ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Effect of Environmental Regulation Violation on the Implied Cost of Equity Capital

  • Yong-Ki Jung College of Business Administration, Chonnam National University

Asian Tax Journal Vol. 17 No. 6 (2016), pp. 9-37

Abstract

The regulations by the environmental law create limitations targeted toward environmental improvements, and thus government institutions want to solve environmental issues on market principles. The firm’ environmental risk brings about management risk, which affects firm value. Then, investors have begun to consider environmental risk associated with business activities in investment decision. With such a background, this study empirically evaluated the relationship between environmental regulation violation(air, water) as the failure of environmental law riposte and the implied cost of equity capital. The results of this study are as follows. First, this study examined the relationship between the propensity of environmental regulation violation(air, water) and implied equity capital cost for the marching sample. The result of this study indicates a positive relationship between the propensity of environmental regulation violation(air, water) and the implied cost of equity capital. This implies that firms associated with environmental regulation violation pay higher implied equity capital costs than those of firms not associated with regulation violation. Additionally, this study assessed the association between the numbers of environmental regulation violation and implied equity capital cost for the regulation violation sample(air, water). The result of this study demonstrates that the numbers of environmental regulation violation(air, water) do not affect the implied cost of equity capital. The results may contribute to the formulation of environmental disclosure policy in terms of communication with investors and creditors, as well as environmental regulation policy.

Keywords

  • Environmental regulation violation
  • Implied cost of equity capital

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Asian Tax Journal

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