A vast literature on firms’ Corporate Social Responsibility (CSR) activity has emerged in recent years across a number of scholarly disciplines, including law, economics, management, accounting, and finance. Our paper “The Impact of Mandated Corporate Social Responsibility: Evidence from India’s Companies Act of 2013” analyzes the impact of exogenously mandated CSR requirements on firm value, CSR activity, and various other outcomes such as advertising expenditures, sales revenue, and accounting performance. It uses quasi-experimental variation created by Section 135 of India’s Companies Act of 2013, which requires (on a comply-or-explain basis) that firms satisfying certain size or profit thresholds spend at least 2% of their income on CSR activity. The thresholds for the application of Section 135 are based on revenue, net profits and net worth; however, it is typically the net profit threshold (set at Indian Rupees (INR) 50 million) that is binding. The law also requires that firms above the threshold establish a CSR Committee of the Board of Directors, which is responsible for formulating the firm’s CSR policy, for CSR spending, and (where applicable) for explaining why the firm failed to achieve the 2% target.
The Companies Act of 2013 was enacted on 29 August 2013, and came into effect for the 2015 fiscal year (ending on March 31, 2015). The bill underwent extensive discussion and debate over a number of years prior to final enactment. The notion that firms would be encouraged to voluntarily undertake CSR was first mooted in late 2009. The first announcement of a mandatory CSR requirement for firms above the threshold was made on August 6, 2010. Subsequent media reports suggested that this measure would be weakened to a comply-or-explain obligation, of the sort that was included as part of the bill in July 2011 (and ultimately enacted in 2013).
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. To address the effect on firm value, we combine a standard event study methodology with a regression discontinuity (RD) design based on the INR 50 million net profit threshold. We compute abnormal returns around the relevant event dates, using stock price data from the Prowess database. Then, we compare abnormal returns for firms just above the net profit threshold with those for firms just below the threshold, using a nonparametric local polynomial regression approach to implement our RD framework.
On the first event date (August 6, 2010), we find a substantial decline – of about 2.6% to 3.3% – in the value of firms subject to the CSR requirement (which at that time was expected to be mandatory, rather than a comply-or-explain obligation). This magnitude is somewhat larger than the amount of CSR spending that the provision required, possibly reflecting compliance and disclosure costs. The effect seems to be concentrated among firms that are less customer-facing, as indicated by low advertising expenditures. The size of the effect suggests that private returns to CSR activity are quite small for firms around the threshold.
We also use financial statement data from Prowess to construct proxies for CSR spending over 2012-2015. 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 (from Business Responsibility disclosures that these firms were required to make by India’s securities regulator). We 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.
Our paper also explores broader theoretical implications, arguing that Section 135 provides both a new source of quasi-experimental evidence and highlights the need for new conceptual frameworks to understand CSR.
Dhammika Dharmapala is the Julius Kreeger Professor of Law at University of Chicago Law School, and Vikramaditya Khanna is the William W. Cook Professor of Law at the University of Michigan Law School