Does corporate social responsibility (CSR) create shareholder value? This was a question asked by two professors of accounting in the Journal of Accounting Research. Hariom Manchiraju (Indian School of Business) and Shiva Rajgopal (Columbia Business School) examined how companies of a certain size in India are required by law to spend at least 2 per cent of their net income on corporate social responsibility (CSR). The law was introduced in 2013 and so the study was able to quantify how the CSR requirement affected the companies' shareholder value.
However, the research found that forcing a company to spend on corporate social responsibility (CSR) is likely to cause a negative impact on shareholder value. The study found that the law caused a 4.1 per cent drop in the stock price of firms forced to spend money on CSR – but companies that spend more on advertising are not negatively affected by the mandatory CSR rule. The academic paper stated: “These results suggest that ﬁrms voluntarily choose CSR to maximize shareholder value.”
India's Companies Act (Clause 135), passed in 2013, requires companies that meet certain size and profit thresholds in any fiscal year to spend 2 per cent of its average net profits of the prior three years on CSR activities. The research notes that this is perhaps the first legislative measure of its kind in the world and the unique circumstance enabled the academic study to compare and measure the impact of forced CRS spending on shareholder value.
The authors conclude: “Our findings also indicate that firms, left to their own devices, choose their optimal level of CSR spending designed to maximize their ﬁrm value. Hence, we suggest caution in drawing causal inferences from associations of corporate outcomes and CSR spending.”
CTMfile take: This study is interesting for companies considering their corporate social responsibility programme and how it could affect some important financial benchmarks. It seems that CSR spending that is undertaken voluntarily can help improve shareholder value but it's a different story if the CSR spending is forced by legislation, as it is in India.
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