Mandatory CSR spending by Indian companies can lead to low investor confidence: IIM study

New Delhi, Jan 4 (PTI) Mandatory CSR spending can reduce perceived corporate benefits, leading to lower investor confidence and a higher cost of equity for Indian companies as investors may interpret the mandated expenditure as a compliance cost rather than a strategic investment, a new study by IIM Lucknow has found.

Centric to the Indian market, the study investigates how mandatory Corporate Social Responsibility (CSR) spending can impact investors' perspectives, financial risk assessments and the cost at which firms can raise equity capital.

The findings of this research have been published in the prestigious Journal of Accounting in Emerging Economies.

According to Seshadev Sahoo, Professor, Finance and Accounting, Indian Institute of Management, Lucknow, to gain in-depth insights into CSR's financial implications in the Indian corporate sector, the research team examined the data from 2014 to 2020 of 484 Indian companies that spent on poverty alleviation initiatives under the CSR mandate of the Companies Act, 2013.

By applying the Ohlson and Juettner-Nauroth (OJ) model and multiple econometric approaches to analyse the data, the research team investigated whether mandated CSR helps or hurts firms' financial positions.

The study specifically concentrated on the perspective of investors, examining how such spending influences their evaluation of firm risk, their confidence in the company, and ultimately the price at which the company can raise equity in the market.

Explaining the Ohlson and Juettner-Nauroth (OJ) model, Sahoo told PTI, "The model is widely used in finance research as it estimates the implied cost of equity by incorporating expected earnings growth and payout ratios. This provides a forward-looking perspective on how markets assess risk, which is essential when examining policy-driven CSR expenditure." The study affirmed that there is a positive correlation between CSR expenditure on alleviating poverty and the implied cost of equity (CoE) for the 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. Mandatory CSR spending can reduce perceived corporate benefits, leading to lower investor confidence and a higher CoE. Investors may interpret mandated CSR expenditure as a compliance cost rather than a strategic investment.

"The study outcomes remain consistent across alternate analytical models, which strengthens the validity of the results. Service sector firms have shown a contrasting trend, where current year CSR spending lowers their CoE, unlike firms in other sectors," he said.

Sahoo explained that the study suggests that investors may reward service-oriented companies for CSR efforts, possibly because their business models depend more heavily on reputation, customer trust and intangible assets.

"Based on the findings, the study highlights that socially responsible investors often view compliance-driven CSR as a liability. However, if companies make an authentic commitment rather than mere compliance, by aligning CSR with their core business values, they can unlock financial benefits.

"Strategically aligned CSR can enhance investor trust, reduce perceived risk, and thereby lowering the cost of raising equity," he said.

Beyond its financial implications, the study encourages firms to consider CSR as strategic engagement. When companies implement authentic CSR initiatives, they not only strengthen their corporate reputation and build trust with stakeholders but also contribute meaningfully to broader societal goals.

"Particularly, such efforts support Sustainable Development Goal 1 (SDG 1), which focuses on ending poverty and improving living standards in India. The study highlights that thoughtfully planned CSR initiatives can have both societal impact and long-term corporate advantages when implemented with sincerity and strategic alignment," he said. PTI GJS DIV DIV