Enforcing Good Deeds: Investment Efficiency of Indian Firms Going Through CSR Law

Abstract

With the enactment of the 2013 government mandate, Indian corporations meeting specific criteria no longer have the discretion to forgo CSR expenditures. Previous studies have reported negative capital market reactions to this regulatory intervention. In contrast, our study offers a long-term perspective on the impact of the CSR law on firms’ investment efficiency. Using a difference-in-differences framework, this study examines publicly listed Indian firms from 2011 to 2018, capturing a clean pre- and post-mandate window that isolates the structural impact of the CSR law while excluding confounding and shocks such as the COVID-19 crisis. Thus, the paper focuses on identifying the long-term institutional and structural effects of CSR rather than short-term cyclical fluctuations. We find that the CSR law leads to an increase in the investment efficiency of affected firms, driven primarily by reductions in agency conflicts and information asymmetry. This effect is more pronounced among firms with a strong presence of active monitoring groups, such as Hindu-owned promoters and institutional investors. Improved efficiency is also profound among firms located in areas with a lower Human Development Index (HDI) and Gender Diversity Index (GDI). Our findings demonstrate the positive impact of mandatory CSR law on capitalism and present insights for policymakers for regulators as ESG and CSR mandates are increasingly debated and adopted.