Mandatory Corporate Social Responsibility (CSR) spending under the Companies Act, 2013, may be increasing the cost of raising equity for Indian companies, a new study by IIM Lucknow has found. According to the research, investors often perceive mandated CSR expenditure as a compliance cost rather than a strategic investment, which can reduce confidence and push up the implied cost of equity (CoE).
The study, published in the Journal of Accounting in Emerging Economies, examined data from 484 Indian companies between 2014 and 2020 that invested in poverty alleviation initiatives under the CSR mandate. Using the Ohlson and Juettner-Nauroth (OJ) model and other econometric approaches, the researchers assessed how mandatory CSR spending affects investors’ perception of risk, firm evaluation, and equity pricing.
Key Findings:
- There is a positive correlation between CSR expenditure and the implied CoE for most Indian firms.
- Mandatory CSR spending may reduce perceived corporate benefits, leading to lower investor confidence.
- Service sector companies, however, showed the opposite trend: CSR expenditure in the current year reduced their CoE, likely due to their business models relying on reputation, trust, and intangible assets.
Professor Seshadev Sahoo, Finance and Accounting, IIM Lucknow, explained:
“Mandatory CSR spending is often viewed as a regulatory burden rather than a strategic initiative, which can increase the required return on equity. However, when companies align CSR with their core business values, it can enhance investor trust, reduce perceived risk, and lower equity costs.”
Implications for Companies:
- Firms treating CSR as a strategic engagement rather than mere compliance can unlock financial and societal benefits.
- Well-planned CSR initiatives can support Sustainable Development Goal 1 (SDG 1), focused on ending poverty and improving living standards in India.
- Strategic CSR can strengthen corporate reputation, build stakeholder trust, and contribute meaningfully to broader societal goals.
The study highlights the need for Indian companies to view CSR as more than a regulatory requirement, emphasizing that authentic, strategically aligned initiatives benefit both society and long-term corporate performance.
