Above all, non-economic sustainability (ESG) is not statistically significant for the cost of capital. Economic Sustainability (ECON) Performance on the cost of capital 85 Appendix E: Summary of Sectors and Interim Year Effect Results.
INTRODUCTION
The main idea of sufficiency was given in His Majesty's birthday speech on December 4, 1998, as “This sufficiency means having enough to live on. This research focuses on the Tokyo Stock Exchange because it is the largest stock market in Japan.
LITERTURE REVIEW
Financial Information and Cost of Equity
Bhattacharya, Daouk, and Welker (2003) examine empirical research among high-standard financial information that can lower the cost of equity capital; Botosan (1997);. Botosan and Plumlee (2002) examine the effect of annual report disclosure level and timing on the cost of equity capital using a dividend discounting model.
Non-Economic Sustainability and Cost of Equity
- Environment and Cost of Equity
- Social and Cost of Equity
- Governance and Cost of Equity
Connors and Silva-Gao (2008) investigate the effect of environmental performance via chemical emissions as environmental risk effects on the cost of equity. The result shows that when the company has higher chemical emissions, the company also has higher cost of equity.
THE RELATED THEORIES AND HYPOTHESIS DEVELOPMENT
The Related Theories
Other theories of sustainability in business include legitimacy theory and signaling or disclosure theory. Signaling/disclosure theory explains management's incentives to both achieve corporate sustainability performance and that investors respond to information disclosure ( Grinblatt & Hwang, 1989 ).
Hypothesis Development
Reducing asymmetry helps to reduce information risk and increase the good relationship between the company and investors. The third hypothesis examines the relationship between economic sustainability performance and the effect of non-economic sustainability performance on the cost of equity capital.
DATA AND SAMPLE SELECTION
Data source
This study uses annual data to match ESG data from Thomson Reuter which is available over a one-year period. For some financial variables, such as calculation quality and sales growth volatility, which required the use of more data for calculation, this study extends to retrieve data from FY1990 to FY2018.
Variables
- Independent Variables
- Cost of Equity Capital
- Controlled Variables
Size of company variable (Sizeit) is calculated by taking the natural logarithm of the market value of equity at the end of the financial year. Dummy variable for loss (DLOSSit) represents the profitability of company i at the end of financial year t.
Descriptive Statistics and Correlation
- Descriptive Statistic
- Correlation
The symbol for variables and factors separated into cost of equity, independent variables, sustainability performance factors, control variables and other variables with its description. Gordonit Implicit cost of equity under Gordon's finite horizon expected return model CAPMit Expected return from the Capital Asset Pricing Model. Sizeit Natural logarithm of market value of equity ALTMANit Probability of bankruptcy by Altman Z-score DLOSSit Dummy variable for loss.
The descriptive statistics of sample all variables and factors include cost of equity, independent variable, economic sustainability performance factors, non-economic sustainability performance factors, control variables and other variables. These descriptive statistics of all variables are shown in the current fiscal year period with no rollover period. The descriptive statistics of all variables and factors include cost of equity, independent variable, economic sustainability performance factors, non-economic sustainability performance factors, control variables and other variables.
These descriptive statistics of all variables are shown in the current fiscal year period with a lead-in period.
RESEARCH METHODOLOGY AND EMPIRICAL RESULTS
Research Methodology
- Limitation of Fixed Effect Model
- Sector and Year Fixed Effect
- Economic Sustainability (ECON) Performance Effects on Cost of Equity
- Non-Economic Sustainability (ESG) Performance Effects on Cost of Equity
- Interaction between Economic Sustainability (ECON) and Non- Economic Sustainability (ESG) Performance Effects on Cost of Equity
- Robustness Test
The results of this part are shown in section 5.2.2 and are divided into two groups of costs of equity. This section examines the relationship between ESG performance on different measures of the cost of equity. This section is split into two groups of costs of equity, which use different panel regression models.
This section studies the relationship between ECON factors and ESG factors affecting the cost of capital. The second cost of capital groups are Gordonit-1 and IndEPit-1 which use panel regression according to equation (6). First, this section studies the effect of individual financial sustainability variables on the cost of capital.
The summary results of between ESG factors and equity costs are shown in section 5.2.5.2.
Empirical Results
- Sector and Year Fixed Effect
- Economic Sustainability (ECON) Performance Effect on Cost of Equity Results
- Non-Economic Sustainability (ESG) Performance Effect on Cost of Equity Result
- Interaction between Economic sustainability (ECON) and non- economic sustainability (ESG) performance on cost of equity results
- Robustness Test Result
Signs of each variable are the same as expectations, but other variables are not significant for the cost of equity capital. The results from both CAPMit and BEit appear that growth opportunities are not significant for both costs of equity capital. Panel regression results on CAPMit, where CAPMit is a proxy for the cost of equity capital, are shown in decimal numbers.
Panel regression results on Betait where Betait is a proxy for the cost of equity are shown in decimal numbers. Panel regression results on Gordonit, where Gordonit is a proxy for the cost of equity, are shown in decimal numbers. The control model results for all proxies of the cost of equity are shown in model 1 of all tables.
All results among ESG factors are not statistically significant for the entire cost of capital in the Japanese market. Panel regression results on IndEPit excluding outliers where IndEPit is a proxy for the cost of equity capital are shown in decimal. The sustainability results conclude that the economic sustainability variables which are statistically significant for the cost of net capital and have a negative relationship are.
CONCLUSIONS
- Conclusions
- Implication
- Limitation of this study
- Suggestions
The results of ESG factors for both groups of cost of equity capital show that ESG factors do not have a significant relationship with cost of equity capital. The results imply that ESG factors have not yet affected the cost of equity capital in a Japanese company. Japanese firms only have economic sustainability performance, which is negatively related to the cost of equity capital in the CAPM and beta.
Non-economic sustainability performance, or ESG, has no effect on the cost of equity capital in Japanese companies. The robustness test examines individual, multiple, and combined variables of economic and non-economic sustainability with respect to the cost of equity capital. These results conclude that Japanese companies can lower their cost of equity capital with stable sales growth.
The other variables such as sales growth, R&D expenditure and dividend omission have no effect on the cost of equity in Japanese firms.
The Impact of Environmental Risk on the Cost of Equity: Evidence from the Toxic Release Inventory. Voluntary non-financial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. Retrieved from https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/esg-scores-methodology.pdf.
Concepts and Theories on Soil Retrieved from http://www.chaipat.or.th/eng/concepts-theories/soil-improvement.html Foundation, C. Capital market impact of product marketing strategy: evidence from the relationship between advertising expenses and cost of capital.
APPENDICIES
Appendix A: The summary of firms in Tokyo Stock Exchange separate by Fama French 49 industrial group
Appendix A: The overview of companies on the Tokyo Stock Exchange, separated by Fama French 49 industrial group. The number of companies on the Tokyo Stock Exchange is divided into Fama-French 49 industrial groups and includes the number of companies and observation of samples.
Appendix B: Correlation between variables
Correlation between all variables included cost of equity capital, independent variables, ECON factors, ESG factors and control variables in the same annual period. Correlation among all variables included cost of equity capital, independent variables, ECON factors, ESG factors and control variables, when the leading term is cost of equity capital and the lagged term includes independent variables, ECON factors, ESG factors and control variables.
Appendix C: Factor analysis by principal factor analysis (PCA)
Appendix D: Summary of Sectors and Year Effect Results between Economic Sustainability (ECON) Performances on Cost of equity
Effect of economic sustainability performance factors (ECON) on cost of capital (Beta) with sector and year effect. The results of the panel regression on Betait with sector and year effects where Betait is a proxy for the cost of equity capital are shown in decimal numbers. The effect of economic sustainability performance factors (ECON) on the cost of capital (Gordon) with sector and year effect.
Panel regression results on Gordonit with sector and year effects, where Gordonit is a proxy for cost of equity capital, are shown in decimal numbers. Effective of economic sustainability performance factors (ECON) on cost of equity (IndEP excludes exceptional item) with sector and year effect. Panel regression results on IndEPit excluding extraordinary item with sector and year effect, where IndEPit is a proxy for cost of equity capital, are shown in decimal numbers.
The effect of economic sustainability performance factors (ECON) on the cost of equity capital (IndEP includes an extraordinary item) with the effect of sector and year.
Appendix E: Summary of Sectors and Year Effect Results between Non-Economic Sustainability (ESG) Performances on Cost of equity
Appendix E: Summary of sector and year impact results between non-financial sustainability (ESG) performance on cost of equity. Effect of non-financial sustainability performance factors (ESG) on the cost of equity capital (Beta) with sector and year effect. Effect of non-financial sustainability performance factors (ESG) on cost of equity (Gordon) with sector and year effect.
Effect of non-economic sustainability performance (ESG) factors on cost of equity capital (IndEP excludes extraordinary item) with sector and year effect. The panel regression results on IndEPit exclude outliers with the effect of sector and year, where IndEPit is a proxy for the cost of equity expressed as a decimal number. The effect of non-economic sustainability performance (ESG) factors on the cost of equity capital (IndEP includes an extraordinary item) with the effect of sector and year.
The panel regression results on IndEPit include outliers with sector and year effects where IndEPit is a proxy for the cost of capital appearing in decimal numbers.
Appendix F: Summary of sectors and year effect results of Interaction between ECON and ESG on Cost of Equity
Appendix F: Summary of Sector and Year Effect Results of Interaction between ECON and ESG on Cost of Equity. Interaction result between economic sustainability (ECON) and non-economic sustainability (ESG) performance on cost of equity (Beta). Column M4 is panel regression due to interaction when adding all individual ESG factors on ECONit-1 factor.
The result of the interaction between economic sustainability (ECON) and non-economic sustainability (ESG) performance on the cost of equity capital (Gordon). The result of the interaction between economic sustainability (ECON) and non-economic sustainability (ESG) performance on the cost of equity capital (IndEP excludes extraordinary items). The result of the interaction between economic sustainability (ECON) and non-economic sustainability (ESG) performance on the cost of equity capital (IndEP includes an extraordinary item).
Appendix G: Robustness test results: Panel regression on individual ECON and ESG variables without industry and year effect.
Appendix G: Robustness test results: Panel regression on individual ECON variables and ESG without industrial and year effect
Columns M2 to M8 are panel regression results on individual economic sustainability (ECON) variables, which are ROEit-1, Saleit-1, SaleGrit-1, SaleGR_SDit-1, RDit-1, ADit-1 and Dividomit-1, respectively. Columns M9 to M11 are panel regression results on individual non-economic sustainability (ESG) factors include Envit-1, Socit-1 and Govit-1, respectively. Column M13 is a regression result of ESGit-1 factor, where ESGit-1 is calculated by the Thomson Reuters weighted average.
Effective of financial and non-financial sustainability performance variables on cost of equity (IndEP excludes extraordinary item). Panel regression results on IndEPit excluding outliers, where IndEPit is a proxy for cost of equity capital, are shown in decimal numbers.
