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Unveiling the role of corporate social responsibility on the efficiency of capital investments and their speed of adjustment: Insights from India

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Abstract

Driven by the dynamic corporate social responsibility (CSR) environment, which is encouraging movement from self-regulation to co-regulation, this study empirically investigates the impact of CSR on the efficiency of capital investments of firms in India, given its remarkable legislation that mandates firms surpassing a threshold to invest 2 per cent of their profits in CSR activities. The study is based on firms listed on NSE 500 from the year 2008 to 2019, and the results suggest that CSR significantly improves investment efficiency in the post-mandate regime. There exists an optimal CSR level that instigates an inverse U-shaped relationship. We also investigate the impact of CSR on the speed of adjustment of capital investments towards the target in case of deviations. High-CSR firms are found to adjust swiftly to their targets since such firms tend to deviate less and incur low adjustment costs. Only the governance dimension of CSR seems to affect the firms’ speed of adjustment in the current context. The positive association between CSR and adjustment speed is pronounced only in the post-mandate period. Also, CSR seems to affect the speed of adjustment only when firms are operating above the target.

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Data Availability

The data supporting this study's findings are available from Bloomberg and Datastream. It is not publicly available due to commercial restrictions.

Notes

  1. Half-life = ln (0.5)/ln (1-speed of adjustment).

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Acknowledgements

This research was funded by University Grants Commission, India (Junior Research Fellowship).

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Authors and Affiliations

  1. Department of Management Studies, Indian Institute of Technology, Delhi, India

    Monika Dahiya, Shveta Singh & Neeru Chaudhry

Authors
  1. Monika Dahiya
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Contributions

Monika Dahiya: conceptualization, writing – original draft preparation, data curation, software validation, methodology, analysis and investigation.

Shveta Singh: conceptualization, writing – review and editing, resources, supervision.

Neeru Chaudhry: conceptualization, writing – review and editing, resources, supervision.

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Correspondence to Monika Dahiya.

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Appendix

Appendix

Variables

Description

Firm size (SIZE)

Natural logarithm of the book value of total assets

Firm age (AGE)

Natural logarithm of the number of years a firm has been listed on NSE

Volatility of cash flows (CFOVOL)

Standard deviation of cash flows over the past three years

Volatility of return on assets (ROAVOL)

Standard deviation of ROA over previous three years

Growth opportunities (TOBINQ)

\(\frac{Market\;value\;of\;equity-Book\;value\;of\;equity+Book\;value\;of\;total\;assets}{Book\;value\;of\;total\;assets}\)  

LOSS

A dummy variable that assumes the value one if net income before extraordinary items is negative, and zero otherwise

Leverage (LEV)

Book value of total debt divided by the sum of the book values of total debt and equity

Tangibility (TANG)

Ratio of fixed assets (property, plant and equipment) to total assets

ZSCORE

Measure of financial distress as per Altman (1968)

Z-score = 1.2X1 + 1.4X2 + 3.3X3 + .6X4 + 1X5

where,

X1 = Working Capital/Total assets

X2 = Retained Earnings/Total assets

X3 = EBIT/Total assets

X4 = Market value of equity/Total liabilities

X5 = Sales/Total assets

Financial reporting quality (FRQ)

Measured by Dechow and Dichev (2002):

\({TCA}_{i,t}={\beta }_{0}+ {\beta }_{1}{CFO}_{i,t-1}+{\beta }_{2}{CFO}_{i,t}+{\beta }_{3}{CFO}_{i,t+1}+{\beta }_{4}{\Delta REV}_{i,t}+{\beta }_{5}{PPE}_{i,t}+{\varepsilon }_{i,t}\)

where, \(\mathrm{TCA}(\mathrm{total}\;\mathrm{current}\;\mathrm{accruals})=\frac{\mathrm\Delta\;\mathrm{Current}\;\mathrm{Assets}-\mathrm\Delta\;\mathrm{Cash}-\mathrm\Delta\;\mathrm{Current}\;\mathrm{Liabilities}+\mathrm\Delta\;\mathrm{Short}\;\mathrm{term}\;\mathrm{bank}\;\mathrm{debt}-\mathrm{Depreciation}\;\&\;\mathrm{amortization}}{\mathrm{Total}\;\mathrm{assets}\;\mathrm{at}\;\mathrm{the}\;\mathrm{beginning}\;\mathrm{of}\;\mathrm{the}\;\mathrm{year}}\)  

CFO represents the lagged, current and future cash flow from operations; ΔREV is the change in revenue, and PPE is the amount of property, plant and equipment. All are scaled by total assets at the beginning of the year

The model has been estimated cross-sectionally provided there are at least 16 observations for each industry and year. FRQ is the absolute value of residuals from the model multiplied by -1

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Dahiya, M., Singh, S. & Chaudhry, N. Unveiling the role of corporate social responsibility on the efficiency of capital investments and their speed of adjustment: Insights from India. Asia Pac J Manag (2023). https://doi.org/10.1007/s10490-023-09897-2

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