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

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.