Research On Environmental Risk Management And Cost Of Capital In Hisense Electric

As the main participant in the development of social economy, profit was the exclusive goal for a firm, neglecting the negative effects to environment and public in the process of pursuing economic performance for a long time. After1990’S, with the shortage of resource, deterioration of environment and great gaps between the rich and the poverty, a firm, as the mainstay of social economy, their behavior is reviewed, as well as the obligation they should take, based on the thought of sustainable development. It is pointed out that only when the harmony between environment performance and economic performance was reached, good exterior and interior conditions can create for the firms’ long-term existence and sustainable development. Environmental risk is defined as a company must take into account, environmental factors due to the operation of the company. As environmental law is getting stricter at present, Enterprises environmental risk is getting greater as well, which is not only a great damage to environment, but also brings crisis to the reputation and finance of the company. Fortunately, today more and more operators have recognized that risk management related to environmental issues has become a competitive advantage. In addition to introducing various legal, policy and institutional means from the external environment as the guidelines, setting up a risk management system is a real way to get benefits both commercially and environmentally.In this paper, through the theoretical study we find that improved environmental risk management is associated with a lower cost of capital. Our findings provide an alternative perspective on the environmental-economic performance relationship, which has been dominated by the view that improvements in economic performance stem from better resource utilization. Firms also benefit from improved environmental risk management through a reduction in their cost of equity capital, a shift from equity to debt financing, and higher tax benefits associated with the ability to add debt. These findings help build better theory regarding the outcomes of strategic improvements in environmental risk management. Using risk management and institutional theories as our conceptual underpinning with Hisense Electric, we examine whether improved environmental risk management is associated with a reduction in firms’ total cost of capital. Such findings should enrich theory by showing that improved environmental risk management signals the financial markets that the firm represents a less risky investment that deserves less expensive debt and lower equity risk premiums. Such lowered costs of capital should, in turn, increase the firm’s overall economic performance and thereby help to explain the observed positive relationship between economic and environmental performance.