Does Corporate Social Responsibility (CSR) Create Shareholder Value? Evidence from the Indian Companies Act 2013

In 2013, a new law required Indian firms, which satisfy certain profitability, net worth, and size thresholds, to spend at least 2% of their net income on corporate social responsibility (CSR). We exploit this regulatory change to isolate the shareholder value implications of CSR activities. Using a...

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Bibliographic Details
Published in:Journal of accounting research 2017-12, Vol.55 (5), p.1257-1300
Main Authors: MANCHIRAJU, HARIOM, RAJGOPAL, SHIVARAM
Format: Article
Language:English
Subjects:
Advertising
Companies
Corporate responsibility
CSR
Discontinuity
Indian Companies Act 2013
M14
M40
M41
M48
Money
Profitability
shareholder value
Shareholders wealth
Social responsibility
Stockholders
Thresholds
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Summary:In 2013, a new law required Indian firms, which satisfy certain profitability, net worth, and size thresholds, to spend at least 2% of their net income on corporate social responsibility (CSR). We exploit this regulatory change to isolate the shareholder value implications of CSR activities. Using an event study approach coupled with a regression discontinuity design, we find that the law, on average, caused a 4.1% drop in the stock price of firms forced to spend money on CSR. However, firms that spend more on advertising are not negatively affected by the mandatory CSR rule. These results suggest that firms voluntarily choose CSR to maximize shareholder value. Therefore, forcing a firm to spend on CSR is likely to be sub-optimal for the firm with a consequent negative impact on shareholder value.
ISSN:0021-8456
1475-679X
DOI:10.1111/1475-679X.12174