Mandatory CSR spending by Indian companies can lead to low investor confidence: IIM study
New Delhi, Jan 4 (PTI) Mandatory CSR spending may reduce perceived corporate benefits, leading to lower investor confidence and higher cost of equity capital for Indian companies as investors may interpret mandatory spending as a compliance cost rather than a strategic investment, according to a new study by IIM Lucknow.
Focusing on the Indian market, the study explores how mandated 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 were published in the prestigious Journal of Accounting in Emerging Economies.
According to Seshadev Sahoo, Professor of Finance and Accounting, Indian Institute of Management, Lucknow, to gain in-depth insight into the financial impacts of CSR in the Indian corporate sector, the research team examined data from 2014 to 2020 of 484 Indian companies spending on poverty alleviation initiatives under the CSR mandate of the Companies Act, 2013.
Applying the Ohlson and Juettner-Nauroth (OJ) model and multiple econometric approaches to analyze the data, the research team investigated whether mandatory CSR helps or hurts firms’ financial positions.
The study focused specifically on investors’ perspectives, examining how such expenses affect their assessment of firm risk, their confidence in the company, and finally the price at which the company can raise equity capital 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 capital by combining expected earnings growth and payout ratios. This provides a forward-looking perspective on how markets assess risk, which is crucial when examining policy-driven CSR spending.”
The study confirmed that there is a positive correlation between CSR expenditure on poverty alleviation and implied cost of equity (CoE) of Indian companies.
“This means that there is a large amount of mandatory CSR spending and the return on equity required by investors is higher. Mandatory CSR spending can reduce perceived corporate benefits, leading to reduced investor confidence and a higher CoE. Investors may interpret mandatory CSR spending as a compliance cost rather than a strategic investment.”
“Study results remain consistent across alternative analytical models, strengthening the validity of the results. Service sector firms showed the opposite trend, where current year CSR spending reduced their CoE, unlike firms in other sectors,” he said.
Sahoo explained that the study suggests that investors may reward service-oriented companies for their CSR efforts, likely because their business models depend more on reputation, customer trust and intangible assets.
“Based on the findings, the study highlights that socially responsible investors often view compliance-focused CSR as an obligation. But companies can unlock financial benefits if they make a genuine commitment, rather than mere compliance, by aligning CSR with core business values.”
“Strategically aligned CSR can increase investor confidence, reduce perceived risk and therefore reduce the cost of raising equity capital,” he said.
Beyond its financial implications, the study encourages firms to view CSR as strategic engagement. When companies implement genuine CSR initiatives, they not only strengthen their corporate reputation and build trust with stakeholders, but also make a meaningful contribution to broader societal goals.
“Such efforts support Sustainable Development Goal 1 (SDG 1), which focuses on ending poverty and improving living standards, particularly in India. The research highlights that carefully planned CSR initiatives can have both societal impact and long-term corporate benefits when implemented with sincerity and strategic alignment.” he said.
