1. Corporate Governance and Financial Reporting Research Discussion of “Does corporate social responsibility affect the cost of capital?” by Ghoul et al. (2011) JBF 1

2. Purpose of the Paper To examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of U.S. firms. 2

3. Motivation & Contribution I. Motivation: large institutional investors such as CalPERS are showing a preference for investing in firms that pursue specific socially responsible activities (Guenster et al., 2010). II. Contribution: provide supportive evidence CSR affects firm value is its effects on firm risk (in turn affects COEC); the impact of CSR continues to hold even after controlling for firm-level corporate governance. 3

4. Sample Data and Method I. Sample Data: 12,915 KLD firms 1992-2007. II. Regression model is used: COEC = controls + CSR_SCORE COEC (rAVG) is the average implied cost of equity premium obtained from four models developed by Gebhardt, Lee, and Swaminathan (2001), Claus and Thomas (2001), Ohlson and Juettner-Nauroth (2005), and Easton (2004). 4

5. Results T7: CSR is significant at Model I, 4 and 7. Model 1 CSR_CONTR is a dummy variable taking the value of 1for firms involved in any of the six controversial business areas. Tobacco (CSR_TOB in Model 4) Nuclear power (CSR_NUC in Model 7). T8: All COEC models. 5

6. Conclusion (1) Firms with better CSR scores exhibit cheaper equity financing; (2) Investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms’ cost of equity; (3) Participation in two “sin” industries, namely, tobacco and nuclear power, increases firms’ cost of equity. 6

7. Extension I. CODT on CSR; II. International Applications. 7