Does doing good cost more? Poverty-alleviation corporate social responsibility and the cost of equity in India

PurposeThis study explores the relationship between firms' corporate social responsibility (CSR) expenditure towards poverty alleviation and the implied cost of equity for Indian firms, aiming to contribute valuable insights to the discourse on CSR’s financial implications for inclusion.Design/methodology/approachWe construct a panel of 484 firms contributing to poverty alleviation under Section 135, Schedule VII(1) of the Companies Act, 2013, for the period 2014–2020. The study examines the link between CSR spending on poverty reduction and implied cost of equity (COE), where COE is computed using the Ohlson and Juettner-Nauroth (OJ) model. The analysis employs a two-step system GMM, supplemented by pooled OLS, random effects and generalized least squares (GLS) models. A sectoral sub-sample analysis is also conducted to compare results across manufacturing and service firms.FindingsOur findings reveal a positive relationship between CSR towards poverty alleviation and implied COE, indicating that mandated spending dampens the corporate benefits for the firms, thus reducing investor optimism and increasing the cost of equity. These results remain robust across alternate model specifications, including pooled OLS, random effects, and GLS estimations. Further, different results are observed for the service industry, where current year spending on CSR towards poverty alleviation reduces the cost of equity for these firms.Practical implicationsSocially responsible investors typically consider compliance-based CSR a liability. Therefore, companies should align their CSR strategies with their core business practices to convey a genuine signal to investors and capitalize on the COE benefits that voluntary CSR towards poverty reduction can provide in a regulated environment.Social implicationsFirms are encouraged to integrate CSR strategies with their core business practices, fostering genuine engagement rather than mere compliance. This alignment will enhance the firm’s reputation while helping India achieve Sustainable Development Goal 1 (SDG 1) of poverty alleviation. If implemented with correct intentions, it will help the living standards of those living below the poverty line in India.Originality/valueTo the best of our knowledge, there is a dearth of studies focussing on CSR activities targeted towards specific goals. Most previous studies have explored CSR as a whole. Also, a dearth of research exists on mandated CSR and its impact on the implied cost of equity.