CSR disclosure and firm performance: evidence from an emerging market

• Published date: 25 January 2021
• Date: 25 January 2021
• DOI: https://doi.org/10.1108/CG-05-2020-0201
• Pages: 553-568
• Subject Matter: Strategy,Corporate governance
• Author: Fahad P.,Showkat Ahmad Busru

CSR disclosure and f‌irm performance:

evidence from an emerging market

Fahad P. and Showkat Ahmad Busru

Abstract

Purpose –This study aims to investigatethe effect of corporate social responsibility (CSR)disclosure on

firm performance,considering both firm profitabilityand firm value in an emerging market,India.

Design/methodology/approach –The study examines the effect of CSR disclosure on firm

performanceusing panel regressions for the finalsample that consists of 386 companieslisted in the BSE

500 index,India. It covers all major players in the capital market for ten yearsfrom 2007–2016.

Findings –The result showsa trend toward the negative effect of CSR disclosureon firm profitability and

firm value in India; this negativeeffect is mainly influenced by environmental disclosurescore and social

disclosure score.An adverse effect of firm profitability and firm value on CSR disclosureis also observed

to underlinethe inverse relationship.

Practical implications –The study provides implications to consumers, investors, managers and

policymakers.Firstly, consumers have to be more awareof CSR initiatives of companies, and they should

support those companiesto do more. Secondly, investors can use the ESG disclosure score as a signal

for the level of CSR activities, which negatively affects firm performance. Thirdly, managers have to

consider CSR more seriouslyand spend CSR amount wisely after proper research and not just to meet

the mandatorylimit. In addition, managershave to take necessary actions to makethe public aware of the

CSR activitiesof the company to gain an advantagein the future. Finally, policymakers have to give more

emphasis on the promotionof CSR activities to reach the ultimate consumers who lie in the remote areas

of the country,and more awareness has to be given to them regardingCSR activities.

Originality/value –The findings contributeto the literature by providing insights on CSR disclosure and

firm performance relationshipin India, an emerging market with increasing international attentionwhere

such studies are scant and less clear, especially after the amendments in the Companies Act, 2013.

Furthermore, the measurement of CSR disclosure using environmental, social and governance (ESG)

score is novelin theIndian context.

Keywords CSR disclosure, Firm performance and ESG score

Paper type Research paper

1. Introduction

The aftermath of the Global Financial Crisis, the effects ofclimate change and the corporate

scams around the globe have questioned the credibility of corporate giants and increased

stakeholders’ interest in corporate social responsibility (CSR) performance (Ferrero-Ferrero

et al.,2016

). As a result, stakeholders started asking for information regarding various CSR

initiatives while taking important investment decisions (Aggarwal, 2013). Considering the

interest of various stakeholders, companies are showing a more favorable attitude toward

integrating more CSR activitiesinto business practice, which offers goodwill, customertrust,

investor confidence and cost savings (Ferrero-Ferrero et al.,2016). Firms engaging in CSR

practices provide transparent disclosure, socially responsible behavior and commitment to

ethical standards (Bacha and Ajina, 2019). CSR performance aims to increase long-term

advantage of the company, keeping good public relation and high ethical standard, which

reduces business and legal risk and create shareholder trust (Han et al.,2016). The

concept of socially responsible investment (SRI) is getting more popular, increasing swiftly

Fahad P. is based at RUA

College, Kozhikode, India.

Showkat Ahmad Busru is

based at BS Abdur

Rahman University,

Chennai, India.

Received 29 May 2020

Revised 21 August 2020

4 October 2020

9 October 2020

Accepted 11 October 2020

DOI 10.1108/CG-05-2020-0201 VOL. 21 NO. 4 2021, pp. 553-568, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 553

and results in the development of sustainability indices (Hubbard, 2008). CSR disclosure

has been a subject to a vast number of studies around the world. Existing studies have

evaluated the motivation behind social disclosures, the need for such disclosures and the

difference in disclosure among companies (Ullmann, 1985;Said et al.,2009;Giannarakis,

2014;Muttakin and Subramaniam,2015).

Many researchers studied the association between CSR disclosure and financial

performance (Margolis and Walsh, 2001).But, mostly based on developed countries where

markets are matured and investors are well aware, few studies have done in developing

countries where social disclosures have a better role to play due to lack of CSR awareness

in such countries (Dobers and Halme, 2009). Diverse characteristics of each country like

culture, population and lifestylehave a significant role in explaining the CSR practice of that

country (Baughn et al.,2007). Apart from that, the findings of the existing studies indicate

that the CSR disclosure and firm performance relationship is inconclusive because the

results are different from one to another and also considering the fact that India is the first

country to issue mandatory CSR spending law (Friede et al.,2015;Muttakin and

Subramaniam, 2015). These three factors indicate the need for further study, especially in

India, which is poor in public awareness about CSR activities and law enforcement

(Dhaliwal et al.,2012;Leuz, 2003). The present study investigates the effect of CSR

disclosure on firm performance, considering accounting measures and value creation and

also the reverse effect of firm performance on CSR disclosure of 386 firms listed in the BSE

500 index for a period of tenyears from 2007–2016. This study provides some unique

contributions, firstly, by using composite and individual environmental, social and

governance (ESG) scores, which is not widely used in CSR-related studies. Secondly, the

study measured firm performance using both firm profitability and firm value. Thirdly, by

analyzing the reverse effect of firm performance on CSR disclosure. Finally, the study

covers a larger sample sizefor an extended study period.

2. Review of literature

There are theories formulated by researchers that support and oppose the spending of

company on CSR initiatives. Firstly, the stakeholder theory states that CSR initiatives

improve the performance of the firm, CSR activities create a good image and reputation

about the company and it will reflect in the financial performance and value creation of the

firm (Freeman, 1984;Donaldson andPreston, 1995). Whereas agency cost theory state that

CSR initiatives weakens value creation of firmand the theory consider the CSR initiatives as

additional cost and trying to fulfill the demand of large group of stakeholders bring

additional cost and agency conflicts (Jensen and Meckling, 1976;Barnea and Rubin,

2010). In line with this, Friedman (1970) states that the firm should use its funds and wealth

only into activities that increase its profitability. The study explains that the main aim of the

organization is to earn profit, and managers are not supposed to spend the owner‘s money

for any other purpose otherthan increasing shareholders’ wealth.

There are extensive studies analyzing the link among a firm’s socially responsible activities

and firm performance (Ducassy, 2013). Bragdon and Marlin (1972) and Moskowitz (1972)

carried the first studies in the area. Literature in this area is so wide and systematically

reviewed by earlier studies, so instead of a widespread review, thepresent study considers

studies that are relevant to the aim of this study. At the same time, the interrelationship

between corporate social performance and financial performance should need more

clarification. Many studies used financial performance as the dependent variable in this

relationship. Empirically, Margolis and Walsh (2001) show that 80 of the 95 reviews they

studied published from 1970–2000 confirm that corporate social performance predicts or

helps to determine a firm’s financialperformance. Moreover, out of 80 papers that reviewed

the relationship between CSR and firm performance, more than half (53%) companies find

positive connection, 24% find no relation, 19% find the mixed result and 4% find a negative

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