The Valuation Channel of Corporate Social Responsibility in Emerging Markets: Evidence from the Cost of Equity

I examine the effects of ESG policies on the cost of equity for emerging markets controlling for Political Risk and data reliability. I find that firms in emerging market countries with relatively high political risk do not benefit from social and governance ESG activities as they lead to a higher cost of equity. This is presumably due to potential or actual political conflicts with the host government. On the other hand, environmental activities do lower the cost of equity as the measured environmental activities are internal to the firms. For emerging market firms in countries with low political risk, all ESG activities are associated with a lower cost of equity.