SEMINAR I
Abstract:
Worldwide Pressure to move towards sustainable practices in business has led to the implementation of mandatory Corporate Social Responsibility in India. The Companies Act 2013 in India made it mandatory for certain eligible companies, selected by their specific financial performance in the last three years, to spend on and report their Corporate Social Responsibility (CSR) activities. The relationship between CSR spending and firms’ financial performance has been a topic of interest among researchers and policy makers in the recent years. Whether CSR facilitates value-enhancement or value distortion has been a question of much debate. There are two prominent views of CSR. The shareholders’ view considers CSR as an agency problem and a waste of corporate resources (Friedman,1970). It argues that profit maximisation and maximizing shareholders’ value should be the only responsibility of the Firm. On the contrary, the stakeholders’ and good governance view argue that CSR can be consistent with wealth maximisation through mitigating agency problem, reducing information asymmetry as well as achieving broader social goals (Freeman, 1984). Therefore, understanding the real impact of CSR spending on firms’ performance requires empirical verification.

In this study, we examine the impact of mandatory CSR expenditure on firms’ financial, economic, and environmental performance. The first objective of the thesis deals with estimating the impact on mandatory CSR on the stock return and volatility of listed companies in India. The second objective of the thesis is to examine the impact of CSR spending on firms’ environmental performance. Lastly, we also examine the role played by CSR spending on firms’ cost of capital.
In this talk, a detailed analysis of CSR spending – stock return relationship will be presented. We utilise actual CSR spending data for the period 2010-2022 and adopt a quasi-natural experiment setup of mandated CSR law. The study findings reveal that mandatory CSR spending has a negative impact on stock return and positive impact on volatility during the study period. We observe that firms complying to mandatory CSR regulation experience significant reduction in stock return and increase in return volatility compared to non-complying firms in the post-regulation period. Moreover, the effect of CSR expenditure levels does not change our findings. We deploy a series of robustness tests to validate our empirical findings. Our findings are consistent with the shareholder expense view which suggests that mandated CSR spending is viewed as a form of tax, leading to loss of signalling value and increase in agency cost which in turn reduces stock returns. Policy implications of our results are also discussed.

Keywords: Mandatory CSR, Firm performance, Stock returns and volatility, cost of capital, India.

JEL code- M14, G38, G39