CSR Contribution and Financial Performance: A Study on Select Indian Companies

1. Introduction

The issue of Corporate Social Responsibility (CSR) is basically ethical (Hopkins, 2008). But, due to reluctance of most of the Indian companies to spend voluntarily on CSR initiatives, the Government of India introduced the CSR Rules 2014 with effect from 1st April 2014. Still, the results were not as expected. Many firms were found to be unable to spend the amount budgeted for CSR activities (Ministry of Corporate Affairs Reports 2014-15 & 2015-16 on the CSR expenditure of Indian companies).

So, the Companies (Amendment) Act, 2019 came into existence with the proposals that the unspent amount on a project, which is not ongoing, is to be transferred to a Fund specified in Schedule VII and the same on an ongoing project is to be transferred to a special account in any scheduled bank. Therefore, mere imposition of legal compulsion can’t motivate Indian firms for undertaking CSR projects. This is where another issue of CSR is important. It is nothing other than the growing awareness about CSR among the customers, employees, investors, and other stakeholders.

Due to consciousness of various stakeholders, no unethical and socially irresponsible firm can survive in today’s world. On the contrary, a socially responsible firm easily draws the attention of the customers, employees, investors and other stakeholders. Those firms build a fair and strong image before the society (Krishnan, 2012). Their reputation gets enhanced (Palmer, 2012). They enjoy competitive advantage over their rivals. All these positively contribute to the survival of an entity. Here, CSR is a strategic issue to the firms for their survival.

Concentrating on this perception, the researchers all over the world have searched for the answer of a question—whether there is any relation between social responsiveness of a firm and its performance. Some studies found positive relation (Sweeney, 2009) between CSR performance and firm performance whereas some others found no relation (Fiori et al., 2008) between the two. Few studies experienced negative relation (Lungu et al., 2011) between them, and again, a few got mixed results (Tilakasiri, 2012) on the relationship between these two variables.

In this backdrop, the present study makes an attempt to get the answer to the same question in the Indian context. For measuring financial performance of firms, two accounting based indicators (ROCE and ROA) and two market based indicators (Market Value to Book Value Ratio and Tobin’s Q) have been chosen (Aggarwal, 2013; Wu and Shen, 2013; Cornett et al., 2014; Saeidi et al., 2015; Resmi et al., 2018; Choi et al., 2010; Cavaco and Crifo, 2014; Zhou et al., 2015).

2. Literature Review & Hypotheses Formulation

A number of studies have been carried out to explore the relationship between CSR performance and firm performance. Majority of the researchers found positive relationship between CSR performance and firm performance (Sweeney, 2009; Isaksson, 2012; Kanwal, 2013; Deng et al., 2013; Cornett et al., 2014; Lu et al., 2014). Matsumura et al. (2014) found that excessive carbon emissions decrease firm’s value. As per the findings of Dhaliwal et al. (2011), disclosure of CSR activities helps firms reducing cost of equity capital.

Some studies found no relationship between CSR performance and firm performance (Fiori et al., 2008; Anderson and Preteni, 2011; Lys et al., 2015). Lungu et al. (2011) found a significant negative relation between profitability, and social and environmental disclosure. Tilakasiri (2012) experienced mixed results in this connection. The study showed that community related activities had significant positive relationship with company performance but health related activities had negative relationship with company performance. Similar type of mixed results was also experienced by Servaes and Tamayo (2013).

In India also, a number of studies were carried out in this broad field of research and like their international peers, majority of the researchers found positive relationship between CSR performance and firm performance (Kadyan, 2009; Krishnan, 2012; Lawande, 2013; Angappan, 2014; Jyothi, 2014; Pradhan, 2015; Panchal, 2017; Padhiyar, 2018). Bhatia (2016) found no significant effect of CSR disclosure on financial performance of automotive sector companies. Similarly, Nagaraju (2017) found no significant influence of CSR expenditure on Net Profit and Net Worth.

The relationship between CSR and financial performance of firms has been the most cultivated area of research in the field of CSR (Angelidis et al., 2008, as cited in Krishnan, 2012). However, results have been mixed and hence inconclusive (Aggarwal, 2013; Lu et al., 2014; Saeidi et al., 2015). Most of the studies were conducted in the context of developed countries (Aggarwal, 2013). In most of the earlier Indian studies, either perception based or content based CSR disclosure index was used to measure social performance of firms. Thus, few studies dealt with quantitative data on CSR expenditure. To bridge this gap, the present study has been proposed with the following two major null hypotheses:

3. The Data and Methodology

A sample of ten companies has been chosen for the study from the set of first 30 most CSR contributing companies appearing in the list prepared by the Ministry of Corporate Affairs for the year 2016-17. For selection, purposive sampling has been used. The followings were the criteria for selection:

The study is based on secondary data. Data have been collected from the published annual reports of the selected companies and from the official website of Bombay Stock Exchange. Data for the period from 2010-11 to 2016-17 have been analysed.

CSR score of a firm (The independent variable) has been computed as percentage of CSR spending on PAT of the company. Firms’ financial performance has been measured from two approaches—accounting approach and market based approach. In the first approach, ROCE and ROA have been chosen as the indicators of financial performance. In the second approach, Market Value to Book Value Ratio (MVBV) and Tobin’s Q have been selected as the indicators of financial performance. Tobin’s Q has been measured by the following formula (Servaes and Tamayo, 2012; Cahan et al., 2015):

Some control variables such as Age, Size, Revenue, D/E ratio and Return on Equity (ROE) have been included in the regression equation (Anderson and Preteni, 2011; Maqbool and Zameer, 2018). Therefore, the panel regression equations based on Constant Coefficients model are as below (Anderson and Preteni, 2011):

Where, Y is ROCE in equation (1), ROA in equation (2), MVBV in equation (3), and Tobin’s Q in equation (4), respectively. X₁, X₂, X₃, X₄, X₅ and X₆ are the CSR score, Age, Size, Revenue, D/E ratio and ROE respectively. ε_it is the disturbance term. α is the intercept. β₁, β₂, β₃, β₄, β₅ and β₆ are the coefficients of CSR score, Age, Size, Revenue, D/E ratio and ROE respectively.

4. Results and Discussion

4.1 Impact of CSR expenditure on ROCE

First we will analyse the degree of association between the two as represented by correlation coefficients in the following table:

From the above table, we find that CSR is slightly negatively associated with ROCE and this association is statistically insignificant at 1% level of significance. So, our hypothesis is accepted. Association between ROCE and D/E ratio is insignificantly negative. Correlation between ROCE and size is significantly negative. The same between ROCE and revenue is also significantly negative. The association between ROCE and age is statistically insignificant though positive.

Now, we will analyse the impact of CSR on ROCE with the help of regression and the results are as below:

As the F value is statistically significant, the regression model is valid. From the value of R Square, it seems that the explanatory variables together can significantly justify more than 2/3rd of the variation in the dependent variable. However, more explanatory variables are needed to explain the dependent variable completely. The Durbin-Watson statistic signifies that the data suffers from positive autocorrelation problem. Impact of CSR expenditure on ROCE is negative but this impact is statistically insignificant at 1% level of significance. Hence, our hypothesis is accepted. D/E ratio and Age have insignificant impact on ROCE. Other two control variables have significant impact on ROCE. Size has negative impact and revenue has positive impact on ROCE. VIF values give the evidence that problem of multicollinearity does not exist in the model.

4.2 Impact of CSR expenditure on ROA

Let’s see the results of correlation at first as represented in the following table:

CSR expenditure is negatively associated with ROA and this association is statistically insignificant at 1% level of significance. Hence, our hypothesis gets accepted. ROA is found to be significantly and negatively associated with D/E ratio, size and revenue, respectively. The correlation between ROA and age is however insignificant.

Now, we will examine the impact of CSR on ROA with the help of regression and the results are as below:

The significance level of F statistic signifies that the regression model is valid. Moreover, the explanatory variables together are able to explain about 2/3rd of the variation in the dependent variable. However, more explanatory variables may be employed to capture the variation of the dependent variable completely. Durbin-Watson statistic gives the evidence that the model suffers from positive autocorrelation problem. Impact of CSR expenditure on ROA is negative but statistically insignificant at 1% level of significance. Hence, our hypothesis is accepted. Both D/E ratio and age have insignificant impact on ROA. Other two control variables have significant impact on ROA. Size has negative impact and revenue has positive impact on ROA. VIF values give the evidence that problem of multicollinearity does not exist in the model.

4.3 Impact of CSR expenditure on MVBV Ratio

Just like earlier, first we will analyse the degree of association between the two as represented by correlation coefficients in the following table:

From the above table, we find that CSR is slightly negatively associated with MVBV Ratio and this association is statistically insignificant at 1% level of significance. So, our hypothesis is accepted. Both Size and revenue are found to be negatively and significantly associated with MVBV Ratio. ROE is found to be positively and significantly associated with MVBV Ratio. Both D/E Ratio and Age have insignificant association with MVBV Ratio.

Now, we will analyse the impact of CSR expenditure on MVBV Ratio with the help of regression and the results are as below:

The F statistic of the above model is statistically significant. So, the regression model is valid for making some meaningful inferences. From the value of R Square, it seems that the explanatory variables can outstandingly explain the variation in the dependent variable. Moreover, the Durbin-Watson statistic suggests that the model does not suffer from severe autocorrelation problem. Impact of CSR expenditure on MVBV Ratio is positive and this impact is statistically significant at 1% level of significance. Hence, our hypothesis is rejected. D/E Ratio, Size, Revenue and Age have insignificant impact on MVBV Ratio. ROE is found to have significant positive impact on MVBV Ratio. VIF values give the evidence that the model is not influenced by severe multicollinearity problem except in the case of Size variable.

4.4 Impact of CSR expenditure on Tobin’s Q

Let’s observe the degree of association between the two as represented by correlation coefficients in the following table:

From the above table, we find that CSR is slightly negatively associated with Tobin’s Q and this association is statistically insignificant at 1% level of significance. So, our hypothesis is accepted. Association between Tobin’s Q and each of the three control variables, ROE, size and revenue respectively, is significant. Tobin’s Q has positive association with ROE but is negatively associated with size and revenue, respectively. Tobin’s Q has insignificant association with the other two control variables, D/E ratio and age.

Now, we will analyse the impact of CSR expenditure on Tobin’s Q with the help of regression and the results are as below:

The value of F statistic is statistically significant and hence the regression model is valid. From the value of R Square, it seems that the model well fits the data as the explanatory variables together can explain more than 85% variation in the dependent variable. Durbin-Watson statistic suggests that the regression model does not suffer from severe autocorrelation problem. Impact of CSR expenditure on Tobin’s Q is positive and this impact is statistically significant at 1% level of significance. Hence, our hypothesis is rejected. D/E ratio, Size, Revenue and Age are found to have insignificant impact on Tobin’s Q. ROE has significant positive impact on Tobin’s Q. VIF values give the evidence that the model is not influenced by severe multicollinearity problem except in the case of Size variable.

5. Conclusion

The study was started with the research question whether CSR expenditure has any impact on financial performance of the select Indian firms. Based on this research question, hypotheses were structured. After analysing the data, it is found that CSR expenditure is negatively associated with all the four selected indicators of financial performance. Surprisingly, all the four associations are statistically insignificant. Based on the insignificant results, no meaningful inference regarding the relationship between CSR contribution and corporate financial performance can be drawn.

From the regression results, it is observed that CSR expenditure has negative impact on both accounting based financial performance indicators, ROCE and ROA. Again, the impacts are statistically insignificant. Therefore, we can’t draw any conclusion regarding the impact of CSR contribution on accounting based measures of financial performance based on these insignificant results.

On the other hand, CSR expenditure is found to have significant positive impact on both market based financial performance indicators, MVBV ratio and Tobin’s Q. Therefore, the study claims that CSR performance has significant positive impact on market based corporate financial performance (Sweeney, 2009; Angappan, 2014; Maqbool and Zameer, 2018). It implies that social responsiveness of a firm is reflected through its market price of securities or it may be said that an entity having strong sense of social responsibility is rewarded by the market itself.

If this is the fact, the companies should integrate CSR policy in their corporate strategy voluntarily (Gangopadhyay, 2012) to sustain in the long run. Such kind of findings may motivate Indian firms to undertake CSR projects voluntarily as they will find that social engagement is rewarded by the market. Moreover, socio-economic health of India will surely improve because of successful implementation of varied social initiatives taken by the Indian firms.

References

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