Diverging investors’ perspectives: The role of the firm’s environmental performance and family nature in shaping the cost of capital

Family firms face a fundamental dilemma in balancing financial and nonfinancial objectives. Particularly, environmental initiatives, while beneficial from a socioemotional wealth (SEW) perspective, expose them to potentially divergent evaluations by shareholders and creditors. Building on an agency-theoretical foundation, this study explains why distinct investors (i.e., shareholders and creditors) value environmental performance in different ways, thereby affecting their respective costs of capital (i.e., the cost of equity and the cost of debt, respectively). Furthermore, by infusing insights from a SEW perspective, it explains why the relationship between environmental performance and the cost of capital for these two investors changes in family versus nonfamily firms. An analysis on a panel dataset comprising 5095 observations from 981 firms in the EU between 2015 and 2023 reveals that better environmental performance boosts the cost of equity but reduces the cost of debt, and that these effects are attenuated in family firms.