Abstract
Over the years, firms have been using Corporate Social Responsibility (CSR) as a strategic tool to improve their competitiveness and ultimately benefit their stakeholders. The evidence on the impact of CSR on firm performance, as documented in the literature, is mixed. This paper aims to examine the relationship between socially responsible behaviour and firm value in the Indian context. We use the natural research setting created by the Indian Companies Act, 2013, which mandates a category of firms to spend at least 2% of their net profits on CSR activities. Over the years since the introduction of the mandatory CSR regime in India, few firms have continued to spend more than the statutory minimum on CSR activities. Using Regression Discontinuity Design (RDD), we have examined the impact of CSR spending in excess of the statutory minimum on the short-term and long-term performance of firms. Using a sample of listed Indian firms which incurred CSR spending in at least one out of the preceding five financial years ending on March 31, 2019, we find that firm's choice of spending more than the required minimum on CSR negatively affects its short-term financial performance. The evidence on the impact of excess CSR spending on long-term financial performance of such firms is mixed. Overall, our study provides evidence that CSR spending in excess of the statutory minimum imposes social burden on the business activities of the firms at the expense of returns to the shareholders. The findings of our study may help firms design their CSR policies and expenditure. The evidence may also help policymakers in determining the level of mandatory CSR spending.
Similar content being viewed by others
Notes
The figures in USD are based on the exchange rate 1 USD = INR 75.50.
The forcing variable is also referred to as rating variable, exposure variable or assignment variable in literature.
References
Akey, P. (2015). Valuing changes in political networks: Evidence from campaign contributions to close congressional elections. Review of Financial Studies. https://doi.org/10.1093/rfs/hhv035
Aupperle, K. E., Carroll, A. B., & Hatfield, J. D. (1985). An empirical examination of the relationship between corporate social responsibility and profitability. Academy of Management Journal. https://doi.org/10.5465/256210
Barnett, M. L. (2007). Stakeholder influence capacity and the variability of financial returns to corporate social responsibility. Academy of Management Review. https://doi.org/10.5465/AMR.2007.25275520
Benabou, R., & Tirole, J. (2010). Individual and corporate social responsibility. Economica. https://doi.org/10.1111/j.1468-0335.2009.00843.x
Bhattacharyya, A., & Rahman, M. L. (2019). Mandatory CSR expenditure and firm performance. Journal of Contemporary Accounting and Economics, 15(3), 100163. https://doi.org/10.1016/j.jcae.2019.100163
Bird, R., Duppati, G., & Mukherjee, A. (2016). Corporate social responsibility and firm market performance: A study of Indian listed companies. International Journal of Business Governance and Ethics, 11(1), 68–88. https://doi.org/10.1504/IJBGE.2016.076351
Campbell, J. L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of Management Review. https://doi.org/10.5465/AMR.2007.25275684
Chen, E., & Gavious, I. (2015). Does CSR have different value implications for different shareholders ? Finance Research Letters, 14, 29–35. https://doi.org/10.1016/j.frl.2015.07.001
Daszyńska-Żygadlo, K., Słoński, T., & Zawadzki, B. (2016). The market value of CSR performance across sectors. Engineering Economics, 27(2), 230–238. https://doi.org/10.5755/j01.ee.27.2.13480
Dharmapala, D., & Khanna, V. (2018). International review of law and economics the impact of mandated corporate social responsibility : Evidence from India ’ s companies act of 2013. International Review of Law & Economics, 56, 92–104. https://doi.org/10.1016/j.irle.2018.09.001
Ding, D. K., Ferreira, C., & Wongchoti, U. (2016). Does it pay to be different? Relative CSR and its impact on firm value. International Review of Financial Analysis, 47, 86–98. https://doi.org/10.1016/j.irfa.2016.06.013
El Ghoul, S., Guedhami, O., Kwok, C. C. Y., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking and Finance. https://doi.org/10.1016/j.jbankfin.2011.02.007
Fama, E. F., & French, K. R. (1992). The Cross-section of expected stock returns. The Journal of Finance. https://doi.org/10.2307/2329112
Flammer, C. (2015). Does corporate social responsibility lead to superior financial performance? A regression discontinuity approach. Management Science. https://doi.org/10.1287/mnsc.2014.2038
Freedman, M., & Jaggi, B. (1982). Pollution disclosures, pollution performance and economic performance. Omega. https://doi.org/10.1016/0305-0483(82)90051-2
Freeman, R. E. (2015). Strategic management: A stakeholder approach. Strategic Management: A Stakeholder Approach., 5, 89. https://doi.org/10.1017/CBO9781139192675
Friedman, M. (1970). A Friedman doctrine - The Social Responsibility of Business Is to Increase Its Profits. New York Times Magazine.
Godfrey, P. C. (2005). The relationship between corporate philanthropy and shareholder wealth: A risk management perspective. Academy of Management Review. https://doi.org/10.5465/AMR.2005.18378878
Greene, W. W. H. (2012). Econometric analysis (7th ed.). Prentice Hall.
Harjoto, M. A., & Jo, H. (2011). Corporate governance and CSR Nexus. Journal of Business Ethics. https://doi.org/10.1007/s10551-011-0772-6
Himmelberg, C. P., Hubbard, R. G., & Palia, D. (1999). Understanding the determinants of managerial ownership and the link between ownership and performance. Journal of Financial Economics. https://doi.org/10.1016/S0304-405X(99)00025-2
Hua Fan, J., & Michalski, L. (2020). Sustainable factor investing: Where doing well meets doing good. International Review of Economics and Finance, 70, 230–256. https://doi.org/10.1016/j.iref.2020.07.013
Iliev, P. (2010). The effect of SOX section 404: Costs, earnings quality, and stock prices. Journal of Finance. https://doi.org/10.1111/j.1540-6261.2010.01564.x
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm manajerial behaviour, ageny cost and ownership. Journal of Financial Economics, 3(4), 305–360.
Jo, H., & Na, H. (2012). Does CSR reduce firm risk? evidence from controversial industry sectors. Journal of Business Ethics. https://doi.org/10.1007/s10551-012-1492-2
Khandelwal, M. R., & Bakshi, M. S. (2014). The new CSR regulation in India: the way forward. Procedia Economics and Finance, 11(14), 60–67. https://doi.org/10.1016/s2212-5671(14)00176-2
Kitzmueller, M., & Shimshack, J. (2012). Economic perspectives on corporate social responsibility. Journal of Economic Literature. https://doi.org/10.1257/jel.50.1.51
Kubik, J. D., Scheinkman, J. A., & Hong, H. G. (2012). Financial constraints on corporate goodness. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1784357
Lee, D. S., & Lemieux, T. (2010). Regression discontinuity designs in economics. Journal of Economic Literature. https://doi.org/10.1257/jel.48.2.281
Li, Z., Minor, D. B., Wang, J., & Yu, C. (2019). A learning curve of the market: Chasing alpha of socially responsible firms. Journal of Economic Dynamics and Control, 109, 103772. https://doi.org/10.1016/j.jedc.2019.103772
Lys, T., Naughton, J. P., & Wang, C. (2015). Signaling through corporate accountability reporting. Journal of Accounting and Economics, 60(1), 56–72. https://doi.org/10.1016/j.jacceco.2015.03.001
Manchiraju, H., & Rajgopal, S. (2017). Does corporate social responsibility (CSR) Create shareholder value? evidence from the indian companies Act 2013. Journal of Accounting Research, 55(5), 1257–1300. https://doi.org/10.1111/1475-679X.12174
Margolis, J. D., Elfenbein, H. A., & Walsh, J. P. (2012). Does it Pay to be good and does it matter? a meta-analysis of the relationship between corporate social and financial performance. SSRN Electronic Journal, 5, 87. https://doi.org/10.2139/ssrn.1866371
Marín, L., Rubio, A., & de Maya, S. R. (2012). Competitiveness as a strategic outcome of corporate social responsibility. Corporate Social Responsibility and Environmental Management. https://doi.org/10.1002/csr.1288
Meng, Y., & Wang, X. (2019). Do institutional investors have homogeneous influence on corporate social responsibility? Evidence from investor investment horizon. Managerial Finance, 46(3), 301–322. https://doi.org/10.1108/MF-03-2019-0121
Mukherjee, A., & Bird, R. (2016). Analysis of mandatory CSR expenditure in India: A survey. International Journal of Corporate Governance, 7(1), 32. https://doi.org/10.1504/ijcg.2016.077982
Mukherjee, A., Bird, R., & Duppati, G. (2018). Mandatory corporate social responsibility: The Indian experience. Journal of Contemporary Accounting and Economics, 14(3), 254–265. https://doi.org/10.1016/j.jcae.2018.06.002
Newey, W. K., & West, K. D. (1987). A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Author(s): Whitney K. Newey and Kenneth D. West Source: Econometrica.
Sardana, D., Gupta, N., Kumar, V., & Terziovski, M. (2020). CSR ‘sustainability’ practices and firm performance in an emerging economy. Journal of Cleaner Production. https://doi.org/10.1016/j.jclepro.2020.120766
Servaes, H., & Tamayo, A. (2013). The impact of corporate social responsibility on firm value: The role of customer awareness. Management Science. https://doi.org/10.1287/mnsc.1120.1630
Thistlethwaite, D. L., & Campbell, D. T. (1960). Regression-discontinuity analysis: An alternative to the ex post facto experiment. Journal of Educational Psychology. https://doi.org/10.1037/h0044319
Waddock, S. A., & Graves, S. B. (1997). The corporate social performance-financial performance link. Strategic Management Journal. https://doi.org/10.1002/(SICI)1097-0266(199704)18:4%3c303::AID-SMJ869%3e3.0.CO;2-G
Wibbens, P. D., & Siggelkow, N. (2020). Introducing LIVA to measure long-term firm performance. Strategic Management Journal, 41(5), 867–890. https://doi.org/10.1002/smj.3114
Wu, C., & Hu, J. (2019). Can CSR reduce stock price crash risk ? Evidence from China ’ s energy industry. Energy Policy, 128, 505–518. https://doi.org/10.1016/j.enpol.2019.01.026
Yu, E. P., Luu, Y., Van, B., & Chen, C. H. (2020). Greenwashing in environmental, social and governance disclosures. Research in International Business and Finance, 52, 101192. https://doi.org/10.1016/j.ribaf.2020.101192
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Beloskar, V.D., Rao, S.V.D.N. Corporate Social Responsibility: Is Too Much Bad?—Evidence from India. Asia-Pac Financ Markets 29, 221–252 (2022). https://doi.org/10.1007/s10690-021-09347-3
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10690-021-09347-3
Keywords
- Corporate social responsibility
- Regression discontinuity design
- Shareholder value
- Financial performance
- Indian companies act 2013