Mandatory corporate social responsibility in India: Motivations and effectiveness

Sydlowski, Joseph

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https://hdl.handle.net/2142/101611 Copy

Description

Title

Mandatory corporate social responsibility in India: Motivations and effectiveness

Author(s)

Sydlowski, Joseph

Issue Date

2018-07-18

Director of Research (if dissertation) or Advisor (if thesis)

Khanna, Madhu

Committee Member(s)

• Myers, Erica
• Deltas, George
• Bansal, Sangeeta

Department of Study

Agr & Consumer Economics

Discipline

Agricultural & Applied Econ

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

M.S.

Degree Level

Thesis

Keyword(s)

• Corporate Social Responsibility
• CSR
• Companies Act
• India
• Financial Performance

Abstract

The Companies Act of 2013 went into effect in India on April 1, 2014 making it the first law in the world to mandate that companies commit a portion of their profits to corporate social responsibility (CSR) initiatives. Companies that met certain thresholds of net worth, net profit, or sales were required to create CSR committees and spend 2% of their average net profits on socially responsible activities. The law specifies that these donations should be focused outwardly, to the benefit of society, and on local communities. It does not, however, provide any penalty to companies which do not meet their 2% mark, only requiring them to disclose the reasons for failing to comply. This provides a unique situation to study the effects of CSR when it is not strictly voluntary but is still subject to the expectations of the public and other firms. The analysis uses panel data from the ProwessIQ database on 39,736 Indian firms from 2010-2016, which allows for two years of data since the Companies Act went into effect. This thesis analyzes three central questions about how firms have responded to the Companies Act. The first is the extent to which firms are adjusting the likelihood of reporting their CSR expenditures and the magnitude of these expenditures under this new directive. To better understand the impact of the Companies Act, firm motivations to comply are considered. Why do firms choose to comply with the Companies Act without any formal penalty for noncompliance? One explanation focuses on the theory that a firm’s CSR expenditure is influenced by the CSR expenditures of the firm’s peers. The second issue centers on the potential reshuffling of expenditures from other types of charitable donations the firms may have been making prior to the Companies Act to CSR categories that comply with the Act. These first two questions are addressed using a series of difference-in-difference regressions to estimate the impact after the law went into effect. The final issue addressed in this thesis looks at the effects of CSR expenditures on a firm’s financial performance, measured by its Tobin’s q and Return on Assets (ROA). I examine whether the markets are rewarding a firm for spending on “mandatory” CSR or instead treating these expenditures as a cost that adversely affects its value or ROA. The results indicate that the Companies Act has had a positive and statistically significant effect on the likelihood of reporting and magnitude of CSR expenditures. While the evidence suggests the Act encouraged firms to increase their CSR to some extent, it also shows a strong peer effect which influenced firms to increase their expenditures. However, there is no evidence that this increase in CSR expenditures came at the cost of non-CSR donations. Finally, the results show no relationship between CSR expenditures on a firm’s financial performance either before or after the Companies Act.

Graduation Semester

2018-08

Type of Resource

text

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Copyright and License Information

Copyright 2018 Joseph Sydlowski

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