Sustainability Practices and the Corporate Cost of Equity in Emerging and Developed Markets

Abstract

Sustainability practices have been attracting growing interest from firms and society in general. Their adoption generates the expectation of improving firms’ financial performance. However, empirical studies did not reach a consensus on the effects of these practices. This study investigates whether adopting sustainable practices negatively impacts firms’ cost of equity. In addition, it analyzes the moderating effect of the country’s development level on this relationship. We conducted a multilevel regression analysis using data from the Bloomberg, Capital IQ Pro, and World Bank databases covering the period from 2010 to 2022. The sample included 5,638 non-financial firms from developed countries (the United States, Japan, Germany, the United Kingdom, and France) and emerging countries (China, Indonesia, India, South Africa, and Brazil), considering three levels: time, firm, and country. The results revealed a negative relationship between sustainable practices and firms’ cost of equity. Furthermore, firms in developed countries that adopt sustainable practices tend to have a lower cost of equity than those in emerging countries. These findings contribute to the ongoing debate in academic literature and help to reduce investors’ uncertainty when allocating capital to sustainable firms. Finally, the results support regulators in confirming the effectiveness of sustainability-oriented policies.