臺大管理論叢 NTU Management Review VOL.30 NO.2

The Effect of Corporate Social Responsibility Performance on Financial Risk 262 price of unacceptable firms plus the reform cost, a lower unacceptable firm price means a lower reformed firm price. Therefore, reformed firms have a higher cost of capital. If the decreased cost of capital is higher than the reform cost, the unacceptable firms will become socially responsible due to green investment. In terms of the effect of accounting information on cost of capital, Lambert, Leuz, and Verrecchia (2007) build a model consistent with CAPM where accounting information can influence the cost of capital and demonstrate that the quality of accounting information can directly affect a firm’s assessed covariances with other firms’ cash flows and indirectly affect a firm’s real decisions to influence the cost of capital. In addition, accounting information is valued by the market. Given an effective system of internal controls to ensure the reliability of financial statements, the results of Kuo and Liao (2020) suggest that although investors may consider Internal Control Weakness (ICW) disclosures having some deficiencies in operations. This also reveals that the effort of firms in assessing their internal control effectiveness. Therefore, they find that ICW disclosures are positively valued by the market. Due to the importance of the book value of equity in debt contracting, market evaluation, and managerial bonus determination, managers have an incentive to adjust upward the estimates of Other Comprehensive Income (OCI) components of equity book value. By using changes in a firm’s market value of equity as variations in business conditions, the results of Yeh and Wang (2020) suggest that OCI adjustments are asymmetric and biased upwards, and these asymmetric adjustments are more significant for firms with more serious agency problems as they use the corporate social responsibility score from KLD STATS database to proxy for managerial ethics. Consequently, any aspect of corporate social responsibility will affect the cost of capital and market evaluation, in turns to affect corporate behavior. For those seeking to understand the possible relationship between Corporate Social Performance (CSP) and firm risk, there is ample empirical evidence on the linkages between CSR activities (of different types) and different types of risk. For example, Luo and Bhattacharya (2009) directly look at the effects of CSR on idiosyncratic risk, and find that higher CSP lowers firm-idiosyncratic risk. Bouslah et al . (2013) also look at several aspects of CSR and firm risk. In summary, as noted by Heinkel et al . (2001), “social investing can impact a firm’s environmental and other ethical behaviors.” Nowadays, the public and investors are gradually coming to value CSR more and more. Therefore, this study argues that a socially responsible firm will enjoy a lower risk and cost of capital.