Mandatory CSR: A Double-Edged Sword in Indian Corporate Sector

A study by IIM Lucknow highlights the impact of mandatory CSR spending on investor confidence and equity costs in India. Findings indicate perceived compliance costs can lower investor trust, but strategically aligned CSR efforts boost reputation and reduce financial risks. The research is centered on data from 2014 to 2020.

Mandatory Corporate Social Responsibility (CSR) spending is affecting investor confidence and raising the cost of equity for Indian companies, as revealed by a new study conducted by the Indian Institute of Management (IIM) Lucknow. The research suggests that investors often see mandated CSR expenditure as a compliance cost rather than a strategic investment.

Focusing on the Indian market, the study delved into how obligatory CSR spending influences investor perceptions, the assessment of financial risks, and the cost at which companies can raise equity. Published in the Journal of Accounting in Emerging Economies, the research used the Ohlson and Juettner-Nauroth (OJ) model to estimate the implications on company finances.

According to Professor Seshadev Sahoo from IIM Lucknow, the study, which analyzed data from 484 Indian companies between 2014 and 2020, found a positive correlation between CSR expenditure for poverty alleviation and the implied cost of equity. Service-oriented companies appeared to benefit more from CSR efforts, potentially due to their reliance on reputation and trust.

(With inputs from agencies.)