A groundbreaking study from the Indian Institute of Management (IIM) Lucknow has revealed a significant financial paradox for Indian corporations. The research indicates that mandatory Corporate Social Responsibility (CSR) spending can inadvertently lead to a higher cost of raising equity capital, as investors may view the expenditure as a regulatory burden rather than a value-adding strategy.
The Research Methodology and Core Findings
Conducted by Professor Seshadev Sahoo and his team, the study meticulously analyzed data from 484 Indian companies between 2014 and 2020. These firms were engaged in poverty alleviation initiatives under the CSR mandate of the Companies Act, 2013. To derive robust insights, the researchers employed the advanced Ohlson and Juettner-Nauroth (OJ) model alongside multiple econometric approaches to assess the financial impact of mandated CSR.
The findings, published in the Journal of Accounting in Emerging Economies, established a clear positive correlation between mandatory CSR expenditure and a company's implied cost of equity (CoE). "This signifies that there is a great deal of CSR expenditure that is mandatory and that there is a greater return on equity that is required by the investors," explained Professor Sahoo. Essentially, when investors perceive CSR as a forced compliance cost, their confidence dips, demanding higher returns for the perceived increased risk, which elevates the firm's cost of capital.
The Service Sector Exception and Strategic Imperative
Interestingly, the study uncovered a notable exception. Firms in the service sector demonstrated a contrasting trend, where current-year CSR spending actually lowered their cost of equity. Professor Sahoo theorized that this could be because investors reward service-oriented companies more readily for CSR efforts, as their business models are inherently more reliant on reputation, customer trust, and intangible assets.
This dichotomy underscores the study's central recommendation. The research strongly advocates for companies to move beyond tick-box compliance and towards authentic, strategically aligned CSR. "If companies make an authentic commitment rather than mere compliance, by aligning CSR with their core business values, they can unlock financial benefits," Sahoo emphasized. Strategically chosen initiatives can enhance investor trust, reduce perceived risk, and ultimately lower the cost of raising equity.
Broader Societal Impact and Long-Term Vision
Beyond the balance sheet, the study highlights the profound societal potential of genuine CSR engagement. When implemented with sincerity, CSR programs do more than improve a company's financial standing; they strengthen corporate reputation, build stakeholder trust, and contribute meaningfully to national goals.
Specifically, well-planned CSR initiatives in poverty alleviation directly support Sustainable Development Goal 1 (SDG 1), which aims to end poverty. The research concludes that a thoughtful, strategic approach to CSR can create a powerful synergy, delivering both long-term corporate advantages and substantial societal impact for India.
