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B. Problem Definition
The improved environmental risk management improves the market‘s risk perception of the firm. There is evidence in the literature that investors and analysts take account of
improvement in environmental risk factors when making investment decisions and recommendations Heinkel, Kraus, and Zechner, 2001; Mackey, Mackey, and Barney,
2007. This perception should, in turn, cause the financial market allow low risk premiums on equity, or allow the firm to get higher levels of leverage, which can cause a lower cost of
capital for the firm. To examine the relationship between environmental risk management and cost of capital, this research underlays these following questions:
1. Does the environmental risk management has a relationship with the firm‘s cost of
equity? 2. Does the environmental risk management has a relationship with
the firm‘s cost of debt?
3. Does the environmental risk management has a relationship with the firm‘s overall cost
of capital?
C. Objectives of the Study
To be more specific, the study was undertaken in order to: 1. To know whether the environmental risk management
is related to the firm‘s cost of capital in Indonesia.
2. To know the significance of the relationship between the environmental risk management and
the firm‘s cost of capital in Indonesia.
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D. Significance of the Study The results of this study are significant in various aspects.
Firstly , on the basis of the findings of the study, the report has identified the reasons behind
the relationship between environmental risk management and the cost of capital
Secondly As consideration for the company in making decision towards the influence of
environmental risk management to the cost of capital.
Thirdly , it gives the researcher the opportunity to gain inside knowledge in the relationship
between environmental risk management and the cost of capital.
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CHAPTER II LITERATURE REVIEW
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