Impact of ESG Performance on Cost of Equity in Eastern Europe

Integrating ESG factors into business operations has become an ever-increasing part of corporate value-creation strategies in recent decades. However, little is known about how ESG engagement relates to corporate financial performance in Eastern Europe. Therefore, this thesis attempts to answer the question of how ESG ratings affect the implied cost of equity of Eastern European companies. Several fixed-effect regression models were used to examine this relationship for a panel consisting of firm data over the period from 2010 to 2020. The empirical results confirm a negative relationship with the environmental score, while governance and social ratings have a positive relationship with implied cost of equity. In particular, the results suggest that investing in pollution prevention can reduce firms' cost of equity. Conversely, the cost of equity is increased by higher management, community, human rights and product responsibility scores. This study makes an important contribution to both academia and practice by providing initial evidence on the relationship between ESG performance and cost of equity in Eastern Europe.