The impact of mandated corporate social responsibility: Evidence from India’s Companies Act of 2013

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Firms' Corporate Social Responsibility (CSR) activity has become the subject of a large literature in recent years. This paper analyzes CSR activity using quasi-experimental variation created by Section 135 of India's Companies Act of 2013, which requires (on a "comply-orexplain" basis) that firms satisfying specific size or profit thresholds spend a minimum of 2% of their net profit on CSR. Our analysis uses financial statement and stock price data on Indian firms from the Prowess database, along with hand-collected data from firms' disclosures of CSR activity. By combining a regression discontinuity (RD) framework (based on a nonparametric local polynomial regression approach) with a standard event study, we find a negative and substantial effect on the value of affected firms (relative to unaffected firms) around the crucial event date. This effect seems to be concentrated among firms that are less customer-facing, as indicated by low advertising expenditures. Using a difference-in-difference approach, we find significant increases in CSR activity among firms affected by Section 135, especially in the fraction of firms engaging in CSR spending. The fraction of firms subject to Section 135 that engage in advertising expenditures appears to have declined, consistent with substitution between advertising and CSR. There is no robust evidence of any significant impact on sales or accounting performance, although a modest decline in the return on assets cannot be ruled out. For a subset of large firms, we hand-collect comprehensive CSR data and find that while firms initially spending less than 2% increased their CSR activity, large firms initially spending more than 2% reduced their CSR expenditures after Section 135 came into effect. We explore various explanations for this presumably unintended consequence of Section 135, and also seek to derive some wider implications of this analysis for understanding the role of CSR. Terms of use: Documents in EconStor mayJEL-Codes: K220.Keywords: corporate social responsibility, India, company law, event study. (2014) argue that exogenous improvements in governance lead to reduced growth in CSR spending. They use the 2003 tax reform in the US (that reduced tax rates on dividends) as source of variation in insider ownership. They also find that close shareholder votes (just above 50%) for measures that improve governance lead to slower CSR growth. On the other hand, Ferrell, Liang and Renneboog (2014) use a dataset of...

Mandatory corporate social responsibility in India and its effect on corporate financial performance: Perspectives from institutional theory and resource‐based view

“…Only from early 1990s CSR activities in India were given due importance by both corporates and policy makers alike (Sarkar & Sarkar, ). While CSR spending has largely been voluntary in most parts of the world, in India, Section 135 of the Companies Act 2013 made CSR mandatory and legally binding on corporate firms with effect from April 1, 2014, requiring them to spend 2% of their net profits for socially beneficial activities and projects as per Schedule VII of the act (Dharmapala & Khanna, ).…”

Corporate Responsibility in India: Academic Perspectives on the Companies Act 2013

“…According to authors embracing this position, past contributions by many firms were substantially higher than 2%, thus, inadvertently lowering CSR investments. In line with this argument, a philanthropic or benevolent commitment to society is reduced to a CSR tax [63][64][65][66]68,90,97]. Accordingly, an unintended consequence may be a shift from quality to quantity, or from long-term societal commitments to short-term projects and programs [63,64,68,90,97].…”

“…According to the literature, there are multiple advantages associated with embedding CSR in a firm in this way. First, integrating CSR into the core operations of business will capitalize on corporate know-how and enable initiatives to leverage existing management and strategic capacities [53,54,59,68,78,89,110,111,113]. Second, the Act compels firms to embed economic, social, and environmental objectives into their core business strategy, projects, and processes [45,69,70,86,87,105,107], which results in improved stakeholder relations and new business opportunities [58,67,68,90,92,97,105], competitive advantage [75,104,105], or enhanced efficiency relating to CSR activities [45,69,78,107].…”

“…First, integrating CSR into the core operations of business will capitalize on corporate know-how and enable initiatives to leverage existing management and strategic capacities [53,54,59,68,78,89,110,111,113]. Second, the Act compels firms to embed economic, social, and environmental objectives into their core business strategy, projects, and processes [45,69,70,86,87,105,107], which results in improved stakeholder relations and new business opportunities [58,67,68,90,92,97,105], competitive advantage [75,104,105], or enhanced efficiency relating to CSR activities [45,69,78,107]. By enforcing the disclosure of CSR practices, the Act furthermore promotes transparency and accountability [47,61,63,64,69,76,88,89,97,105,109,117], and it assists in unifying sporadic CSR activities by standardizing procedures [59,77,…”

Facilitating Financial Sustainability: Synthesis Report

“…Specifically, CSOs face a diverse range of contextual factors in their environment which challenge their capacity for strengthening financial sustainability. Social stigma, poor economic conditions, restrictive government regulations, lack of local culture of philanthropy, taxation regimes, competition between CSOs, and lack of access to skilled labor, all limit the ability of a CSO to operate independently (VanSant 2003;Leon 2001;Dharmapala and Khanna 2016). Furthermore, internal dynamics such as organizational culture, management capacities, internal governance structures, and financial planning mechanisms can severely impact an organizations' ability to build financial sustainability (Lewis, 2017;Muriithi 2014;Omeri 2015).…”