Do ethical companies have lower implied cost of equity capital? Evidence from the Korean stock market

Abstract

This study examines company business ethics (BE) as one of the important factors of corporate valuation. It looks into the causal relations between the level of a company's ethical commitment and risk measures, and the association of both with the costs of equity capital (COC). The link between BE and firm value is examined by investigating (a) the degree of companies' ethical commitment, (b) implied costs of capital and (c) the valuation of companies listed on the Korean stock market. Our results confirm the existence of a significantly negative association between the level of commitment to BE and the implied COC.