanese firms to understand the relationship between business sustainability on cost of equity that different from other researches which study in the United States of America. All above results show that Japan market is different from US market which all of non-economic sustainability performances are not effect to cost of equity. These results may possibly different from the culture and trend of ESG in Japan that has begun for a few years back and also the limitation of data.
6.3 Limitation of this study
There are the limitation of information in this study such as ESG and some ECON information. Even though ESG data in Japan market from Thomson Reuter can provide more than other countries in Asia but it is around 10% out of all firms in the market (460 out of 3,729 firms). Some financial data such as advertisement, R&D expense are not available in database so retrieved data are in short period as this study has only 119 firm on observation 805 firm-year or around 7 years per firm. According
to the limitation of information, this study is possible to bias from available data in Thomson Reuter EIKON.
6.4 Suggestions
According to the limitation of data in Japan and other countries in Asia, further research shall do in case still studying between sustainability performance and cost of equity in two ways; first way is investigating for all country in Asia and Europe for more information that can retrieve or second way is waiting for more information in the future because this sustainability trend is still one famous trend in the future. Other further studies about business sustainability in firm side shall do with cost of debt, cost of capital, cash flow generation or even firm valuations. For investor side, shall do in terms of return and risk. The last regulator shall do in dimension of information disclosure of firms and revise the accounting standard.