IIM Lucknow Study Reveals Financial Impact of CSR Spending on Indian Companies
Mandatory CSR may increase Cost of Equity, says research
Lucknow | January 5, 2026 | CampusKatta News
A recent study conducted by the Indian Institute of Management (IIM) Lucknow has revealed that mandatory Corporate Social Responsibility (CSR) expenditure may increase the Cost of Equity (CoE) for Indian companies, particularly when CSR spending is perceived as a compliance obligation rather than a strategic investment.
The research specifically examines the financial implications of CSR expenditure on poverty alleviation initiatives mandated under the Companies Act, 2013, and its impact on investor perception, firm risk, and equity financing costs in the Indian corporate sector.
Study Published in Prestigious International Journal
The findings of the study have been published in the internationally reputed Journal of Accounting in Emerging Economies.
The research paper is co-authored by:
- Prof. Seshadev Sahoo, Professor of Finance and Accounting, IIM Lucknow
- Dr. Sukanya Wadhwa, Research Graduate
Study Scope and Methodology
To analyze CSR’s financial consequences, the research team examined data from 2014 to 2020 involving 484 Indian companies that invested in poverty alleviation programs under mandatory CSR norms.
Key research tools and methods included:
- Ohlson and Juettner-Nauroth (OJ) Model
- Multiple econometric and robustness analyses
The study adopted a forward-looking investor perspective, assessing how CSR spending influences:
- Perceived corporate risk
- Investor confidence
- Cost of raising equity capital
What is the OJ Model?
Explaining the methodology, Prof. Seshadev Sahoo stated:
“The Ohlson and Juettner-Nauroth (OJ) model is widely used in finance research as it estimates the implied cost of equity by incorporating expected earnings growth and payout ratios. This forward-looking approach is essential when assessing policy-driven CSR expenditure.”
Key Findings of the IIM Lucknow Study
The study revealed several critical insights:
🔹 Mandatory CSR increases Cost of Equity
- A positive correlation was observed between CSR spending on poverty alleviation and higher implied Cost of Equity.
- Investors tend to demand higher returns when CSR is viewed as a mandatory compliance cost.
🔹 Investor confidence may decline
- Mandatory CSR is often perceived as a financial burden, reducing perceived corporate benefits.
- This leads to lower investor confidence and higher equity financing costs.
🔹 Service sector shows a contrasting trend
- In service-sector firms, current-year CSR spending reduces Cost of Equity.
- Investors appear to reward CSR initiatives in service firms due to:
- Reputation sensitivity
- Customer trust
- Dependence on intangible assets
🔹 Results remain robust
- Findings were consistent across alternative analytical models, strengthening the credibility and validity of the conclusions.
CSR Should Be Strategic, Not Just Compliant
Commenting on the broader implications, Prof. Sahoo noted:
“Socially responsible investors often view compliance-driven CSR as a liability. However, when CSR is aligned with a company’s core business values and pursued authentically, it can enhance investor trust, reduce perceived risk, and ultimately lower the cost of raising equity.”
CSR and Sustainable Development Goals
Beyond financial outcomes, the study emphasizes CSR’s role in strategic societal engagement.
Authentic CSR initiatives contribute to:
- Enhanced corporate reputation
- Stronger stakeholder trust
- Meaningful progress toward Sustainable Development Goal 1 (SDG-1) — ending poverty and improving living standards in India
Conclusion
The IIM Lucknow study underscores that CSR delivers long-term corporate and societal value only when implemented with sincerity and strategic intent. Thoughtfully planned CSR initiatives can simultaneously create social impact and financial advantages, reshaping how investors perceive corporate responsibility in India.
