The Politics of Mandatory Corporate Philanthropy

Abstract

India requires certain companies to disclose corporate social responsibility (CSR) expenditures and meet CSR targets. However, these firms cannot classify political donations as CSR. I argue that firms belonging to business groups, which are politically dependent and have opaque corporate governance, substitute between CSR and political donations. Business group members are less likely to meet CSR targets and reduce CSR spending around elections in their headquarter state. Consistent with the substitutability thesis, these firms increase measures of official and illicit political donations around elections. The staggered and pre-determined timing of state elections supports a causal interpretation of this substitution effect.

Keywords: Corporate social responsibility, political business cycles, India, agency costs

JEL Classification: G32, G38, K22, M14