Mandatory CSR expenditure and stock return

Abstract

Purpose India has mandated corporate social responsibility (CSR) expenditure under Section 135 of the Indian Companies Act, 2013 – the first national jurisdiction to do so. The purpose of this paper is to examine the impact of mandated CSR expenditure on firms’ stock returns by using actual CSR spending data, whereas the previous studies mostly focus on voluntary CSR proxied by CSR scores. Design/methodology/approach The authors estimate their baseline regression by using ordinary least squares(OLS) method. Although the baseline regression involving CSR expenditure and stock returns using ordinary least squares method are estimated, endogeneity and reverse causality biases are addressed by using two-stage least squares and generalized method of moments approaches. These approaches contribute mitigating endogeneity bias and biases associated with unobserved heterogeneity and simultaneity. Findings The findings document that mandatory CSR expenditure has a negative impact on firms’ stock returns which supports the “shareholders” expense’ view. This result remain robust after controlling for endogeneity bias and the use of both standard and robust test statistics. The authors however observe that this result holds for the firms with actual CSR expenditure equal to the mandated amount but does not hold for the firms with actual CSR expenditure greater than the mandated amount. Therefore, the authors provide evidence that CSR expenditure’s impact on stock returns depends on whether firms simply comply the regulation or voluntarily chose an amount of CSR expenditure above the mandated amount. Originality/value The primary contribution is to present a valid and robust evidence of negative effect of mandated CSR spending on firms’ stock returns when the mandatory CSR spending rule is already in place. This study contributes by examining the impact of mandated CSR spending on stock during post-implementation period (2015-2017), whereas other studies by Dharampala and Khanna (2018); Kapoor and Dhamija (2017); and Mukherjee et al. (2018) mainly examined the impact of legislation on Indian CSR. The authors use mandated actual CSR expenditure, whereas previous studies mostly focus on voluntary CSR proxied by CSR scores.

Can Corporate Social Responsibility (CSR) Enhance Firm Performance

“…Current conditions indicate that CSR is not only related to social activities, but investors react more when companies care about the environment because the company primarily causes environmental damage/pollution that occurs. This study's results support research [17] [18] and [19], [20]. Our finding contradicts the findings [10] [11] [12] [13] [14] [15] which states that CSR improves company performance and [6] [16] explained that social responsibility has no impact on financial performance measured by ROA.…”

“…Firm size and leverage this year improve future firm performance (ROAt + 1), large firm size has more significant resources for CSR expenditure and, therefore, engages in CSR-related activities to improve company performance in the future [23]. Companies with high debt tend to spend CSR expenditure on reducing information asymmetry with lenders and using debt to increase profitability in the future to improve company performance in the future [20].…”

“…We use two control variables are firm size and leverage. Larger firms to receive more press attention [26] [23] [20]. Higher leverage contributes to higher profitability and makes more social spending [20].…”

“…Dkhili & Ansi [16] explained that social responsibility has no impact on financial performance measured by ROA. The negative relationship shown by [17] [18] and [19], [20] showed that CSR decreased ROA and stock return although CSR in China and India is mandatory, Based on the inconsistent results between one research with another, this research aims to examine that CSR can enhance firm performance, especially future firm performance. We argue that CSR activities can improve firm performance, as measured by ROAt + 1.…”

Forcing responsibility? Examining earnings management induced by mandatory corporate social responsibility: evidence from India

“…They found that firms decreased their CSR spending after the law was enacted because of CSR’s reduced signaling value under the mandatory norms. Manchiraju and Rajgopal (2017) and Bhattacharyya and Rahman (2020) have examined the law’s impact on a firm’s performance. They have documented that the CSR law negatively affects a firm’s performance because mandatory CSR adds costs to the firm.…”