Mandatory corporate social responsibility and provision of trade credit: Evidence from India

• Published date: 01 February 2023
• Author: Nufazil Altaf
• Date: 01 February 2023
• DOI: http://doi.org/10.1002/pa.2830

RESEARCH ARTICLE

Mandatory corporate social responsibility and provision of

trade credit: Evidence from India

Nufazil Altaf

Department of Humanities, Social Sciences

and Management, NIT Srinagar, Srinagar, India

Correspondence

Nufazil Altaf, Department of Humanities,

Social Sciences and Management, NIT

Srinagar, Srinagar, India.

Email: nahangar113@gmail.com and nufazil.

ahangar@nitsri.net

The relationship between corporate social responsibility and trade credit is investi-

gated in this study via the trust (direct) and cash holding (indirect) channels. We dis-

covered that corporate social responsibility and trade credit are strongly correlated,

lending support to the trust channel. We also find evidence for the indirect route;

particularly, enterprises with high CSR have high cash holdings, which are associated

with less trade credit.

KEYWORDS

cash holding, corporate social responsibility, trade credit, trust

1|INTRODUCTION

Section 135 of the Indian Companies Act 2013 has made corporate

social responsibility (CSR) spending mandatory for the first time in the

world. This Act was mandated in order to bring Indian corporate prac-

tices in line with the global practices, to promote a healthier legal

environment, ensure that businesses contribute to the establishment

of an equitable society and promote sustainable economic develop-

ment (Bhattacharyya & Rahman, 2019). Granted that CSR expenditure

was mandated in Indian context, vast amount of literature emerged in

India, mostly on exploring the links between CSR expenditure and firm

performance (Bhattacharyya & Rahman, 2019; Garg & Gupta, 2020;

Kapoor & Sandhu, 2010; Kaur, 2018). However, in this study we take

a different stand as to understand whether CSR firms tend to extend

more or less trade credit. Motivated by prior literature that suggests

that CSR may affect trade credit via trust and cash holding channel. It

is suggested that CSR enhances trust which in turn facilitates the pro-

vision for trade credit. Additionally, it is argued that by engaging in

CSR activities firms build and maintain relationships with their stake-

holders (Lins et al., 2017) and recently, Levine et al. (2016) found that

trust enhances trade credit. These findings provide support to the

incomplete contract theory that suggests that trust is the device that

makes incomplete contracts sustainable. The extent to which CSR

may enhance trust, it is quite reasonable to believe that CSR may

enhance trade credit.

The cash holding channel, on the other hand, implies that CSR

firms are linked to greater cash holdings (Cheung, 2016), which could

affect trade credit. It is claimed that CSR leads to customer loyalty or

investor inelastic demand, lowering the firm's refinancing risk. Firms

seek to shorten their debt maturity due to low refinancing risk, hence

increasing refinancing risk. Firms tend to hoard capital as a result of

higher refinancing risk (Harford et al., 2014). Given these two argu-

ments we tend to explore whether CSR firms tend to extend more

trade or less trade credit. Specifically, in this article we consider CSR

firms as suppliers of trade credit.

Further, the search of the literature suggested only three studies,

Xu et al. (2020); Cheung and Pok (2019) and Zhang et al. (2014) that

investigate whether CSR has an effect on trade credit. Xu et al. (2020)

and Zhang et al. (2014) examine trade credit from the buyer's per-

spective, whereas Cheung and Pok (2019) examine trade credit from

the supplier's perspective. Furthermore, according to Dass et al.

(2015) and Fabbri and Menichini (2010), despite advancements in

research on trade credit demand and supply, it is still unclear which

factors impact suppliers' decisions to grant trade credit. As a result,

we approach trade credit from the standpoint of the supplier in this

study, thereby we are examining the relationship between CSR and

accounts receivable rather than CSR and accounts payable.

The present study makes following contributions. First, we look

at trade credit from the supplier's perspective thereby explaining why

CSR may affect the suppliers' willingness to provide trade credit. Fur-

ther, endeavour we examine both the trust and cash holding channel

through which CSR may affect trade credit. Second, most of the prior

literature have used CSR score as a proxy for CSR expenditure

(Cheung & Pok, 2019; Lys et al., 2015; Servaes & Tamayo, 2013),

however as argued by Bhattacharyya and Rahman (2019) that “CSR

score does not indicate the level or amount of CSR expenditure. Since

Received: 27 July 2021 Revised: 9 June 2022 Accepted: 15 June 2022

DOI: 10.1002/pa.2830

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https://doi.org/10.1002/pa.2830