Social responsibility, moral hazard, and collateral requirement: Evidence from a quasi‐natural experiment in India

• Published date: 01 March 2023
• Author: Nemiraja Jadiyappa,Santosh Shrivastava,Avinash Ghalke
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/irfi.12378

ORIGINAL ARTICLE

Social responsibility, moral hazard, and collateral

requirement: Evidence from a quasi-natural

experiment in India

Nemiraja Jadiyappa

1

| Santosh Shrivastava

2

| Avinash Ghalke

3

1

Department of Finance and Accounting,

Indian Institute of Management, Raipur, India

2

Department of Business Analytics, Institute

of Management Technology, Ghaziabad, India

3

Department of Banking, Insurance and

Financial services, Goa Institute of

Management, Goa, India

Correspondence

Santosh Shrivastava, Department of Business

Analytics, Institute of Management

Technology, Ghaziabad, India.

Email: sksrivastava@imt.edu

Abstract

The stakeholder theory predicts that corporate social

responsibility (CSR) activities reduce the morale hazard prob-

lem between creditors and corporate firms and decrease the

requirement of collaterals in debt transactions. Consistent

with this theory, our analysis shows that there is a negative

relationshipbetween CSR and secured debt ina cross-section

of firms. Further, by using the mandatory CSR regulation

implemented in India as a quasi-natural experiment setting,

we observe the same negative relationship across periods in

firms that were impacted b y the regulation. These result s

suggest that CSR activities may substitute collaterals for

obtainingdebt from financial institutions,especially banks.

KEYWORDS

collateral requirement, corporate social responsibility, CSR

regulations, moral hazard, natural experiment

1|INTRODUCTION

The adverse selection and moral hazard issues in capital markets make lending decisions complex and risky, leading

to distrust between the suppliers of fund, that is, creditors and the users, that is, corporate firms (Rajan &

Winton, 1995); (Manove et al., 2001). In this context, collaterals serve as security for the suppliers and help to coun-

ter the ill-effects of adverse selection and moral hazard (Rajan & Winton, 1995). However, if firms can build trust

with all stakeholders, particularly creditors, the usefulness of collaterals as a signaling tool to manage morale hazard

problem would be reduced. Corporate social responsibility (CSR) activities, in our opinion, have the capacity to fulfill

this function. Therefore, in this study, we examine the impact of CSR activities on the collateral requirement for

corporate debt in India.

Received: 23 August 2021 Revised: 17 January 2022 Accepted: 22 February 2022

DOI: 10.1111/irfi.12378

© 2022 International Review of Finance Ltd.

International Review of Finance. 2023;23:27–36. wileyonlinelibrary.com/journal/irfi 27