Compulsory CSR spending may lower investor confidence, says IIM study
What's the story
A recent study by the Indian Institute of Management (IIM) Lucknow, has revealed that mandatory corporate social responsibility (CSR) spending could hurt investor confidence and raise the cost of equity for Indian companies. The research shows that investors may view such mandated expenditure as a compliance cost instead of a strategic investment. The findings were published in the Journal of Accounting in Emerging Economies.
Research focus
Study examines impact of mandatory CSR on investor perception
The study, centered on the Indian market, looks at how mandatory CSR spending affects investors' perceptions and financial risk assessments. It also analyzes the cost at which firms can raise equity capital. To understand CSR's financial implications in the Indian corporate sector, Seshadev Sahoo, Professor of Finance and Accounting at IIM Lucknow, led a research team that studied data from 484 Indian companies between 2014 and 2020.
Analytical approach
Ohlson and Juettner-Nauroth model used in research
The research team employed the Ohlson and Juettner-Nauroth (OJ) model and several econometric techniques to analyze the data. The study specifically focused on investors' perspectives, looking at how such spending impacts their assessment of firm risk, confidence in the company, and ultimately the price at which it can raise equity in the market. Sahoo explained that this model is commonly used in finance research as it estimates implied cost of equity by factoring expected earnings growth and payout ratios.
Key findings
Study finds link between CSR spending and cost of equity
The study found a positive link between CSR spending on poverty alleviation and the implied cost of equity (CoE) for Indian companies. "This signifies that there is a great deal of CSR expenditure that is mandatory and that there is a greater return on equity that is required by the investors," Sahoo said. He added, "Mandatory CSR spending can reduce perceived corporate benefits, leading to lower investor confidence and a higher CoE."
Sectoral variation
Service sector firms show different trend in CSR spending
Unlike other sectors, service sector companies have shown a different trend where current year CSR spending reduces their CoE. Sahoo said this could be because investors might reward service-oriented companies for their CSR efforts as their business models rely more on reputation, customer trust, and intangible assets. The study highlights that socially responsible investors often see the compliance-driven CSR as a liability but if companies align it with core business values, they can unlock financial benefits.