Do CSR practices affect perceived market performance through compliance status? Evidence from a quasi-natural experiment in India

Abstract

PurposeThe study examines the impact of corporate social responsibility (CSR) non-compliance on firm value. It also investigates the moderating roles of ownership concentration and research and development (R&D) intensity in this relationship.Design/methodology/approachFor hypothesis testing, the authors utilized panel data regression models on a dataset comprising 13,760 firm-years listed on the Bombay Stock Exchange, covering a period of nine years following the legislation (from March 2015 to March 2023).FindingsOur findings reveal a detrimental effect of mandatory CSR spending on the value of non-compliance firms, consistent with the notion of deterrence theory. Further, we find that the negative impact is more pronounced among widely-held firms compared to closely-held firms, aligning with shareholder activism and information asymmetry theory. Our subsequent tests indicate that R&D intensity mitigates the negative impact, indicating a substitution relationship between CSR and R&D expenditure. Consistent with this finding, we find a lesser negative impact of CSR non-compliance on firm value of widely-held R&D intensified firms. Our findings are robust to the problem of endogeneity and self-selection bias.Practical implicationsOur findings highlight practical implications for managers regarding performance management. Managers should recognize that mandatory CSR spending can negatively impact performance, especially in widely-held firms, leading to shareholder dissatisfaction. To mitigate these effects, increasing R&D investment is likely to buffer against the adverse impacts of CSR mandates. Firm managers should align R&D efforts with CSR obligations to counterbalance costs and manage shareholder expectations, thereby maintaining performance and enhancing the perception of innovation among stakeholders.Originality/valueIt is the first study to consider the degree of compliance within firms while examining the impact of mandatory CSR spending on firm value. Also, the study is among pioneer attempts to investigate the moderating role of ownership structure and R&D intensity on the relationship.