Slack resources, free cash flow and corporate social responsibility expenditure: evidence from an emerging economy

Abstract

PurposeThe purpose of this study is to investigate whether financial resource allocation decisions for corporate social responsibility (CSR) depends on slack resources and free cash flow.Design/methodology/approachThe study's sample consists of 202 company-year observations from 51 financial institutions over the period 2015–2019. The authors collected CSR data from CSR review reports published by the Central Bank (Bangladesh Bank). The financial and governance data are collected from corporate annual reports and year-end review reports published by the Dhaka Stock Exchange. This study uses both the random-effect and generalized estimating equation models to test the hypotheses.FindingsThe authors establish two key findings consistent with the predictions of slack resource theory and free cash flow theory. First, the authors find a significant and positive relationship between slack resources and CSR expenditure. This result also supports the traditional thinking about corporate giving – that doing well enables doing good. Second, the author show that increases in free cash flow are associated with increases in CSR expenditure. This indicates the presence of agency problems between managers and shareholders regarding CSR expenditure.Originality/valueThis study is the first to show the positive impacts of slack resources and free cash flow on CSR expenditure in an emerging economy characterized by both capital constraints and high salience of CSR expenditure. The study has important implications for regulators, advocacy groups, shareholders and analysts in emerging economies that share similar contextual characteristics.