Digitalisation of Mandatory Social Expenditure Targets in India: Cost or Value Addition?

Digitalisation of Mandatory Social Expenditure Targets in India: Cost or Value Addition?

Ajit Dayanandan (University of Alaska, Anchorage, USA) and Sudershan Kuntluru (Indian Institute of Management, Kozhikode, India)
DOI: 10.4018/978-1-7998-2799-3.ch007

Abstract

The chapter examines the impact of mandatory CSR expenditure targets of firms on financial performance in India. Extant studies have shown using event study methodology that announcement effect of compulsory CSR expenditure targets on abnormal returns of these firms is negative. Further, it is examined on how financial performances of these firms which met or exceeded the targets (Socially responsible firms) or were not able to meet the targets (socially irresponsible firms) differ. Based on the data for 1,460 firm years for the period 2015 to 2018 in the Indian context, the empirical analysis shows that their financial performance was negatively impacted because of these mandated CSR targets. Available evidence shows that CSR expenditure that spurs digitalisation and technological innovation helps the poorest and most vulnerable which enables them to lead a healthy, productive life.
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Introduction

Corporate Social Responsibility (CSR) is widely discussed among academics, firms, regulators and other market participants (Maragolis et al. 2009; Barnea & Rubin, 2010; Kitzmueller and Shimshack, 2012, Ali et al. 2017). By engaging in CSR activities, firms can not only generate favorable stakeholder attitudes but also better support behaviors like the purchase of its product, seeking employment, investing in the company. In the long run, it enables firms to build corporate image, strengthen stakeholder-company relationships, and enhance stakeholders' advocacy behaviors. The increasing power of activist organizations and the media has made CSR strategies increasingly relevant and strategies of “doing well by doing good” more relevant in the modern corporate world (Economist, 2005). Firms engage in “good” corporate conduct because it provides benefits to the society, although they have operational and disclosure costs (Benabou and Tirole, 2010). The incorporation of environmental, social and governance principles into corporate decisions has shifted the paradigm from conventional view that the firms’ purpose was no longer to serve their owners alone, but also customers, staff, suppliers, communities and other stakeholders (Economist, 2019). There is also impressive body of research which examined the relationship between CSR investments and a firm’s performance and these have concluded that the relationship is inconclusive (Orlitzky et al. 2003; Mackey et al. 2007).

But in the context of developing economies, it is increasingly argued that CSR should embrace not only corporate conduct, social, environmental and human right issues but also the role of business in relation to poverty reduction (Prieto-Carrón et al. 2006). But many firms in emerging market economies firms are reluctant to undertake CSR expenditures on a voluntary basis. India had taken legislative measures to mandate CSR expenditures. Under mandated CSR expenditure provisions in India, larger Indian firms are mandated to spend annually 2 per cent of their 3-year average annual net profits on CSR activities since 2014. In the delivery of CSR outcomes, the corporate sector in India had played an active role in digitally empowering the “have-nots” by addressing economic and social divide, tackle social injustice, climate change, inequality etc. The study examines whether the meeting mandatory CSR targets in India had positively/adversely affected the profitability of firms.

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