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Does mandatory expenditure on CSR affect firm value? Empirical evidence from Indian firms

Praveen Bhagawan (Accounting and Finance Area, IFMR GSB, Krea University, Sri City, India)
Jyoti Prasad Mukhopadhyay (Economics Area, IFMR GSB, Krea University, Sri City, India)

Journal of Accounting Literature

ISSN: 0737-4607

Article publication date: 6 February 2024

355

Abstract

Purpose

The purpose of this study is to examine the impact of mandatory corporate social responsibility (CSR) spending on firm value in the Indian context.

Design/methodology/approach

Using firm-level data over the period 2012–2017, this study uses the difference-in-differences (DID) technique combined with matching to control for potential endogeneity of the decision to comply with the CSR Act since the Act in its current form is applicable as a comply-or-explain obligation.

Findings

The results of this study suggest that mandatory CSR spending has a positive and statistically significant impact on firm value. These results remain robust to alternative econometric techniques such as regression discontinuity design (RDD) and randomization inference test as well as to alternative empirical specifications. Furthermore, the study demonstrates that the positive effect of CSR spending on firm value is more pronounced for firms with higher information asymmetry problem and lower institutional holdings.

Originality/value

This study explicitly considers the “comply-or-explain” flexibility option, in terms of spending on CSR, provided to Indian firms for the initial two to three years and investigates whether spending on CSR helps firms enhance their firm value. The study also finds that the positive effect of CSR spending on firm value is more pronounced for firms with higher information asymmetry problems and lower institutional holdings.

Keywords

Acknowledgements

We thankfully acknowledge research grant received from IFMR GSB, Krea University to carry out this research. We would like to thank anonymous reviewers, Tom Smith (Editor), Nagpurnanand Prabhala, Balasingham Balachandran, C N V Krishnan, and Late T N Srinivasan, for their valuable comments. The authors are also thankful to conference participants at 37th International Conference of the French Finance Association (AFFI) 2019, Financial Markets and Corporate Governance (FMCG) 2019 conference held in Sydney, Annual Meetings 2018 of European Financial Management Association (EFMA) held in Milan Italy, and International Conference on Financial Markets and Corporate Finance (ICFMCF) 2018 held at Indian Institute of Technology (IIT) Kanpur, for their helpful comments. The authors are also thankful to the seminar participants of Brown Bag, the Department of Applied Finance, Macquarie University, Sydney and annual research seminar held at IFMR GSB for their valuable suggestions. We are also thankful to the Managing Editor of Ideas for India for publishing some preliminary results pertaining to our work (link: https://www.ideasforindia.in/topics/governance/does-mandatory-csr-expenditure-affect-firm-value-evidence-from-indian-firms.html dated January 4, 2018).

Citation

Bhagawan, P. and Mukhopadhyay, J.P. (2024), "Does mandatory expenditure on CSR affect firm value? Empirical evidence from Indian firms", Journal of Accounting Literature, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAL-10-2023-0184

Publisher

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Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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