Uncovering the Value of Green Innovation in the Context of Cost of Equity : An Empirical Study of how Green Innovation Efforts Impact the Cost of Equity

Abstract

This thesis investigates the relationship between green innovation and the cost of equity for the 500 largest European public firms from 2000 to 2019. The findings show that more green innovation is associated with a lower cost of equity, although the effect is small. The results are robust to alternative measures of green innovation but sensitive to the definition of cost of equity. We use a 2SLS regression with initial green innovation as an instrument to address endogeneity, and the results remain robust. Previous literature discuss two main mechanisms (increased investor base and lower risk), but we find weak support. In conclusion, green innovation can reduce the cost of equity, but further research is needed to understand the mechanisms behind the relationship.