Valuation Implications of Mandatory CSR Expenditure in India

Abacus-A Journal of Accounting, Finance and Business, Forthcoming

48 Pages Posted: 28 Apr 2023

See all articles by Sudipta Bose

Sudipta Bose

Discipline of Accounting and Finance, Newcastle Business School, The University of Newcastle, Australia

Peter Clarkson

University of Queensland - Business School; Simon Fraser University (SFU) - Beedie School of Business; Financial Research Network (FIRN)

Gordon D. Richardson

University of Toronto - Rotman School of Management

Date Written: April 25, 2023

Abstract

We examine the value relevance of CSR expenditure utilizing the Indian setting of mandatory CSR spending regulation which commenced in 2014. India is the only country where regulators mandate both CSR reporting and spending. Our interest is in two types of firms that meet the minimum specified thresholds: firms that voluntarily made CSR expenditures pre-Regulation (Voluntary Spenders) and firms that did not (Forced Spenders). This separation in revealed preference allows researchers and investors to observe, at least on average, a firm’s true CSR strategy type (proactive/leader versus reactive/follower) through their pre-Regulation expenditure strategy. This unique quasi-experimental setting allows us to investigate whether CSR spending is positively associated with shareholders’ value, both when spending was voluntary pre-Regulation (for Voluntary Spenders) and after it becomes mandatory post-Regulation (for Voluntary and Forced Spenders). We find that for Voluntary Spenders, the markets assess CSR expenditure as valuation enhancing pre-Regulation but post-Regulation the valuation benefits are significantly weakened. The market’s assessment is that a Forced Spender’s (imposed) CSR expenditure is, on average, less valuable than that of Voluntary Spenders, consistent with such spending being viewed as a form of corporate taxation. Further, we find that shortfalls from the required spending amount are penalized by the market for Voluntary Spenders but rewarded for Forced Spenders. We also find that advertising appears to play an important communication role both pre- and post-Regulation. We view the results as being consistent with the notion that mandated expenditures are viewed differently than those made voluntarily.

Keywords: Corporate Social Responsibility Expenditure; Mandatory-versus-Voluntary CSR; India; Valuation; Signaling

JEL Classification: M14; M48; G31; G38

Suggested Citation

Bose, Sudipta and Clarkson, Peter and Richardson, Gordon D., Valuation Implications of Mandatory CSR Expenditure in India (April 25, 2023). Abacus-A Journal of Accounting, Finance and Business, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4428436

Sudipta Bose (Contact Author)

Discipline of Accounting and Finance, Newcastle Business School, The University of Newcastle, Australia ( email )

Sydney
Australia

HOME PAGE: http://www.newcastle.edu.au/profile/sudipta-bose

Peter Clarkson

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Gordon D. Richardson

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8601 (Phone)
416-971-3048 (Fax)

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