The purpose of this study is to empirically investigate whether firms with promoter share pledging increase their corporate social responsibility (CSR) expenditures, as a strategic response to mitigate the negative perceptions associated with share pledging. Share pledging by controlling shareholders represents a corporate governance concern that intensifies principal-principal conflicts and is viewed unfavorably by the market. The Indian Companies Act mandates companies to allocate a portion of their profits to CSR initiatives. The authors identify “excess CSR”, representing voluntary contributions exceeding the mandated requirement, thereby serving as a meaningful indicator of discretionary CSR efforts.
The authors analyzed a panel data of 1,986 National Stock Exchange-listed firms from 2013–2021. They estimate fixed-effects regressions controlling for firm financials, ownership, board characteristics and year and industry effects.
The findings reveal that firms with promoter share pledging exhibit higher levels of voluntary CSR spending, potentially signaling a commitment to long-term value creation. This signaling incentive strengthens with greater promoter shareholding and higher business risk but diminishes under conditions of credit constraints. Notably, as the proportion of shares pledged relative to total holdings of the promoter increases, voluntary CSR spending declines, reflecting on short-term earnings management.
This study provides novel insights into a corporate governance issue, promoter share pledging, in the context of India’s unique mandatory CSR regime. To the best of the authors’ knowledge, it is the first study to examine how widespread share pledging influences excess CSR spending under this mandate.
