Corporate social responsibility, governance and financial constraints in Indian listed firms

The study examines the effect of corporate social responsibility (CSR) activities on financial constraints by using a balanced panel dataset of 1,496 firms listed on the National Stock Exchange (NSE) in India from 2014 to 2020. It employs a generalized method of moments (GMM) two-step estimator method to analyze the data. GMM analysis is efficient in dealing with the endogeneity issues among firm-level variables. The robustness checks are conducted by the three-step least square (3SLS) regression method to confirm the consistency of results. Whited and Wu index (2006) and the debt-to-asset ratio have been used to classify the firms into financially constrained and unconstrained firms. We find that financially constrained find it difficult to engage in CSR activities. However, CSR spending can help in reducing financial constraints for firms. CSR activities are associated with stakeholder engagement that reduces the likelihood of opportunistic behaviour of managers. Further, stakeholder engagements help firms to enhance their value through their relationship with customers, employees and other stakeholders. The study also finds that corporate governance alleviates financial constraints, implying that firms are becoming more accountable and transparent in disclosing CSR activities. Finally, it confirms that firms engaging in CSR activities face lower financial constraints. The study focuses on the Indian-listed firms only which can be extended to private firms in future research.