Can Catering to Local Area Needs Through CSR Reduce Firm Risk?

Abstract

This paper examines the effect of corporate social responsibility (CSR) spending to cater to the local area's needs (the area of business operations) in reducing the firm's risk in the mandatory CSR setting. Using a sample of 1677 Indian firms spanning the financial year 2009–2022, we present several interesting results. First, we demonstrate that the risk of the firms eligible under mandatory CSR law is higher than those not qualifying. Second, we find that the risk of firms that focus their CSR on the local area's needs is lower. In an additional analysis, we demonstrate that firms with higher spending on the local area experience lower contingent liability, legal expenses, and audit fees. We illustrate that focusing on the local area's needs in CSR efforts retains signaling value under a mandatory CSR regime.