The Impact of Mandated Corporate Social Responsibility: Evidence from India's Companies Act of 2013

36 Pages Posted: 3 Nov 2016 Last revised: 13 Sep 2018

See all articles by Dhammika Dharmapala

Dhammika Dharmapala

University of Chicago Law School

Vikramaditya S. Khanna

University of Michigan Law School

Multiple version iconThere are 3 versions of this paper

Date Written: September 8, 2018

Abstract

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 on CSR spending and related outcomes, as well as exploring broader theoretical implications. Our analysis uses financial statement data on Indian firms from the Prowess database, along with hand-collected data from firms’ disclosures of CSR activity. Using a difference-in-difference approach, we find significant increases in CSR activity among firms affected by Section 135, especially along the extensive margin (i.e. in the fraction of firms engaging in CSR spending). The fraction of firms subject to Section 135 that engage in advertising expenditures declines, consistent with substitution between advertising and CSR. 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.

Keywords: Corporate social responsibility, India, Company law, Event study

JEL Classification: G38, K22, M14

Suggested Citation

Dharmapala, Dhammika and Khanna, Vikramaditya S., The Impact of Mandated Corporate Social Responsibility: Evidence from India's Companies Act of 2013 (September 8, 2018). U of Chicago, Public Law Working Paper No. 601, University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 783, U of Michigan Law & Econ Research Paper No. 16-025, U of Michigan Public Law Research Paper No. 526, Available at SSRN: https://ssrn.com/abstract=2862714 or http://dx.doi.org/10.2139/ssrn.2862714

Dhammika Dharmapala (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Vikramaditya S. Khanna

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-615-6959 (Phone)

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