Empirical Analysis of CSR Requirements in India

Professors Dhammika Dharmapala
and Vikramaditya
have posted an interesting paper on SSRN that is titled “The Impact of Mandated Corporate
Social Responsibility: Evidence from India’s Companies Act of 2013
”, the
abstract of which is as follows:
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-or-explain” basis) that firms satisfying
specific size or profit thresholds spend a minimum of 2% of their net profit on
CSR. We examine effects along a number of different dimensions including firm
value, CSR spending, and other outcomes, as well as exploring broader
theoretical implications. 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.
A longer summary of the paper is
available on the Oxford
Business Law Blog

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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