Does A Government Mandate Crowd Out Voluntary CSR - Evidence From India

DOI: 10.1111/1475-679X.
12461
Journal of Accounting Research
Vol. 61 No. 1 March 2023
Printed in U.S.A.
Does a Government Mandate

Crowd Out Voluntary Corporate
Social Responsibility? Evidence
from India
S H I VA R A M R A J G O PA L ∗ A N D P R A S A N N A TA N T R I †
Received 13 August 2019; accepted 4 January 2022
ABSTRACT
This study investigates the implementation of a Government of India man-

date that requires firms to spend at least 2% of their profits on corporate so-
cial responsibility (CSR). The results show that qualifying firms that voluntar-
ily engaged in CSR before the mandate reduce their CSR spending afterward.
Despite increasing advertisement expenditure likely to offset the lost signal-
ing value of voluntary CSR, stock prices and operating performance of former
voluntary CSR spenders who qualify under the law decline. Our results sug-
∗ Department of Accounting, Columbia University Graduate School of Business; † Indian

School of Business
Accepted by Christian Leuz. We thank an anonymous associate editor and an anonymous
referee for helpful suggestions. We also thank Sakshi Gabba, Sharad Hotha, Gautham Kan-
thasamy, Saiharsha Katuri, Aditya Murlidharan, Shradhey Prasad, and Nishka Sharma for ex-
cellent research assistance. We acknowledge helpful comments from Ray Ball and workshop
participants at Booth School of Business, University of Chicago. We also acknowledge help-
ful comments from David Yermack and Conference participants at NYU-IIM C India Confer-
ence. We are grateful to the Center for Analytical Finance, Indian School of Business, for
providing the data and the necessary financial assistance for this project. Rajgopal thanks
the Columbia Business School for financial support. We have no conflict of interest to dis-
close. Any remaining errors are ours. An online appendix to this paper can be downloaded at
https://www.chicagobooth.edu/jar-online-supplements.
415
© 2022 The Chookaszian Accounting Research Center at the University of Chicago Booth School of
Business.
1475679x, 2023, 1, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/1475-679X.12461 by <Shibboleth>[email protected], Wiley Online Library on [20/06/2023]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
416 s. rajgopal and p. tantri
gest that regulatory intervention in CSR can both diminish its signaling value
and lead to a reduction in voluntary CSR spending.
JEL codes: D22, H23, M14, M40, M41, M48

Keywords: government mandate; CSR; signalling; Indian Companies Act
2013
1. Introduction
Governments in several countries have begun playing an active role in
corporate social responsibility (CSR). Some have nudged corporations to
spend funds on CSR, whereas others have moved to mandate disclosures.1
A few countries, such as India (Manchiraju and Rajgopal [2017], Dharma-
pala and Khanna [2018]) and Indonesia (Waagstein [2011]), have gone a
step further by promulgating laws that make not only disclosure but also
spending on specified CSR activities mandatory. We study the Indian CSR
mandate in this paper.
A significant part of the current academic debate on CSR is centered
around firms’ motives underlying voluntary CSR and the value conse-
quences thereof (see Orlitzky, Schmidt, and Rynes [2003], McWilliams,
Siegel, and Wright [2006], Margolis, Elfenbein, and Walsh [2009], Per-
rini et al. [2011], Kitzmueller and Shimshack [2012]). Christensen, Hail,
and Leuz [2021], however, point out that most extant studies that have ex-
amined voluntary CSR are subject to selection issues. Furthermore, most
CSR-related regulations worldwide only mandate disclosure; therefore, an
analysis of the impact of forced CSR spending in India can help shed light
on the motives behind voluntary CSR spending.
In particular, the Government of India forces “eligible”firms to spend at
least 2% of average net profits of the immediately preceding three financial
years (calculated in India as April 1 to March 31 of the subsequent year) on
CSR. The eligibility threshold is either INR2 50 million in annual profits,
INR 5 billion in net worth, or INR 10 billion in sales. Firms that exceed
one or more of these thresholds are subject to the 2% CSR spending rule.
We focus on firms that voluntarily spent more than the minimum 2% limit
before the law was passed.
1 Recently, the European Union member states have agreed to pass a legislation re-
quiring corporations to report their CSR activities in detail. Similar laws have been
passed or are being contemplated in countries such as China (Chen, Hung, and Wang
[2018]) and Canada. Source: https://www.theguardian.com/sustainable-business/eu-
reform-listed-companies-report-environmental-social-impact; http://corporatejustice.org/;
http://corporatejustice.org/news/1174-getting-non-financial-reporting-right-eu-
commission-guidelines-clarify-expectations-towards-business; https://www.globalreporting.
org/information/policy/Pages/EUpolicy.aspx; https://mastereia.wordpress.com/2014/04/
10/mandatory-environmental-corporate-social-responsibility-can-canada-become-a-leader/;
https://www.greenbiz.com/news/2009/01/07/mandatory-csr-reporting-denmarks-largest-
companies
2 INR stands for Indian Rupee.
evidence from india 417
The CSR law imposed by India is relatively stringent in terms of its in-
tent and enforcement, and the mandate requires that a firm’s board jus-
tify any failure to comply with the CSR requirement (the “comply or ex-
plain”model). However, the law does not specify what can be considered
a reasonable explanation, creating room for ambiguous interpretations of
such explanations by officials of the Ministry of Corporate Affairs (MCA).
More importantly, the law elevates the responsibility of CSR spending from
management to the board. Therefore, the violation of the CSR require-
ment is considered a nonfulfillment of directors’ duties.
If the law is effective, we expect firms that spent less than 2% before
the mandate (labeled “low-CSR firms”) to spend close to 2% of profits after
as well. We find this result in the data. However, the expected reaction of
firms that spent more than 2% (labeled “high-CSR firms”) in the premandate
period is not clear ex ante. We expect high-CSR firms to cut spending in the
postmandate period if (1) the mandate dilutes the underlying motive for
voluntary CSR spending, (2) alternative avenues of satisfying such a motive
become relatively more attractive, or (3) 2% is seen as society’s new norm
for CSR spending. Otherwise, the voluntary spending of high-CSR firms
should not decline.
Data on voluntary CSR spending are drawn from the Prowess database
maintained by the Center for Monitoring Indian Economy (CMIE). In ad-
dition, we obtain data on mandated CSR spending from the MCA. In uni-
variate tests, we find that high-CSR firms significantly reduce their average
annual CSR spending from 10.8% of profits before the mandate to around
3.6% of profits after the mandate. On the other hand, as expected, low-CSR
firms increase their CSR spending from 0.7% of profits before the man-
date to 2.2% of profits after the mandate. As several new firms are forced
to spend on CSR, the overall level of spending on CSR increases by 82% in
the postmandate period.
The ideal identification strategy is unfortunately not available to us. Both
high- and low-CSR firms are “treated”in an experimental sense as the 2%
law applies to both these types of firms. Furthermore, comparing the entire
mandated group as treated with the nonmandated control group would not
work well because the postmandate incentives of high- and low-CSR firms
within the mandated group differ.
Therefore, in our baseline difference-in-difference (diff-in-diff, hence-
forth) analysis, the treated (control) firms are those that are (not) man-
dated to invest in CSR, within the sample of high-CSR firms (see figure 1).
Because both the treated and control group firms already spend more than
2% on CSR, none of the firms in the sample needs to alter their CSR spend-
ing solely to comply with the law. Thus, we can identify actions that are not
solely driven by compliance requirements. The dependent variable in our
research design is the magnitude of CSR spending at a firm-year level. Our
focus is on the interaction between the postmandate indicator variable and
the indicator variable representing firms required to spend on CSR. We
test for the existence of pretrends. We acknowledge that the nonmandated
Fig 1.—Comparison between mandated and nonmandated firms within subsamples. This fig-
ure depicts the identification strategy. High (low) CSR spenders are those that spend more
(less) than 2% of their average three-year profits on CSR in the premandate period. The
firms that are required by law to spend on CSR form the mandated group and those that are
not so required form the nonmandated group.
group is likely to react to the actions of the mandated group; hence, we can
only measure the relative effect across the two groups and not the complete
causal effect of the mandate.
We find a statistically significant 29.78% decline in CSR spending in the
postmandate period in a diff-in-diff sense between the treated and control
firms. This is an economically meaningful decline from the premandate
average level of INR 26.42 million among the mandated high-CSR firms.
These inferences continue to hold when we use a triple interaction frame-
work with all three margins (timing of the mandate, mandate eligibility,
and premandate CSR spending) considered together.
Next, we examine the impact of the mandate on firm value and oper-
ating performance. Manchiraju and Rajgopal [2017] show that the CSR
mandate leads to a negative stock price reaction. In line with their finding,
we observe that the further strengthening of the CSR law leads to a 1.2%
negative stock price reaction during three days around the event date. Fur-
ther, we also detect a 2.63% decline in return on equity (ROE) and close
to a 1% decline in return on assets (ROA). Total revenues do not change
significantly.
We proceed to explain the combination of the cut in CSR spending
among high-CSR firms and the concurrent loss of market value and op-
erating performance. A combined reading of our results suggests that
unconstrained CSR spending added shareholder value to the firm. A naïve

expectation would suggest that a decline in an item of expenditure should
improve valuations and operating performance. However, when an expen-
diture that used to add value loses its ability to do so as a result of gov-
ernment intervention, its reduction could coincide with a decline in share-
holder valuation and overall operating performance.
Why do high-CSR firms reduce CSR expenditure after the mandate? A
possible reason is that achieving differentiation at a given level of CSR
spending becomes difficult after the regulation. Consider a firm that dis-
tinguished itself by spending 4% of its profits on CSR before the mandate
when most other firms spent close to nothing. In the postmandate period,
many firms now spend upwards of 2% on CSR; therefore, the firm spending
4% becomes less differentiated relative to others. Consequently, maintain-
ing CSR spending at the same level as before the mandate could become
less valuable for mandated high-CSR firms.
Such high-CSR firms now have two options. The first is to increase their
voluntary spending on CSR to achieve the same level of differentiation as
before. The additional expenditure must be at least 2% of their profits,
which would increase their CSR spending by at least a further 2 percent-
age points. Thus, the firm spending 4% in the previous example would
have to increase its CSR spending to at least 6% of its profits; however, we
do not observe such an increase in the data. We conjecture that spending
an additional 2% of profits on CSR may not be viable in a large number
of formerly high-CSR cases because of the nonavailability of meaningful
CSR projects requiring such additional expenditure. Thus, some additional
spending may become wasteful.
In addition, it is possible that the incremental spending required to main-
tain differentiation may be even higher than an additional 2% of profits for
several reasons. First, some excess spending over 2% may be seen as a buffer
against a strict interpretation of what is considered CSR by the MCA. Sec-
ond, compliance costs are now higher in the postmandate period because
of the need to seek board approval for CSR-related projects and reduced
flexibility as a consequence of the obligation to spend on CSR every year.
Finally, the possibility that CSR projects may not be perfectly divisible into
“2%” and “above-2%” components further increases compliance costs in
proportion to the overall CSR spending and not just the mandated spend
level. Thus, even when meaningful CSR projects are available at a higher
level of spending, the net benefit from CSR may not be worth the total
expenditure, inclusive of the additional compliance costs.
Even those stakeholders who previously used a simple heuristic of differ-
entially identifying firms that spent on CSR compared to those who did not
spend, irrespective of the magnitude of spending, may find it challenging
to use the above metric when a large number of former nonspenders initi-
ate CSR spending because of the mandate. Finally, the compliance-induced
costs and the need to maintain a buffer may create uncertainty in the minds
of stakeholders, who used a simple ranking of firms based on allocation to

CSR to evaluate social impact.
The second option such firms have is to seek a substitute for voluntary
CSR and reduce their CSR spending to 2% of their profits. By revealed
preference, the substitute is likely to be less valuable when compared to un-
constrained CSR. Such a substitute either (1) leads to worse outcomes—for
example, lower revenues—at the same level of spending as voluntary CSR,
or (2) requires a higher level of spending to achieve the same outcome.
However, as long as CSR adds value, high-CSR firms may opt for such a sub-
stitute and reduce their CSR spending to the minimum required 2% level.
Our results support this interpretation. Here, we draw a parallel between
our setting and the one studied by Bushee and Leuz [2005], who document
that Over-the-Counter-Bulletin-Board (OTCCB) firms opt out of the quo-
tation service when faced with additional compliance costs, although being
in OTCCB was beneficial before such an increase. We explore further to
understand whether mandated high-CSR firms opt for a substitute for CSR.
Because the source of the strategic value of CSR that is diluted because of
the mandate and the substitute for CSR are likely to be closely related, we
investigate the two together. First, we examine the CSR sections of firms’ an-
nual reports and social media postings. We find a significant (1) decline in
the number of CSR communications in general, (2) decrease in the num-
ber of words in these communications that conveyed product or service
quality, (3) decrease in words that signaled virtue, and (4) aincrease in the
standardization of CSR communication. Second, mandated high-CSR firms
that reduce CSR expenditure significantly increase advertising expenditure
after the 2% rule. Moreover, the rupee increase in advertising expenditure
is similar to the rupee decline in CSR expenditure for the mandated high-
CSR firms. The results suggest that voluntary CSR creates value by signaling
high product quality and virtue.
The results relating to the loss of value suggest that voluntary CSR, as
opposed to advertising, is more effective at simultaneously communicat-
ing product quality and virtue (Kotler and Lee [2008], Kausar, Shroff, and
White [2016]). Treated firms suffer a decline in operating expenditure and
not revenue, suggesting that they incur additional expenses beyond a one-
to-one replacement of CSR by advertisement expenditure to maintain the
same level of revenue. Given the lack of granular data, we are not able to
detect such additional spending.
In our subsequent analysis, we consider alternative strategic channels for
CSR impact. One possibility is that customers were willing to pay more for
products or services of firms that previously spent voluntarily on CSR, and
such willingness was reduced after the mandate. In this customer overpay-
ment channel, customers value CSR for its own sake and see overpaying
for the products of firms engaging in voluntary CSR spending as a part
of their own social responsibility; in other words, they need not see CSR
spending as a signal of higher product quality or virtue. Another possibility
is that some workers were willing to work for lower wages for firms spending
voluntarily on CSR. The motivation behind this channel, known as the la-
bor donations channel, and the reason for its dilution are the same as those
of the customer overpayment channel. We rule out these two explanations
by investigating pricing and wages before and after the mandate. However,
we do not observe a significant change in either product pricing or wages
after the mandate.
An alternative explanation is that firms that used to “overspend” on CSR
to avoid public and private political intervention reduce their CSR spend-
ing after the mandate when they learn about the expected level of CSR
spending. However, the data suggest that firms likely to be highly impacted
by political intervention do not cut spending on CSR any more than other
firms. Thus, we rule out the above explanation.
We cannot rule out the possibility that voluntary CSR is partly motivated
by stakeholder altruism (Reinhardt, Stavins, and Vietor [2008], Bénabou
and Tirole [2010]), managerial moral hazard (Cheng, Hong, and Shue
[2013], Masulis and Reza [2014]), or the revelation of the broader society’s
expectations related to CSR spending through the mandate.3 We interpret
our four empirical findings (a decline in voluntary CSR spending, negative
impact on valuations and operating performance, changes in CSR com-
munications, and the replacement of CSR by advertisements) as evidence
consistent with the thesis that firms consciously use CSR to signal quality
and virtue, potentially in addition to other motives.
1.1 related literature

Our paper contributes to the literature on the strategic value of spending
on CSR (Blacconiere and Northcut [1997], Dhaliwal et al. [2011], Deng,
Kang, and Low [2013], Cheng, Ioannou, and Serafeim [2014], Dimson,
Karakaş, and Li [2015], Flammer [2015], Christensen et al. [2017], Elliott,
Grant, and Rennekamp [2017], Lins, Servaes, and Tamayo [2017]). Our re-
sults show that CSR has a strategic value that is diluted when a government
mandates CSR spending. Because a reduction in CSR spending by high-
CSR firms is a consequence of a government mandate in our setting, the
impact of the endogeneity of CSR spending highlighted by Christensen,
Hail, and Leuz [2021] is likely to be lower in our study.
Manchiraju and Rajgopal [2017] and Dharmapala and Khanna [2018]
also study the short-term stock price impact on the passing of the manda-
tory CSR rule in India. In the present study, we focus on the impact of the
mandate on actual CSR spending and show that erstwhile high spenders cut
their CSR spending postmandate. More importantly, we examine plausible
motives behind voluntary CSR spending and suggest that, unlike advertis-
ing, voluntary CSR uniquely signals both virtue and product quality.
3 Note that the public and private political intervention that we ruled out in the previous
paragraph is based on the expectations of some segments of society, that is, government and
organized civil society.
The literature on the adoption of voluntary audits (Lennox and Pittman

[2011], Dedman and Kausar [2012], Kausar, Shroff, and White [2016])
and International Financial Reporting Standards (IFRS) (Hung and Subra-
manyam [2007], Kim, Tsui, and Cheong [2011], Florou and Pope [2012],
Daske et al. [2013]) points out that an action is likely to have positive sig-
naling value when undertaken voluntarily. This literature shows that infor-
mation conveyed to capital providers by voluntary actions can reduce fi-
nancing frictions, improve loan terms from banks, increase liquidity, and
provide several other benefits. This literature inspires our inquiry into the
signaling value of voluntary CSR. Similar to the above cited studies, we find
that voluntary CSR spending is valuable, possibly because it sends positive
signals about a firm’s quality and virtue. Finally, that literature inspires the
idea that a mandate to spend on CSR could reduce firms’ ability to differ-
entiate themselves through voluntary CSR spending.
2. Institutional Background and the Event

Section 135 of the Indian Companies Act of 2013 mandates that firms
above a specific threshold (defined in terms of net worth, sales, and
profits) must spend 2% of their average past three years’ profit on CSR
activities. The eligibility threshold is defined as either INR 50 million
(USD 0.78 million)4 in profits, INR 5 billion (USD 0.078 billion) in net
worth, or INR 10 billion (USD 0.156 billion) in sales. Before the decree,
firms were required only to disclose spending as per existing accounting
standards. Every firm covered by the mandate is required to establish a CSR
policy. Although the Companies Act came into force on August 29, 2013,
the CSR mandate was made effective in the financial year 2014–15 (i.e., the
year beginning April 1, 2014). We are not aware of any economically mean-
ingful reason for fixing the limit at 2%; it appears that the government
selected a round number for simplicity.
The law requires noncompliant firms to explain, in their annual reports,
the reasons behind their noncompliance. However, the law does not specify
guidelines to determine whether an explanation is valid, leaving room for
regulatory discretion in the interpretation of these explanations: The Act
defines CSR broadly but leaves the details to the boards of individual firms
(see Manchiraju and Rajgopal [2017] for information about the specific
provisions). Under the new law, the responsibility to manage CSR spending
rests with the board and not with the management.
To date, the MCA has issued show-cause notices to more than 1,000
firms, charging them with violations of the CSR law.5 Notices have been
issued even when firms have preferred to explain rather than to comply on
4 We assume an exchange rate of INR 63 to USD 1, which was prevalent when the Act
was passed.
5 https://www.financialexpress.com/industry/government-issued-notices-to-1018-firms-
for-csr-non-compliance/589099/
the grounds that the stated explanations were unsatisfactory. Section 135,
which imposes mandatory CSR spending, does not impose penal provi-
sions if the spending mandate is violated; however, the MCA has charged
allegedly noncompliant firms under Section 134, which specifies directors’
responsibilities for financial statements and includes strict penal provisions.
Although in theory, mandatory CSR works on a “comply or explain”model,
in practice, it is safer for Indian companies to comply rather than explain.
3. Data, Variable Definition, and Sample Construction

We use the Prowess database maintained by the CMIE for the preman-
date period. For the postmandate period, we use the MCA data for firms
covered by the ministry and the CMIE Prowess database in other cases.
Both these databases source information from the annual reports of firms.
Expectedly, both the data sets report the same rupee numbers for CSR out-
lays in most cases. As shown in table A1 in the online appendix, both the
5th and the 95th percentile thresholds of the difference between reported
CSR amounts in the two databases for a given firm are zero. We manually
check the reasons behind the differences between the two data sets in some
extreme cases. The MCA data set is more accurate in all cases. However, we
find data entry errors and incorrect round-offs of decimals in the Prowess
database in rare situations.6
Given these findings, we use the MCA database for the postmandate pe-
riod for the firms covered by the ministry. As the ministry does not maintain
premandate data and data for nonmandated firms, we have to rely on the
Prowess data set for (1) the premandate period CSR spending of all firms
and (2) pre- and postmandate period CSR spending of all nonmandated
firms. The ministry data are available for years 2014–15 to 2018–19.
Compilation of the data thus gathered gives us CSR spending at a firm-
year level. The variable thus created is labeled the “CSR amount.”Given the
data integrity issues at the extreme ends of the CSR spending distribution,
we winsorize the variable at 1% and 99% in our primary analysis. We pro-
vide variable definitions in table 1.7
3.1 sample construction

We report the details underlying the construction of the sample in
table 2. The Prowess database contains information on 43,051 firms, many
of which are shell companies that have potentially been established for
6 In one case, the Prowess database had omitted one part of CSR expenditure reported
in the annual report. In another case, the Prowess database used the budgeted CSR numbers
presented in the annual report rather than the actual amount spent. We provide five examples
of the largest deviations between these two databases in table A2 in the online appendix.
7 In table A3 in the online appendix, we list the variables used and their respective
data sources.
TABLE 1
Variable Definition
Variable Definition
High-CSR Firms Firms that spent more than a threshold, usually 2%, in terms of
CSR-to-profit ratio in the preregulation period. We also use other
thresholds. Profit here refers to the average profits of the previous
three years.
Low-CSR Firms Firms that spent less than a threshold, usually 2%, in terms of
CSR-to-profit ratio in the preregulation period.
Postregulation period Financial years 2014–15 and after.
Mandated Firms Firms that breach in any one or more of the criteria specified by
Section 135 of the Companies Act. These are INR 50 million in
profits; INR 5 billion in net worth; INR 10 billion in sales. The values
are arrived at based on annual averages in the premandate period.
CSR Amount INR spending on CSR. Preregulation period data come from Prowess;
Postregulation period data come from the ministry of corporate
affairs (MCA) for firms covered by them and from Prowess database
for other firms.
CSR Ratio The ratio between CSR and average profits after tax in the previous
three years.
Profits Profit after tax at a firm-year level
Net worth Book value of equity at a firm-year level.
This table presents the definitions of the key variables.
TABLE 2
Sample Construction
Variable Value
Firms in Prowess Database 43,051
Firms in Ministry Database 12,097
Firms in MCA that could be merged with Prowess 10,154
Firms in both the pre- and postmandate Period 39,309
Number of sample years 10
Total observations in the merged data set 236,044
Total observations with non-missing average CSR numbers in the 44,769
premandate period
Observations with CSR more than 2% of average three-year profits 16,251
Observations with CSR less than 2% of average three-year profits 28,518
Observations with CSR more than 7.5% of average three-year profits 6,873
This table shows the sample selection process. The column named “Variables” describes the category of
the sample, and the column called “Value” reports the size of the sample category.
money laundering.8 The MCA data set covers 12,097 companies, 10,154
of which we found in the Prowess database using the unique corporate
identity number (CIN) as the matching variable. Our sample starts from
8 http://www.firstpost.com/business/over-1-62-lakh-shell-companies-deregistered-over-
half-from-mumbai-delhi-hyderabad-3907583.html
the financial year 2009–10. The years between 2009–10 and 2013–14 are
labeled as the preregulation years. Years 2014–15 to 2018–19 comprise the
postmandate period; thus, we analyze a total of 10 years’ data. The table
shows that the merged data set contains 39,309 firms and 236,044 firm-year
observations with usable data in both pre- and postmandate periods.
We employ two additional filters. We exclude observations where CSR
information is missing instead of treating them as zeros because the rea-
son for the absence of these data points is unclear. We have data on CSR
spending for 44,769 of the 236,044 firm-year observations. Of these, 16,251
(28,518) observations belong to firm-years where the average preperiod ra-
tio between the amount spent on CSR and average past three years’ profits
is more than 2% (less than or equal to 2%). The table also lists the number
of observations for which the CSR-to-profits ratio is equal to or greater than
the 5%, 7.5%, and 10% thresholds.
4. Empirical Strategy and Results

4.1 univariate tests
We begin by calculating the CSR ratio, defined as the ratio between the
CSR amount and average profit before tax for the past three years for each
firm-year. We average the CSR ratio over the preregulation period. Firms
with an average CSR ratio of greater than 2% form the “high-CSR”group,
whereas firms below this threshold form the “low-CSR” group. As a further
robustness check, we use three other threshold cutoffs based on 5%, 7.5%,
and 10% of the past three years’ profits. Table 3 shows that the low-CSR
(high-CSR) firms, on average, spent 0.7% (10.8%) of profits on CSR before
the mandate.
In table 3, we find that the high-CSR firms cut back their spending on
CSR to 3.6% of their profits in the postmandate period. However, the low-
CSR firms increase CSR spending to 2.2% of their profits in the postman-
date period. In terms of INR value, the high-CSR firms reduce spending on
CSR from INR 26.42 million to INR 18.15 million. We further divide the
firms into smaller intervals and find similar results. For example, column
4 shows that firms that spent between 0% and 1% of their profits on CSR
before the intervention increase spending by 1.7 percentage points, on av-
erage, after the mandate. In column 6, we report that firms that used to
spend between 2% and 3% before the mandate maintain almost the same
level of spending even after the mandate. Interestingly, from column 7, we
find a significant decline in CSR spending after the mandate. In column
7, firms that used to spend between 3% and 4% in the premandate period
reduce spending to 3% in the postmandate period. In column 9, firms that
used to spend between 5% and 6% also reduce spending by 2.5 percentage
points in the postmandate period. A similar trend is seen in other columns
where we consider firms that used to spend a higher proportion of profits
on CSR in the premandate period.
426
TABLE 3
Univariate Comparison Between High- and Low-CSR Firms
Group-Based Pre-Period CSR Ratio
< 2% => 2% Zero 0–1 1–2 2–3 3–4 4–5 5–6 6–7 7–10 >10
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Pre 0.007 0.108 0.000 0.004 0.015 0.025 0.036 0.046 0.056 0.066 0.087 0.276
s. rajgopal and p. tantri
Post 0.022 0.036 0.024 0.021 0.024 0.026 0.030 0.036 0.031 0.038 0.050 0.103
Difference (Post − Pre) 0.014 −0.072 0.024 0.017 0.009 0.001 −0.006 −0.010 −0.025 −0.029 −0.037 −0.173
T-Stat −27.29 40.33 −11.12 −28.56 −8.07 −0.70 2.49 2.67 6.81 5.10 8.00 24.78
Number of Observations 20,758 31,017 2,878 15,040 5,718 3,079 1,975 1,501 1,031 676 1,230 4,857
This table presents univariate comparisons between the high-CSR and the low-CSR firms. CSR ratio, as defined in table 1, is the dependent variable. The sample is restricted to
firms that earn positive profits across all the sample years. Firms are grouped based on their preregulation spending on CSR. Column 1 (2) considers firms that spent less than (more
than or equal to) 2% of three years’ average profits before the mandate. Column 3 considers firms that spent nothing on CSR in the premandate period. Column 4 considers firms
that spent between 0 to 1 percent of the previous three years’ average profits in the pre-regulation period. Similarly, each column considers a progressively higher range. The table
presents a comparison of the difference between preregulation and postregulation average expenditure on CSR and also reports the t-statistics. ***, **, and ∗ represent significance
at the 1%, 5%, and 10% levels, respectively.
4.2 difficulty with comparing high- and low-csr firms

A potential empirical strategy is a diff-in-diff test within the set of firms
subject to the 2% mandate where the high-CSR firms (low-CSR firms) are
designated as the treated (control) group. One problem with this strategy
is that both the treated and control groups are directly impacted by the
mandate, although in opposite directions. The univariate results presented
in table 3 clearly show that the high-CSR firms cut their spending on CSR,
whereas the low-CSR firms increased their spending. Therefore, it is diffi-
cult to deduce whether our results are attributable to (1) an increase in
spending by the control group or (2) a decline in spending by the treated
group. Hence, we do not use this identification strategy. A second strategy
of comparing the entire mandated group as the treated class and the entire
nonmandated group as the control class does not work either because the
high- and low-CSR firms behave differently within the mandated group.
4.3 mandated versus nonmandated within high-csr firms

To test the response of the high-CSR firms to the mandate, we adopt an
identification strategy that compares mandated and nonmandated firms
within the high-CSR group. The mandate applies only to those firms that
satisfy at least one of the qualifying criteria described in section 2. We con-
sider such firms as the treated group. We acknowledge that nonmandated
firms will have to consider the reaction of mandated firms while formulat-
ing their plans. Hence, our tests can only capture the incremental effect on
the treated firms relative to the control sample and not the complete causal
effect of the mandate.
We conduct a diff-in-diff comparison between the mandated and non-
mandated groups of high-CSR firms (figure 1), estimating the following
standard diff-in-diff regression equation:
Yit = α + β1 ∗ P ostt ∗ Treat menti + β2 ∗ Xit + β3 ∗ θi + β4 ∗ γt + it . (1)
The dependent variable is the amount (in INR) of CSR expendi-

ture incurred by a firm i in the year t . In some specifications, we
scale the CSR amount using total assets. The variable P ostt is a dummy
variable, which takes the value of one for postregulation years and zero
otherwise. Treat menti is a dummy variable that takes the value of one if a
firm satisfies at least one of the three CSR mandate conditions based on
the average values during the premandate years and zero otherwise. Firms
that do not satisfy any of the qualifying conditions of the 2% rule form the
control group. θi denotes firm fixed effects that account for the influence
of time-invariant firm-level factors. γt denotes year fixed effects that absorb
the general time trend. The natural logarithm of the levels of profits and net
worth are the control variables included in the vector Xit . We use net worth
as a proxy for size because of better data coverage when compared to the
available data on sales. The standard errors are clustered at the industry
level and adjusted for heteroskedasticity.
The results are reported in panels A and B of table 4. The CSR amount
is the dependent variable in panel A. We focus on the interaction between
the P ostt and Treat menti variables to ascertain the impact of the mandate
in a diff-in-diff sense. In columns 1 and 5, we use the 2% threshold to de-
fine high-CSR firms. We find a sharp decrease in the difference between
the treatment and control firms in the postregulation period compared
to the difference in the preregulation period. The magnitude of the de-
cline is INR. 7.87 million, which is 29.78% of the average CSR amount in
the premandate period. Therefore, the fall is economically meaningful. We
present the results with higher thresholds of 5% (columns 2 and 6), 7.5%
(columns 3 and 7), and 10% (columns 4 and 8) of past profits. The results
strengthen with an increase in the threshold spending levels, suggesting
that voluntary high spenders cut CSR spending significantly in response
to the CSR mandate. In panel B, we use the ratio between CSR amount
and total assets as the dependent variable. Column 1 shows that the ra-
tio decreased by 14 basis points. The decline represents an economically
meaningful 32.57% of the premandate levels.
To test whether the treated firms drive the impact, we compare the pre-
and postmandate periods for the sample of mandated high-CSR firms only,
estimating the following regression equation:
Yit = α + β1 ∗ P ostt + β2 ∗ Xit + β3 ∗ θi + it . (2)
All the terms have the same definitions as in equation (1). We cannot
include year fixed effects because the tests compare pre- and postperiod
expenditure. The results are reported in panels A and B of table A4 of
the online appendix. In column 1, in which we limit the sample to firms
spending at least 2% of their profits on CSR, the CSR spending declines
by about INR 7.63 million after the mandate, which is a 28.87% decrease
from the average CSR amount in the premandate period. We find similar
results even when we use the ratio between CSR amount and total assets
as the dependent variable in panel B. These results show that almost all
of the decline in CSR spending documented in table 4 is driven by the
treated group.
We perform the same diff-in-diff analysis as in equation (1) between
the mandated and nonmandated low-CSR firms. We report the results in
table A5 of the online appendix. In this subsample, the mandated firms
spend more on CSR in a diff-in-diff sense. The result seems to be mechani-
cally driven by the mandate as low-CSR firms are forced to spend more after
the 2% rule was enforced.
Next, we incorporate all three variations in one specification whereby
the differences “Post-Pre,”“Mandated-Non-Mandated,”and “High-CSR-
Low-CSR,”are considered in a triple interaction framework as shown at the
bottom of figure 1. In line with the earlier results, the triple interaction
term, the Post × Mandated × High-CSR indicator variable, has a negative co-
efficient (table A6 of the online appendix). Thus, our results stem from the
TABLE 4
Comparison Between Mandated and Nonmandated Firms Within High-CSR Firms
Dependent Variable Panel A: CSR Amount
(1) (2) (3) (4) (5) (6) (7) (8)
∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗
Treatment × Postmandate −7.87 −18.58 −24.63 −27.80 −7.49 −18.98 −25.17 −29.00∗∗∗
(−5.84) (−7.60) (−7.51) (−7.87) (−5.33) (−8.13) (−7.98) (−7.93)
Firm-Level Controls No No No No Yes Yes Yes Yes
Firm Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes
Year Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes
Observations 15,678 8,708 6,544 5,251 15,673 8,704 6,541 5,248
R-squared 0.71 0.66 0.67 0.68 0.72 0.68 0.68 0.68
Dependent Variable Panel B: CSR/Total Assets

∗∗∗ ∗∗∗ ∗∗∗
Treatment × Postmandate −0.0014 −0.0040 −0.0056 −0.0067∗∗∗ −0.0014∗∗∗ −0.0041∗∗∗ −0.0057∗∗∗ −0.0067∗∗∗
(−3.1038) (−5.4022) (−5.6622) (−5.5534) (−3.2415) (−5.6697) (−6.1635) (−6.3933)
Firm Fixed Effect Yes Yes Yes Yes Yes Yes Yes Yes
Year Fixed Effect Yes Yes Yes Yes Yes Yes Yes Yes
Observations 15,073 8,288 6,216 4,971 15,070 8,285 6,213 4,968
R-squared 0.56 0.57 0.58 0.59 0.56 0.57 0.58 0.59
This table presents a comparison of CSR expenditure before and after the government mandate between treatment and control firms. Each observation represents a firm year.
In panel A, the CSR Amount, as defined in table 1, is the dependent variable. In panel B, the ratio between CSR amount and total assets is the dependent variable. The sample is
restricted to firms investing above a threshold in terms of the proportion of the last three years’ average profits in the premandate period. The threshold used is 2% in columns 1
and 5, 5% in columns 2 and 6, 7.5% in columns 3 and 7, and 10% in columns 4 and 8. Postmandate is a dummy variable taking the value one for years after the regulation change
and zero otherwise. Treatment is a dummy variable that takes the value of one if the firm under consideration belongs to the mandated group and zero otherwise. The firm-year
evidence from india
level controls included in columns 5 to 8 are profit after tax and net worth. The results account for firm and year fixed effects in all columns. Errors are clustered at the industry
level, and robust t-statistics are reported in parentheses. ***, **, and ∗ represent significance at the 1%, 5%, and 10% levels, respectively.
429
.006
.005
Ratio of CSR to Assets
.004
.003
.002
2010 2012 2014 2016 2018 2020

Years
Treatment Control
Fig 2.—Pre- and posttrend comparison between mandated and nonmandated firms within
high-CSR category. This figure depicts the pre- and posttrend between the treated and the
control groups in terms of CSR spending. The sample is restricted to high CSR spenders in
the premandate period. In other words, all firms in the sample spend more than 2% of their
average three years’ profits on CSR in the premandate period. The firms that are required
by law to spend on CSR form the treated group and those that are not so required form the
control group. The vertical axis plots the ratio of the CSR amount and the total assets and the
horizontal axis denotes the years. The blue line represents the treated group and the orange
line the control group.
spending cuts initiated by the high-CSR firms among the mandated group
after the law was promulgated.
Taken together, the results suggest that (1) the CSR mandate leads to a
reduction in voluntary spending, (2) the reduction stems from a cut in CSR
spending postmandate by the former high spenders, and (3) the preman-
date low spenders increase spending as required by law.
4.4 diff-in-diff prerequisites and robustness

4.4.1. Analysis of Pretrends. To mitigate the possibility that a mechanical
continuation of a preexisting trend drives our results, we plot the ratio be-
tween CSR amount and total assets for the treated and control groups in
figure 2. We consider five years before and five years after the mandate. As
shown in the figure, there does not appear to be any clear pretrend. We
notice a sharp decline in the CSR spending of the treated group in the
postmandate period.
Further, in our baseline regression setup, we introduce indicator vari-
ables for individual years. Then, we interact each of the preyear indicator
variables with the treatment variable. We find all the interaction terms, ex-
cept the interaction between postmandate and treatment indicator variables,
to be statistically indistinguishable from zero. This finding, reported in
TABLE 5
Summary Comparison
Ratios Observations Control Treatment Difference T-Stat
Profit to Income (Margin) 21,110 0.12 0.13 −0.01 −0.95
Debt to Equity (Leverage) 14,997 1.13 0.63 0.5 1.24
Sales to Assets (Turnover) 23,802 1.4 0.91 0.49 0.81
Profit to Equity (Return On Equity) 23,746 0.41 0.35 0.06 0.25
Advertisement to Sales Ratio 11,740 0.02 0.01 0.01 0.81
Profit Per Employee 3,402 0.44 0.28 0.16 0.1
This table presents a comparison between the treated and the control groups in terms of various
accounting ratios. Mandated (nonmandated) firms form the treated (control) groups. The sample is re-
stricted to firms that spend more than 2% of their average three-year profits on CSR in the premandate
period.
table A7 of the online appendix, also shows that our results are not a con-
tinuation of pretrends.
4.4.2. Comparing Treated and Control Groups. We acknowledge that the
treated firms are systematically larger than the control firms because the
mandate applies to larger firms. Though the nonexistence of pretrends
helps ameliorate concerns in this regard, we conduct an additional test.
We compare several operating and financial ratios for the treated and con-
trol firms in table 5. These ratios include operating margin, leverage, stock
turnover, ROE, advertisement to sales ratio, and profit per employee. None of the
above ratios is significantly different between the treated and control firms.
This analysis shows that the two sets of firms are similar in terms of operat-
ing efficiency, despite differing in size.
4.4.3. Additional Robustness Tests. We perform several additional robust-
ness tests. First, to account for the possible anticipation of the law resulting
from public discussion in the media before its implementation, we omit
the years 2012–13 and 2013–14 from the sample, which is when the new
Companies Act was discussed and introduced. The CSR provision came
into force effective 2014–15. We estimate equation (1) using this subsample
and find that the results largely remain unchanged (table A8 of the online
appendix).
Second, we conduct placebo tests with false treatment years within the
premandate period. We report the results using 2011–12 as a false treat-
ment year in table A9 of the online appendix. We estimate equation (1).
The coefficient of the interaction term between the postmandate indicator
variable and the treatment indicator variable is statistically indistinguishable
from zero. Furthermore, we get similar results when we use other false treat-
ment years.
Finally, control firms that are very close to the cutoff during the preman-
date period may cross over during the postmandate period and fall within
the purview of the 2% rule. Thus, we potentially misclassify a few treated
firms as control firms. To account for such a possibility, we exclude con-
trol firms proximal to the cutoff and re-estimate equation (1). We present
the results in table A10 of the online appendix. The results remain largely
unchanged.
4.5 impact on valuations and operating performance

To understand the overall impact of the mandate, we examine whether
it affects the valuation of the treated firms and their operational perfor-
mance.
4.5.1. Impact on Stock Valuations. Manchiraju and Rajgopal [2017] exam-

ine eight events leading up to the CSR law and find that the stock price reac-
tion of the entire set of mandated firms, when compared to nonmandated
firms, is negative. We compare the stock market reaction of mandated and
nonmandated firms’ stocks, but we limit the sample to high-CSR firms in
line with the focus of the paper.
As noted by Manchiraju and Rajgopal [2017], the introduction of manda-
tory CSR was a part of the new company law. Naturally, all the provisions of
the bill were debated in detail. Hence, it is hard to use a single date to con-
duct an event study. Instead, we rely on the sudden announcement made
by the finance minister on July 17, 2019, that, henceforth, noncompliance
with CSR provisions will constitute a criminal offense. Till then, noncompli-
ance with CSR was considered a civil offense. The finance minister reversed
her position on August 23, 2019. This event provides an excellent testing
ground for the shareholder value implications of voluntary CSR for the fol-
lowing reasons. First, after the first announcement by the minister, business
executives faced the prospect of a jail term for noncompliance with the CSR
provision. Therefore, the value of voluntary CSR should have significantly
diminished after her first announcement as the element of force increased.
Second, the relatively arbitrary reversal of her position mitigates other en-
dogenous factors that might confound our event study results. It is hard to
argue that some other unobservable factor moved precisely in line with the
minister’s announcements on both occasions.
We present our results in table 6. In panel A, we consider the first an-
nouncement, which made noncompliance with CSR regulations a crimi-
nal offense. We compare all the mandated firms with all the nonmandated
firms. We estimate a regression where the dependent variable is the excess re-
turns of a stock compared to the market benchmark three days around the
event.9 In columns 1 and 2, the explanatory variable (“treatment”) identifies
mandated firms. We include industry-fixed effects and cluster standard er-
rors at an industry level. We find that the mandated firms, in general, react
negatively to the event (−1.2%), consistent with Manchiraju and Rajgopal
[2017]. In columns 3 and 4, we restrict the sample to high-CSR firms and
find that the stock prices of mandated high-CSR firms decline by about
0.8% relative to that of nonmandated high-CSR firms.
9 We use Nifty 50, India’s most widely tracked market index, as the market benchmark.
TABLE 6
The Value Impact of Mandatory CSR
Panel A: CSR violation to be a criminal offence
Dependent Variable Excess Return

(1) (2) (3) (4)
Mandatory −0.005 ∗∗∗
−0.012 ∗∗∗
−0.005 ∗
−0.008∗
(0.002) (0.003) (0.003) (0.004)
Turnover 0.002 0.008∗∗∗ 0.008∗∗∗ 0.013∗∗∗
(0.002) (0.003) (0.002) (0.003)
Industry F.E Yes Yes Yes Yes
Sample All Firms All Firms High-CSR Firms High-CSR Firms
Observations 1,994 1,994 824 824
R-squared 0.094 0.125 0.047 0.061
Panel B: CSR violation not to be a criminal offence

Dependent Variable Excess Return
∗∗∗ ∗∗∗
Mandatory 0.012 0.014 0.013∗∗∗ 0.017∗∗∗
(0.003) (0.004) (0.004) (0.006)
Turnover −0.000 0.001 −0.003 0.000
(0.003) (0.003) (0.003) (0.003)
Industry F.E Yes Yes Yes Yes
Sample All Firms All Firms High-CSR Firms High-CSR Firms
Observations 1,994 1,994 824 824
R-squared 0.091 0.093 0.068 0.059
This table presents the results relating to stock price reaction to mandatory CSR. The July 17, 2019,
announcement that made the violation of mandatory CSR a criminal offense is used as the event in panel
A and the announcement of the withdrawal of the above provision on August 23, 2019, as the event in
panel B. The three-day excess return around the event is the dependent variable. Treatment is a dummy
variable that takes the value of one if the firm under consideration is mandated to invest in CSR and zero
otherwise. Columns 1 and 2 consider all firms. In columns 3 and 4, the data are restricted to firms that
used to spend more than 2% of their average past three years’ profits on CSR in the premandate period.
To account for liquidity, the table includes turnover as a control variable in columns 2 and 4. The results
account for industry fixed effects and cluster the errors at an industry level. Robust t-statistics are reported
in parentheses. ***, **, and ∗ represent significance at the 1%, 5%, and 10% levels, respectively.
In panel B, we study the reaction to the reversal of position by the finance

minister on August 23, 2019. The remaining details stay unchanged. In-
vestors appear to reverse almost the entire underperformance of mandated
high-CSR stocks when the finance minister changed her mind. Note that we
do not examine the market reaction to the imposition of the mandate. As
noted above, the negative reaction to the imposition of the mandate has
been documented by Manchiraju and Rajgopal [2017]. We complement
their findings by showing that a further tightening of the regulation leads
to an additional decline in the valuation of the treated firms. When the ad-
ditional tightening of the mandate gets reversed, the incremental decline
in response to the tightening of the mandate also gets reversed. Our results
do not imply that the entire decline in valuations because of the mandate,
documented by Manchiraju and Rajgopal [2017], gets reversed.
TABLE 7
Comparison Between Mandated and Nonmandated Firms Within High-CSR Firms in Terms of
Operating Performance
Dependent Variable ROE ROA Log Sales ROE ROA Log Sales
(1) (2) (3) (4) (5) (6)
Treatment × Postmandate −0.0229∗ −0.0093∗∗∗ 0.0720 −0.0263∗ −0.0099∗∗∗ 0.0605
(−1.7267) (−2.8758) (1.4981) (−1.7999) (−2.8863) (1.4045)
Lag Profit After Tax 0.0000 0.0000
(0.8915) (1.6313)
Net Worth −0.0000 0.0000 0.0000
(−1.2108) (1.6392) (1.0428)
Profit After Tax 0.0000
(1.5784)
Firm Fixed Effects Yes Yes Yes Yes Yes Yes
Year Fixed Effects Yes Yes Yes Yes Yes Yes
Observations 23,629 23,629 23,521 22,389 22,387 23,520
R-squared 0.3768 0.4606 0.8850 0.3927 0.4774 0.8854
This table presents a comparison of the operating performance before and after the government man-
date between treatment and control firms. Each observation represents a firm year. The return on equity
(ROE) (the return on assets (ROA))(natural logarithm of sales) is the dependent variable in columns 1 and
4 (2 and 5) (3 and 6). The sample is restricted to firms investing above 2% of the last three years’ average
profits in the premandate period. Postmandate is a dummy variable taking the value one for years after the
regulation change and zero otherwise. Treatment is a dummy variable that takes the value of one if the firm
under consideration is required to spend on CSR as per law and zero otherwise. The firm-year level control
variables included in columns 4 and 5 are one-year lagged profits and net worth. Column 6 uses the current
year’s profits and net worth as control variables. The results account for firm and year fixed effects in all
columns. Errors are clustered at the industry level, and robust t-statistics are reported in parentheses. ***,
**, and ∗ represent significance at the 1%, 5%, and 10% levels, respectively.
4.5.2. Impact on Operating Performance. We use ROA and ROE as measures

of operating performance. Column 1 of table 7 shows that ROE declines by
2.29 percentage points for the treated group in a diff-in-diff sense. As the
average ROE is 19.9% in the premandate period, the decline represents
an economically meaningful 11.51%. Similarly, in column 2, we find a 0.93
percentage points decline in ROA, or an economically meaningful 8.08%
of the average ROA, during the premandate period. In columns 4 and 5,
we include one-year lags of profits and net worth as control variables. Finally,
in columns 5 and 6, we use the natural logarithm of sales as the dependent
variable. We do not find a significant change in sales.
4.6 a discussion of results

The combination of results observed—a decline in CSR spending in re-
sponse to the mandate by eligible high-CSR firms and an accompanying re-
duction in valuation and operational performance—requires explanation.
In a world where CSR does not add value, its decline leads to an increase
in firms’ valuation and an improvement in operational performance. The
fact that we find a reduction in the market value of a group of firms that
reduce CSR spending in response to the mandate suggests that the volun-
tary spending on CSR before the mandate added value. It is possible that
the mandated high-CSR firms used CSR spending as a differentiator before
the mandate. It is also possible that the differentiating appeal of CSR gets
diluted when a large number of firms spend at least 2% of their profits

on CSR after the mandate because stakeholders may see at least a part of
a firm’s postmandate CSR spending as being incurred by force. Further,
the fact that operational performance worsens at the same level of revenue
indicates that the impacted firms incur additional expenditure as a replace-
ment for CSR spending after the mandate to maintain similar revenue lev-
els as before.
A reader may wonder why the mandated high-CSR firms suspend efforts
to differentiate themselves by increasing spending on CSR. One argument
could be that the high-CSR firms should be able to differentiate themselves
by spending an additional 2% of profits in the postmandate period. Con-
sider a firm that spent 4% of its profits on CSR voluntarily and derived
value from such spending. A possibility is that in the postmandate period,
the firm can spend 4% voluntarily by increasing its overall CSR spending
to 6%. Thus, the mandated high-CSR firm under consideration should be
able to differentiate itself from others, who now spend 2% of profits on
CSR, to the same extent as before the mandate, by spending 6% on CSR.
Our results suggest that such firms actually cut CSR spending to close to
2% rather than increasing it to 6%.
We offer some plausible explanations. First, meaningful and value-
adding CSR projects may not be available at higher spending levels. Thus,
additional expenditure may turn out to be wasteful. For instance, if a firm
built a hospital with 4% of profits, it may not be possible to build an-
other hospital by spending an additional 2% of profits. More importantly,
there may not exist any other value-adding extensions required to the ex-
isting hospital that fall within the 2% budget. Other value-adding CSR
projects may not be immediately available. Thus, in such cases, any addi-
tional amount spent is unlikely to create further social impact that helps
the firm to differentiate itself from others.
Second, even when meaningful projects are available, the additional
spending required may be significantly more than 2% of a firm’s profits
because of additional compliance costs and the need to maintain a buffer.
We believe that regulatory intervention increases compliance costs across
the board for both the 2% mandated part and any voluntary spending
above the 2% threshold for three reasons. First, the board of directors was
not previously required to be involved in CSR activity, and its approval was
not explicitly required. Relatedly, a firm could flexibly continue or cease
CSR projects in future years, whereas today, they must spend 2% of their
profits every year. Hence, the marketing department may have to commit
spending for a certain number of years to obtain board approval. The board
might insist on such visibility as it might be difficult to find a worthy CSR
opportunity at the last minute if a prior project were to be discontinued.
Second, the issue of tax deductibility of the entire CSR expenditure is sub
judice: The revenue department claims that the entire CSR expenditure
is not tax deductible. Finally, CSR spending is not easily divisible into the
strict “2%” and “above 2%” compartments. Therefore, even when meaning-
ful CSR projects are available, the incremental expenditure could be more
than the additional 2% of profits. Some of the compliance costs described
above may increase with the level of spending.
The need to maintain a buffer may arise because, before the mandate, a
firm did not have to worry about any externally imposed definition of CSR
that would also be subject to ex post regulatory interpretation. As men-
tioned in section 5.1, the MCA now has discretionary powers to question
what constitutes CSR for a particular firm. Hence, additional spending over
and above the 2% level potentially constitutes slack that the firm can use
to protect itself against regulatory questioning. Such slack-based spending
is unlikely to have the same differentiating impact as voluntary spending:
Even broader stakeholders may see some part of this additional spending
purely as a buffer.
Thus, the imaginary firm we considered above may be required to spend
8% instead of 6% of its profits to obtain the same value as before. There-
fore, from a cost-benefit standpoint, increasing CSR spending beyond pre-
mandate levels may become unviable, even when additional CSR projects
are available. In response, firms may reduce their CSR spending to close
to the 2% level and seek flexible alternative ways of deriving the strategic
benefits provided by voluntary CSR spending.
Another possibility is that stakeholders might not distinguish the various
shades of CSR spending but instead operate with a simpler heuristic on the
extensive margin: A firm either spends on CSR or it does not. This heuris-
tic disappears once many firms are forced to spend 2% of their profits on
CSR; thus, increasing CSR spending beyond 2% may become less valuable
in general.
Similarly, the stakeholders who evaluated firms before the mandate only
by ranking them based on the proportion of profits allocated to CSR may
have difficulty continuing with this approach because of the possibility of
the above-described buffer and additional costs. Firms that spend more
only because of compliance requirements or to maintain a buffer may not
be ranked highly after the mandate. The extra spending required, even
from this point of view, could be substantially higher.
Finally, in a competitive environment, firms consider the likely response
of other firms before finalizing any course of action. As noted above, the
costs of continuing with a higher level of CSR spending are likely to vary sig-
nificantly between firms based on several idiosyncratic factors, such as the
nature of existing CSR projects, cost of compliance, and others. Therefore,
it may become hard to predict the competitive reaction to voluntary CSR
spending after the mandate. Given the increased difficulty in gauging com-
petitive reaction, it may become difficult for firms to continue spending on
CSR from a strategic point of view.
Because of the above-stated constraints imposed by the regulation, firms
may reduce CSR spending close to the 2% level and look for alternative
avenues of deriving the strategic benefits provided by voluntary CSR spend-

ing. As noted before, we see a reduction in CSR spending in the data.
Plausibly because of the indivisibility of CSR projects, firms may not be able
to cut spending to exactly 2% immediately. The alternative option is likely
to be closely linked to the source of value created by voluntary CSR spend-
ing. Therefore, we next investigate both the source of value of CSR and
the likely substitute for CSR spending, after the mandate, in the following
section.
5. Possible Strategic Reasons

To determine a potential strategic motivation behind voluntary CSR
spending before the mandate, we closely examine (1) the various forms
of public communications related to CSR and (2) the types of expenditure
that likely replaced voluntary CSR spending after the mandate.
5.1 loss of signaling value?

The literature has argued that the voluntary adoption of audits has signal-
ing value (Kausar, Shroff, and White [2016], Dedman and Kausar [2012],
Lennox and Pittman [2011]). Similarly, Kotler and Lee [2005], ,2008] sug-
gest that voluntary CSR positively impacts potential customers’ views about
a firm, its strengths, and its product offerings. We extend these ideas to
posit that voluntary CSR provides a unique opportunity to signal both high
quality and virtue. However, regulation and enforcement that circumscribe
the exact nature of CSR potentially dilute the power of such signaling.
Thus, we examine whether voluntary CSR indeed has signaling value by
studying the various forms of communication released by firms.
5.1.1. CSR Communications Through Social Media. We begin with a study

of firms’ communication related to CSR. We identify the official Twitter
handles of firms and scrape the tweets tweeted during the sample period.
We label a tweet as CSR-related if any words related to CSR are mentioned
in the tweet. In section 1 of the online appendix, we provide a detailed ac-
count of the process used to identify CSR-related words. We ask whether
the proportion of CSR-related tweets comes down in a diff-in-diff sense. We
estimate equation (1) with the proportion of CSR-related tweets among all
tweets as the dependent variable and present the results in column 1 of
table 8. We find a 2 percentage point decline in the proportion of CSR-
related tweets for the mandated firms. The general reduction in CSR-
related tweets suggests that CSR-related communication loses value after
the mandate.
Next, we investigate the proportion of words within CSR tweets that signal
the high quality of a firm’s products or services. We use standard marketing
dictionaries to identify such words, as explained in section 1.2 of the online
appendix. As shown in column 2 of table 8, we find a 2 percentage point
decline in the proportion of words that signal product or service quality
TABLE 8
Test of Signaling Hypothesis—Social Media Communication
Dependent Variable CSR Product Charity CSR Product Charity
(1) (2) (3) (4) (5) (6)
Treatment × Post −0.02 ∗
−0.02 ∗
−0.01 ∗∗
−0.03 ∗
−0.02 ∗
−0.01∗∗
(−1.87) (−1.99) (−2.24) (−1.99) (−1.89) (−2.20)
Firm Level Controls No No No Yes Yes Yes
Firm Fixed Effects Yes Yes Yes Yes Yes Yes
Year Fixed Effects Yes Yes Yes Yes Yes Yes
Observations 704 500 409 704 500 409
R-squared 0.58 0.39 0.61 0.58 0.39 0.61
This table presents results relating to the social media communications of firms through their official
Twitter handles. Each observation represents a firm year. In columns 1 and 4, the proportion of CSR-related
tweets is the dependent variable. The dependent variable in columns 2 and 5 (3 and 6) is the proportion
of words signaling product or service quality (virtue) within CSR-related tweets. The procedure used to
identify CSR-related tweets, words signaling the quality of products and services, and words signaling virtue
is detailed in section 1 of the online appendix. The sample is restricted to firms investing above 2% of
the proportion of the previous three years’ average profits in the premandate period. Postmandate is a
dummy variable taking the value one for years after the regulation change and zero otherwise. Treatment
is a dummy variable that takes the value of one if the firm under consideration is required to spend on CSR
as per law and zero otherwise. The firm-year level controls included in columns 4 to 6 are profit after tax
and net worth. The results account for firm and year fixed effects in all columns. Errors are clustered at the
industry level, and robust t-statistics are reported in parentheses. ***, **, and ∗ represent significance at the
1%, 5%, and 10% levels, respectively.
within CSR-related tweets in a diff-in-diff sense. Finally, we check whether

virtue-signaling also reduces post the mandate. We identify words that sig-
nal charity or good intentions of the firms within CSR-related tweets (see
section 1 of the online appendix). As shown in column 3 of table 8, we find
a 1 percentage point decline in the proportion of words that signal virtue.
The subsequent three columns, in which we include firm-level control vari-
ables, show similar results. These findings suggest that voluntary CSR was
used to convey higher product quality and virtue, and the effectiveness of
the signal reduces after the mandate.
5.1.2. CSR Communications Through Annual Reports. We then examine the
CSR sections of the annual reports to look for additional evidence relating
to a reduction in signaling through CSR. We calculate the cosine similar-
ity of the text of the CSR section in the annual reports between firms ev-
ery year. For each mandated (nonmandated) firm, we calculate the cosine
similarity of the CSR section of its annual report with that of all other man-
dated (nonmandated) firms in a year and arrive at the average of the cosine
similarity score. These comparisons are limited to firms whose annual re-
ports are available.10 The average thus calculated is the dependent variable
for each firm-year. Higher standardization is likely to make the reporting
more similar.
We find an increase in the standardization of CSR reporting in a diff-in-
diff sense for the mandated group in the postmandate period. We report
10 We obtain annual reports from www.moneycontrol.com.

TABLE 9
Test of Signaling Hypothesis—Annual Reports
Dependent Variable Similarity Product Charity Similarity Product Charity
(1) (2) (3) (4) (5) (6)
Treatment × Postmandate 0.21 ∗∗∗
−0.19 ∗∗∗
−0.08*** 0.22 ∗∗∗
−0.19 ∗∗∗
−0.09∗∗∗
(3.78) (−6.73) (−6.54) (3.86) (−6.21) (−6.04)
Firm Level Controls No No No Yes Yes Yes
Firm Fixed Effect Yes Yes Yes Yes Yes Yes
Year Fixed Effect Yes Yes Yes Yes Yes Yes
Observations 242 242 242 242 242 242
R-squared 0.70 0.66 0.78 0.70 0.66 0.78
This table presents results relating to the CSR sections of firms’ annual reports. Each observation rep-
resents a firm year. In columns 1 and 4, the average cosine similarity at a firm-year level is the dependent
variable. For each mandated (nonmandated) firm, the cosine similarity of the CSR section of the annual
report with every other mandated (nonmandated) firm in a year is calculated and the average of the cosine
similarity score is taken. The average so calculated is the dependent variable. In columns 2 and 5 (3 and 6),
the dependent variable is the proportion of words signaling product or service quality (virtue) within the
CSR section of the annual report. The procedure used to identify words signaling the quality of products
and services and words signaling virtue is detailed in section 1 of the online appendix. The sample is re-
stricted to firms investing above 2% of the previous three years’ average profits in the premandate period.
Postmandate is a dummy variable taking the value one for years after the regulation change and zero other-
wise. Treatment is a dummy variable that takes the value of one if the firm under consideration is required
to spend on CSR as per law and zero otherwise. The firm-year level controls included in columns 4 to 6 are
profit after tax and net worth. The results account for firm and year fixed effects in all columns. Errors are
clustered at the industry level, and robust t-statistics are reported in parentheses. ***, **, and ∗ represent
significance at the 1%, 5%, and 10% levels, respectively.
the above results in column 1 of table 9. Increased standardization is con-

sistent with the reduced use of CSR for signaling purposes. In columns 2
and 3, we ask whether mandated firms reduce signaling their product qual-
ity and virtue. We follow the same methodology as was used to analyze the
social media posts. We find close to an 8 percentage points (6 percentage
points) reduction in the signaling of product quality (virtue).
5.1.3. Increase in Advertising. A likely consequence of a reduction in the
signaling ability afforded by CSR after the mandate and the consequent
decrease in CSR spending is an increase in expenditure on advertisements.
Therefore, we test whether mandated firms increase their advertising spend
by estimating equation (1). As before, the sample is restricted to high-CSR
firms. In table 10, the level of advertisement expenditure (the ratio between
advertising spend and total assets) is the dependent variable in panel A (B);
the table is organized as per table 4. We find a significant increase in ad-
vertising spend in all specifications: The increase is 24.85% of the average
premandate advertisement expenditure and is, therefore, materially signif-
icant.
Next, we explore the relative magnitude of the advertisement expendi-
ture incurred by firms to replace their CSR spending, summing the CSR
and advertisement expenditures and using the newly created variable as
the dependent variable in equation (1). An increase (decrease) in a diff-
in-diff sense would indicate that the increase in advertisement expendi-
ture is higher (lower) than the reduction in CSR spending. No change
440
TABLE 10
Test of Signaling Hypothesis—Advertisement
Dependent Variable Panel A: Advertising Expenditure
(1) (2) (3) (4) (5) (6) (7) (8)
Treatment × Postmandate 31.97∗∗∗ 32.64∗∗∗ 36.79∗∗∗ 38.66∗∗ 31.56∗∗∗ 33.55∗∗∗ 37.03∗∗∗ 38.00∗∗∗
(4.97) (2.80) (2.76) (2.60) (5.25) (3.18) (2.92) (2.80)
Observations 16,300 8,964 6,711 5,397 16,292 8,961 6,708 5,394
R-squared 0.87 0.89 0.89 0.88 0.87 0.90 0.89 0.88
s. rajgopal and p. tantri
Dependent Variable Panel B: Advertisement/Total Assets

Treatment × Postmandate 0.0052∗∗ 0.0071∗ 0.0050 0.0081∗ 0.0051∗∗ 0.0070∗ 0.0049 0.0079∗
(2.1987) (1.8668) (1.0296) (1.7337) (2.1703) (1.8227) (0.9889) (1.6888)
Observations 15,657 8,554 6,398 5,135 15,652 8,552 6,396 5,133
R-squared 0.59 0.59 0.57 0.62 0.59 0.59 0.57 0.62
This table presents a comparison of advertising expenditure before and after the government mandate between treatment and control firms. Each observation represents a firm
year. In panel A (B), the INR amount spent on advertising (the ratio between advertisement expenditure and total assets) is the dependent variable. The sample is restricted to firms
investing above a threshold in terms of the proportion of the previous three years’ average profits in the premandate period. The threshold used is 2% in columns 1 and 5, 5% in
columns 2 and 6, 7.5% in columns 3 and 7, and 10% in columns 4 and 8. Postmandate is a dummy variable taking the value one for years after the regulation change and zero
otherwise. Treatment is a dummy variable that takes the value of one if the firm under consideration is required to spend on CSR as per law and zero otherwise. The firm-year level
controls included in columns 5 to 8 are profit after tax and net worth. The results account for firm and year fixed effects in all columns. Errors are clustered at the industry level,
and robust t-statistics are reported in parentheses. ***, **, and ∗ represent significance at the 1%, 5%, and 10% levels, respectively.
would mean a close to one-to-one replacement. We present the results in

table A11 of the online appendix. We find that the diff-in-diff coefficient is
statistically indistinguishable from zero. In other words, it appears that
the replacement of CSR expenditure by advertisement expenditure is al-
most one-to-one.
In section 4.5.1, we discuss that mandatory CSR leads to a loss of share-
holder value. Even by the revealed preference of firms, it seems reason-
able to infer that unconstrained voluntary CSR spending is more valuable
than advertisements as a signaling device. Hence, even a close to one-to-
one replacement of CSR by advertising does not prevent the loss of share-
holder value.
However, the fact that we can observe a decline in operational perfor-
mance as denoted by the ROA and ROE and not a decline in the overall
level of sales requires an explanation. A substitute signaling mechanism
can achieve a lower level of revenue at the same level of spending as that
of the preferred mechanism, or it can achieve the same level of revenue at
a higher level of spending. Consequently, the substitute is a second choice.
In this case, the results suggest that impacted firms opted for higher expen-
diture to maintain the same level of revenue. As noted before, the level of
additional advertisement spending is almost equal to the reduction in CSR
spending. Therefore, it is likely that mandated high-CSR firms also incur
other types of expenditures over and above advertisements to replace CSR.
However, lacking granular data about all expenditures, we are not able to
detect such additional spending in a statistically meaningful way.
5.2 other strategic reasons
5.2.1. Customer Overpayment. Kitzmueller and Shimshack [2012] suggest
that some customers are willing to pay more for the products of firms en-
gaged in CSR-related activities. Note that the customer overpayment chan-
nel is distinct from the signaling channel discussed in section 5.1. Under
the customer overpayment channel, customers are willing to pay a higher
price for products of socially responsible firms in order to contribute to
society and encourage socially responsible behavior. These customers may
not see higher CSR spending as a signal of higher product quality or virtue.
They simply support social responsibility for its own sake. Given the inher-
ent differences in these channels, firms’ responses when the channels are
diluted are also likely to differ. If the customer overpayment channel were
weakened by the mandate, firms would likely respond with price discounts
because the weakening of the customer overpayment channel implies cus-
tomers’ unwillingness to pay more after the mandate. However, when sig-
naling through CSR is diluted, firms are likely to consider substitute meth-
ods of signaling.
We test whether the customer overpayment channel gets diluted because
of the mandate. We obtain information about the quantity sold and rev-
enues of each product type of a firm from the Prowess database. We cal-
culate the price at a firm-product type-year level. Organizing the data at
a firm-product type-year level, we estimate a diff-in-diff test of the form of

equation (1). We present the results in table A12 of the online appendix. In
addition to firm and year fixed effects, we also include product type fixed
effects. We find no significant change in prices in a diff-in-diff sense. The
result implies no change in consumers’ willingness to pay for products in re-
sponse to mandated CSR. Thus, evidence is inconsistent with the customer
overpayment channel as an explanation for our results.
5.2.2. Labor Donations. We next consider the “labor donation”argument,
which posits that some employees are willing to accept lower wages to
work for socially responsible firms (Greening and Turban [2000]). We ask
whether the dilution of the labor donations channel in response to the
regulation leads to reduced spending on CSR by the mandated high-CSR
firms. If the labor donation channel works, we would expect wages for the
mandated firms within the high-CSR group to increase in the postmandate
period. However, we do not find such an increase as reported in table A13
of the online appendix.
5.2.3. Politics. The politics view of CSR posits that CSR deters interven-
tions by social activists (Davidson III, Worrell, and El-Jelly [1995]) and gov-
ernments (Khanna and Anton [2002]) in firms’ affairs. Such interventions
can make a firm’s product or service unpopular. However, it is challenging
to estimate in advance the level of CSR spending activists and governments
expect from a firm. An explicit 2% rule clearly signals what governments
and activists expect in terms of CSR. Therefore, firms that invested in CSR
with a political motive likely converge their spending to the 2% limit. Those
who invested more (less) reduce (increase) CSR expenditure.
To address this concern, we rely on highly polluting firms as a subsample
of companies that likely invest in CSR to deter governments and activists
from unwanted intervention. We obtain data relating to highly polluting
firms from the database maintained by the ministry of environment.11 We
estimate the following triple interaction regression equation:
Yit = α + β1 ∗ P ostt ∗ Treat menti + β2 ∗ P ostt ∗ P ol l ut ingi
+β3 ∗ P ostt ∗ P ol l ut ingi ∗ Tr aet menti + β4 ∗ Xit + β5 ∗ θi + β6 ∗ γt + it , (3)
where P ol l ut ingi is an indicator variable that takes the value one for pollut-
ing firms and zero otherwise. All other terms have the same meaning as in
equation (1).
We present the results in panel A of table A14 in the online appendix.
Note that the coefficient of the interaction term between the Treat ment
and P ost M andat e variables continues to be significantly negative, as be-
fore. Our focus is on the triple interaction between Treat ment , P ost , and
P ol l ut ingF ir ms. The coefficient of the triple interaction term is statis-
tically indistinguishable from zero. In panel B, we consider firms that
11 Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=137373
belong to industries with high climate change exposure, identified by

Sautner et al. [2020], as polluting firms. We estimate the triple interac-
tion equation (3). As in panel A, the coefficient of the interaction term
between the Treat ment and P ost M andat e variables continues to be sig-
nificantly negative and the triple interaction between Treat ment , P ost ,
and P ol l ut ingF ir ms has a coefficient that is statistically indistinguishable
from zero.
Thus, we conclude that the mandated high-CSR firms, among the po-
litically sensitive firms, reduce CSR spending as much as other mandated
high-CSR firms but not more. Therefore, the reduction in CSR spending
documented in this study is likely not driven by politically sensitive firms.
5.2.4. Revelation of Social Norms. We now consider the more general pos-
sibility of firms learning about society’s expectations from the mandate.
Before the 2% mandate, we observe heterogeneity in CSR spending, likely
because firms found it difficult to assess the social norms for CSR spending.
Here, social norms reflect the expectations of broader society and not just
those of governments and nongovernmental civil society organizations as
in section 5.2.3. Thus, even under the above channel, the CSR spending
by high (low) CSR firms is likely to reduce (increase) after the mandate.
In an analogous situation, Rose and Wolfram [2002] find that a tax pol-
icy attempt to restrict CEO pay to USD 1 million had the perverse effect
of establishing USD 1 million as a new expected norm, whereby CEO pay
increased in cases in which it was previously less than this figure.
If the realization of social norms is the dominant explanation, both man-
dated and nonmandated voluntary high spenders should have moved sym-
metrically toward the 2% limit because the norms apply to all firms. How-
ever, our results show that, even among high spenders, mandated firms
cut CSR spending more. Whereas 43% of nonmandated high spenders cut
spending after the regulation, the proportion is more than 80% for the
mandated high spenders. Mandated high spenders also cut more of the ac-
tual rupees spent. The fact that the nonmandated high-CSR firms do not
cut back as much as mandated high-CSR firms indicates that the realization
of social norms cannot explain our results. Note that nonmandated high-
CSR firms can continue to signal their quality and virtue using CSR, at least
to some extent. Therefore, the result is consistent with the dilution of the
signaling value of CSR because of the mandate.
6. Discussion
6.1 compliance and signaling
The discussion in section 4.6 shows that mandated high-CSR firms could
be impacted by both a loss of direct signaling value and the higher cost of
compliance, rendering CSR a less desirable signaling method. We do not
have a definitive way of disentangling the two costs, partly because these
costs reinforce one another. With that caveat in mind, we test whether
larger firms behave differently from smaller firms. Larger firms should be
able to absorb the fixed costs of compliance better. If compliance costs
are the prime driver behind the reduced CSR spending documented in
table 4, larger firms should be less impacted by the mandate.
We estimate a triple interaction specification (Treated × Post × Large
Firms) and report the results in table A15 of the online appendix. In our
main specification, where we use CSR amount as the dependent variable,
larger firms cut CSR spending more than the smaller firms. When we con-
sider the ratio of CSR amount and assets, we find that the large firms cut
CSR spending as much as the small firms. These findings are inconsistent
with a simple compliance cost–based explanation.
6.2 nonstrategic motives
The existence of strategic outcomes alone is not sufficient to rule out the
presence of nonstrategic motives such as stakeholder altruism (Reinhardt,
Stavins, and Vietor [2008], Bénabou and Tirole [2010]) and manager
moral hazard (Cheng, Hong, and Shue [2013], Masulis and Reza [2014])
behind voluntary CSR spending. For instance, a firm may derive signaling
benefits even when altruism motivates its CSR spending. Therefore, we
cannot design sharp tests to cleanly separate strategic and nonstrategic
motives. The fact that the impacted firms change their CSR communica-
tion strategy and increase advertisement spending to replace voluntary
spending shows that signaling has a role with or without other motives.
7. Conclusion
In this study, we examine the impact of a regulatory edict related to min-
imum CSR spending on the actual CSR spending of firms. We rely on the
recent law passed in India that requires all firms above a certain threshold
to spend at least 2% of their average past three years’ profits on CSR. We ex-
plore the impact of this law on firms that were voluntarily engaged in CSR
before the regulation was passed relative to those that were not. Among the
voluntary high spenders in the premandate period, we also compare the
firms mandated to spend on CSR with those that are not.
We find that voluntary spenders reduce their CSR spending significantly
after the mandate to just below the legally prescribed limit of 2% of their
average past three years’ profits. On the other hand, firms that spent less
on CSR during the preregulation period increase their spending slightly
to meet the new requirement. Our findings suggest that the imposition of
mandatory CSR crowds out voluntary spending on CSR. We also find that
voluntary high spenders that are subjected to the mandate suffer valuation
discounts and a decline in operational performance. The combination of
the above results suggests that voluntary CSR was valuable before the man-
date and that the mandate diluted the value of voluntary CSR spending.
In the second part of the paper, we attempt to understand the channel at
work behind such cuts. We find that the affected firms change the tone
of their CSR communications significantly, moving away from signaling

product quality and virtue to a tone of compliance. They also increase their
advertising expenditure. These results indicate that voluntary CSR signals
product quality and virtue to stakeholders and that this signaling effect is
diluted by the mandate.
In light of our results, regulators might want to consider the possible
impact of a proposed intervention on the CSR spending of firms that vol-
untarily engage in prosocial behavior. In the short term, a mandate may
plausibly lead to increased total CSR spending because the edict brings a
larger number of firms into the mandatory CSR net. In fact, a recent KPMG
report shows that total CSR spending increased following the introduction
of the regulation.12 However, if the compulsion to spend on CSR crowds
out voluntary spending, then such a mandate may lead to a reduction in
CSR spending in the long run. Firms that would have voluntarily spent
on CSR, with some persuasion by nongovernmental organizations (NGOs),
may not do so when regulation is imposed. In such a case, the magnitude
of CSR spending in the preregulation period may not serve as the appro-
priate counterfactual. Given that India is among the fastest-growing large
economies in the world, many Indian firms may have potentially initiated
CSR investments voluntarily in the absence of a mandate in response to
their growing prosperity.
We acknowledge that we cannot make welfare claims. We do not have a
good way to trade off the welfare generated by the increased CSR spending
of mandated firms against the reduced spending by the high-CSR firms.
We do not have data to assess the relative quality and social impact of the
spending by the two types of firms. In addition, the overall welfare provided
depends on several factors, such as (1) the utility of increased spending
when a country is underdeveloped relative to spending at a more advanced
stage of development, (2) the relative efficiency of private spending com-
pared with that of government spending on social issues, (3) the impact
of CSR on tax compliance, and (4) other factors. We do not have credible
evidence to judge these hypotheses.
As previously acknowledged, a change in the marketing and CSR strategy
among one set of firms in an industry impacts all firms in the ecosystem:
Even nonmandated firms are likely to change their CSR, communications,
and marketing strategies. Therefore, our identification strategy of compar-
ing mandated and nonmandated firms can only capture the relative differ-
ence in the impact of the new rule and not the complete causal effect.
Further, we do not have a high-quality survey or field evidence to test
what kind of stakeholders were impacted by different types of signaling.
Instead, we rely on carefully constructed archival proxies to draw inferences
about signaling. Finally, we cannot fully isolate the signaling channel from
12 Sourc: KPMG Report can be found here: https://assets.kpmg.com/content/dam/
kpmg/in/pdf/2018/02/CSR-Survey-Report.pdf
alternative channels that may exist. However, the evidence we present in

this paper is consistent with the hypothesis that voluntary CSR spending can
credibly signal the quality of firms’ products and virtue and that a mandate
crowds out such spending.
We find that about 19% of high-CSR firms increased their spending on
CSR. Thus, even among high-CSR firms, there is heterogeneity in whether
they decide to maintain their unique position or to pool with the 2% crowd.
The uncertainty about the likely reaction of high-CSR firms after the man-
date makes it difficult for all firms to adjust their response strategy in the
short term. Firms will likely learn about one another and execute appropri-
ate response strategies in the medium and long term. It would be interest-
ing to study how firms respond to the change in CSR strategy of high-CSR
firms; however, we leave the question to future research.
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Does A Government Mandate Crowd Out Voluntary CSR - Evidence From India

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DOI: 10.1111/1475-679X.

Does a Government Mandate

Received 13 August 2019; accepted 4 January 2022

This study investigates the implementation of a Government of India man-

∗ Department of Accounting, Columbia University Graduate School of Business; † Indian

JEL codes: D22, H23, M14, M40, M41, M48

unconstrained CSR spending added shareholder value to the firm. A naïve

of stakeholders, who used a simple ranking of firms based on allocation to

1.1 related literature

The literature on the adoption of voluntary audits (Lennox and Pittman

2. Institutional Background and the Event

3. Data, Variable Definition, and Sample Construction

3.1 sample construction

4. Empirical Strategy and Results

4.2 difficulty with comparing high- and low-csr firms

4.3 mandated versus nonmandated within high-csr firms

Yit = α + β1 ∗ P ostt ∗ Treat menti + β2 ∗ Xit + β3 ∗ θi + β4 ∗ γt + it . (1)

The dependent variable is the amount (in INR) of CSR expendi-

Yit = α + β1 ∗ P ostt + β2 ∗ Xit + β3 ∗ θi + it . (2)

Dependent Variable Panel B: CSR/Total Assets

2010 2012 2014 2016 2018 2020

4.4 diff-in-diff prerequisites and robustness

4.5 impact on valuations and operating performance

4.5.1. Impact on Stock Valuations. Manchiraju and Rajgopal [2017] exam-

Dependent Variable Excess Return

Panel B: CSR violation not to be a criminal offence

In panel B, we study the reaction to the reversal of position by the finance

4.5.2. Impact on Operating Performance. We use ROA and ROE as measures

4.6 a discussion of results

diluted when a large number of firms spend at least 2% of their profits

avenues of deriving the strategic benefits provided by voluntary CSR spend-

5. Possible Strategic Reasons

5.1 loss of signaling value?

5.1.1. CSR Communications Through Social Media. We begin with a study

within CSR-related tweets in a diff-in-diff sense. Finally, we check whether

10 We obtain annual reports from www.moneycontrol.com.

the above results in column 1 of table 9. Increased standardization is con-

Dependent Variable Panel B: Advertisement/Total Assets

would mean a close to one-to-one replacement. We present the results in

a firm-product type-year level, we estimate a diff-in-diff test of the form of

+β3 ∗ P ostt ∗ P ol l ut ingi ∗ Tr aet menti + β4 ∗ Xit + β5 ∗ θi + β6 ∗ γt + it , (3)

belong to industries with high climate change exposure, identified by

of their CSR communications significantly, moving away from signaling

12 Sourc: KPMG Report can be found here: https://assets.kpmg.com/content/dam/

alternative channels that may exist. However, the evidence we present in

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Yit = α + β1 ∗ P ostt ∗ Treat menti + β2 ∗ Xit + β3 ∗ θi + β4 ∗ γt + it . (1)

Yit = α + β1 ∗ P ostt + β2 ∗ Xit + β3 ∗ θi + it . (2)

+β3 ∗ P ostt ∗ P ol l ut ingi ∗ Tr aet menti + β4 ∗ Xit + β5 ∗ θi + β6 ∗ γt + it , (3)