The Impact of Mandatory and Voluntary CSR Expenditures on Future Financial Performance: Evidence from India

• In Event: 2.03. Reporting Requirements, ESG Investments, and Financial Outcomes

Abstract

Section 135 of India’s Companies Act 2013 mandates large firms to spend at least 2% of the average net profits made during the three preceding years on corporate social responsibility (CSR) activities. Using the top 100 firms in India, this study examines and finds that neither mandatory nor voluntary CSR expenditures are associated with future financial performance, measured by future net income and future operating cash flows. However, expenditures on certain types of CSR activities, such as poverty, environment, and rural development (education, equality, health, and politic) activities are positively (negatively) associated with future financial performance. Further evidence shows that the association between CSR expenditures on the industry-related CSR activities and future performance is weak. Finally, we provide evidence that board independence and board diversity, in general, do not affect the association between CSR expenditures and future financial performance. Overall, the results of this study suggest that firms do not appear to have benefited from mandatory CSR expenditures as required by the Company Act of 2013. Our results also suggest that weak corporate governance overall and board independence, in particular, may have negatively affected the association between CSR expenditures and future financial performance in India.

Authors

• Ran Ling, Texas A&M University - Commerce

• Wen-hsin Hsu, National Taiwan University

• Steve Wen-Jen Lin, University of Memphis

• Shu-hsing Wu, Chang Jung Christian University