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Does Corporate Social Responsibility (CSR) Create Shareholder Value? Evidence from the Indian Companies Act 2013
Author(s) -
MANCHIRAJU HARIOM,
RAJGOPAL SHIVARAM
Publication year - 2017
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.12174
Subject(s) - corporate social responsibility , profitability index , business , shareholder , regression discontinuity design , shareholder value , event study , accounting , enterprise value , exploit , value (mathematics) , stock (firearms) , monetary economics , corporate governance , finance , economics , law , medicine , mechanical engineering , paleontology , context (archaeology) , computer security , pathology , machine learning , biology , political science , computer science , engineering
In 2013, a new law required Indian firms, which satisfy certain profitability, net worth, and size thresholds, to spend at least 2% of their net income on corporate social responsibility (CSR). We exploit this regulatory change to isolate the shareholder value implications of CSR activities. Using an event study approach coupled with a regression discontinuity design, we find that the law, on average, caused a 4.1% drop in the stock price of firms forced to spend money on CSR. However, firms that spend more on advertising are not negatively affected by the mandatory CSR rule. These results suggest that firms voluntarily choose CSR to maximize shareholder value. Therefore, forcing a firm to spend on CSR is likely to be sub‐optimal for the firm with a consequent negative impact on shareholder value.