Does Mandatory CSR Expenditure Regulation Induce Corporate Risk-Taking?

Abstract

Regulations that mandate firms to spend on CSR activities can influence such firms’ corporate strategies. In this paper, we look at how mandatory CSR expenditure laws impact corporate risk-taking. Using tenets of the resource-based allocation to balance the stakeholder-shareholder interests under the theoretical arguments of stakeholder saliency and political stakeholder theory, we show that mandatory CSR expenditure regulations induce higher corporate risk-taking among mandated CSR firms. We use the Indian mandatory CSR legislation under a difference-in-differences set-up to provide evidence of causality. Our findings are in congruence with the legal bonding created by regulatory interventions to stimulate optimal investment behaviour and risk-taking. We further show that the increase in corporate risk-taking is associated with improvement in investment and allocative efficiency, especially among small firms, firms with high ownership concentration, and those with low debt deployment.

Keywords: Corporate social responsibility; Risk-taking; ESG; Emerging market; CSR

JEL Classification: G30, G32, G34, G38, G39, M14