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Social responsibility, moral hazard, and collateral requirement: Evidence from a quasi‐natural experiment in India

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  • Nemiraja Jadiyappa
  • Santosh Shrivastava
  • Avinash Ghalke

Abstract

The stakeholder theory predicts that corporate social responsibility (CSR) activities reduce the morale hazard problem between creditors and corporate firms and decrease the requirement of collaterals in debt transactions. Consistent with this theory, our analysis shows that there is a negative relationship between CSR and secured debt in a cross‐section of firms. Further, by using the mandatory CSR regulation implemented in India as a quasi‐natural experiment setting, we observe the same negative relationship across periods in firms that were impacted by the regulation. These results suggest that CSR activities may substitute collaterals for obtaining debt from financial institutions, especially banks.

Suggested Citation

  • Nemiraja Jadiyappa & Santosh Shrivastava & Avinash Ghalke, 2023. "Social responsibility, moral hazard, and collateral requirement: Evidence from a quasi‐natural experiment in India," International Review of Finance, International Review of Finance Ltd., vol. 23(1), pages 27-36, March.
    • Handle: RePEc:bla:irvfin:v:23:y:2023:i:1:p:27-36
    DOI: 10.1111/irfi.12378
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    References listed on IDEAS

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