The effect of green certificated companies on implied cost of equity capital: Evidence from South Korea

Abstract

This paper investigates the effect of green certificated companies on implied cost of equity capital in Korea market. Although the importance of green growth has been globally acknowledged, little is known about the relation between green growth and the perceptions of market participants in an accounting field. Prior research on environmental management, corporate valuation, and performance offer conflicting arguments. By discussing these conflicting arguments and the current market demand, we examine the effect that firms with a green certification from the South Korean government have on the implied cost of equity capital. Using unique data from green certified companies (GCCs), we analyzed the relation between GCCs and the implied cost of equity capital as it existed in 2010. We found that, across all three specifications of the dependent variables (Price Earnings to Growth ratio, Modified Price Earnings to Growth ratio, and Gode and Mohanram model), GCCs have a significant positive association with the implied cost of equity capital. These results proved to be robust using the arithmetic mean and change of the implied cost of equity capital. These results indicate that investors expect a higher ex-ante return from the GCCs than from other firms. We infer that market participants might have difficulty identifying GCC's substantial risk and evaluating their future performance due to the lack of proper information about the green industry. We expect this study to improve the understanding of the impact of GCCs on profitability assessments and investment risk evaluation. We expect our results provide implications to South Korean and other governments considered the adoption and implementation of green growth. © Serials Publications Pvt. Ltd.