Dhammika Dharmapala on Mandated Corporate Social Responsibility and India’s Companies Act of 2013
The Impact of Mandated Corporate Social Responsibility: Evidence from India’s Companies Act of 2013
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.