Mandatory CSR and its impact on audit fees

Purpose India has mandated corporate social responsibility (CSR) expenditure under Section 135 of the Indian Companies Act, 2013 – the first national jurisdiction to do so. The purpose of this paper is to examine the impact of mandated CSR expenditure on firms’ stock returns by using actual CSR spending data, whereas the previous studies mostly focus on voluntary CSR proxied by CSR scores. Design/methodology/approach The authors estimate their baseline regression by using ordinary least squares(OLS) method. Although the baseline regression involving CSR expenditure and stock returns using ordinary least squares method are estimated, endogeneity and reverse causality biases are addressed by using two-stage least squares and generalized method of moments approaches. These approaches contribute mitigating endogeneity bias and biases associated with unobserved heterogeneity and simultaneity. Findings The findings document that mandatory CSR expenditure has a negative impact on firms’ stock returns which supports the “shareholders” expense’ view. This result remain robust after controlling for endogeneity bias and the use of both standard and robust test statistics. The authors however observe that this result holds for the firms with actual CSR expenditure equal to the mandated amount but does not hold for the firms with actual CSR expenditure greater than the mandated amount. Therefore, the authors provide evidence that CSR expenditure’s impact on stock returns depends on whether firms simply comply the regulation or voluntarily chose an amount of CSR expenditure above the mandated amount. Originality/value The primary contribution is to present a valid and robust evidence of negative effect of mandated CSR spending on firms’ stock returns when the mandatory CSR spending rule is already in place. This study contributes by examining the impact of mandated CSR spending on stock during post-implementation period (2015-2017), whereas other studies by Dharampala and Khanna (2018); Kapoor and Dhamija (2017); and Mukherjee et al. (2018) mainly examined the impact of legislation on Indian CSR. The authors use mandated actual CSR expenditure, whereas previous studies mostly focus on voluntary CSR proxied by CSR scores.

PurposeWith corporate social responsibility (CSR) becoming mandatory, several firms in India have been compelled into spending resources on CSR while their business strategy and processes were unprepared to take up CSR activities, effectively. In this light, the CSR relationship with other business functions would be altered. Using Thomson Reuters data from 2010 to 2018 (pre-mandate to post-mandate) this study aims to re-examine the relationship between CSR and financial performance.Design/methodology/approachThe current study is rooted in the bandwagon-bias effect theory and uses a long-term data (2010–2018) of Indian firms. It uses Refinitiv Thomson Reuters ESG rating to measure CSR and accounting measures for financial performance (FP) to make a pre-post analysis of the impact that mandatory CSR regime has had on firms performance. The study uses the weighted panel regression method.FindingsThe relationship between CSR and FP is different when CSR was voluntary than when it has been mandated by Law. CSR has a positive effect over the FP during the voluntary phase but this positive relationship weakens during the mandatory phase. The waning effect of CSR over FP substantiates the presence of bandwagon bias effect which can be explained by the crowding-in of several companies engaged in CSR activities because of the mandatory CSR law.Research limitations/implicationsvFew countries have made CSR mandatory therefore CSR literature is limited. But mandating CSR is a growing phenomenon so this study augments to the body of knowledge. Until now literature generally converged on a positive relationship between CSR performance and FP but the current study shows altering directions to this relationship in a changing CSR environment. The use of the bandwagon-bias theory contributes to the theoretical approaches. Theoretically, the findings add to the body CSR literature and offer impetus to the evolving domain of impact measurement and reporting.Practical implicationsResults of the study offer a clear indication to managers that they need to re-strategise their CSR activities during the mandatory CSR environment if they wish to draw instrumental benefits of a positive impact on the FP of their firms. CSR expenditure is now a leveller so managers may either exceed the mandatory 2% expenditure as some firms did during the voluntary CSR phase or else design their CSR implementation plans to bring about a more impactful positive change. Communicating the impact of CSR to influential and powerful stakeholders beyond the mandatory reporting to the government is yet another way through which managers can draw benefits of CSR activities. Additionally to draw positive results from CSR activities firms may consider adopting international reporting and benchmarking standards such as the GRI and ISO 26000. Finally, the results of the study can be used by policymakers to make a note that the CSR law is causing a weakening of the financial benefits and therefore.Social implicationsThe results of the study can be used by policymakers also need to make a note that the CSR law is causing a weakening of the financial benefits and therefore firms are adopting shortcuts, by donating the required amount of funds. But donation of funds defeats the real purpose of mandatory CSR which is social impact, therefore the regulators may want to make the necessary changes unplug the gaps in the CSR law to ensure better adherence to the law in spirit and a real impact on the ground activities.Originality/valueWhile CSR–FP relationship has been extensively explored but limited studies have explored this relationship in a mandatory CSR environment and no other work presents a comparative view of the CSR–FP relationship, namely, before and after the mandatory CSR policy. The current study is one of the limited few studying the impact of mandatory CSR policy on FP, and the only one that uses the bandwagon-bias effect to explain the phenomenon of weakening impact of CSR on FP of firms. Bandwagon-bias effect has been used in studying consumer behaviour, where group effect impacts behaviour of individuals and with mandatory CSR policy, firms following the other firms leading to crowding in. Using the bandwagon-bias effect has found limited attention from the CSR scholars, the current study uses this theoretical basis and therefore augments the CSR literature.

Purpose This study aims to examine the impact of mandatory corporate social responsibility (CSR) regulations on audit fees, using Section 135 of India’s Companies Act, 2013, as a quasi-natural experiment. The regulation mandates firms exceeding specific financial thresholds to allocate 2% of their net profits to CSR. Unlike voluntary CSR, which often signals strong governance, mandatory CSR imposes compliance obligations that may increase audit complexity, risk and costs. While prior research has focused on voluntary CSR’s impact on audit fees, this study explores how mandatory CSR influences firm level outcomes, offering insights into the distinct effects of regulatory compliance on audit practices. Design/methodology/approach The study uses a quasi-natural experimental design, using difference-in-differences (DiD), instrumental variable (IV) and regression discontinuity (RD) methodologies to analyze the impact of Section 135. Firms subject to the regulation were compared to unaffected firms, while accounting for prior CSR engagement. The analysis identifies audit fee changes attributable to mandatory CSR, distinguishing them from voluntary CSR effects. Robustness checks ensure reliability of the results across various methodological frameworks. Findings Mandatory CSR significantly increased audit fees for newly compliant firms due to heightened compliance and agency costs. Firms already engaged in voluntary CSR before the regulation showed no significant fee changes, underscoring the regulatory driven nature of the audit fee premium. These findings highlight that mandatory CSR imposes external obligations that increase audit complexity, unlike voluntary CSR, which signals governance strength and reduces audit risk. The study offers valuable insights for policymakers and auditors navigating the compliance challenges of CSR mandates. Research limitations/implications This study focuses on India’s Section 135 CSR mandate, making it a single country case study. While this provides a unique regulatory context to examine mandatory CSR, it limits the generalizability of findings to other institutional settings. In addition, the study centers specifically on audit fees, leaving other firm-level outcomes unexplored. Future research should investigate broader consequences of CSR mandates, such as their impact on operational efficiency and stakeholder relationships. Social implications This research highlights the social implications of mandatory CSR regulations, emphasizing their role in promoting corporate accountability and societal welfare. By identifying the compliance costs associated with mandatory CSR, such as increased audit fees, the study underscores the need for balanced regulations that achieve social goals without imposing excessive burdens on firms. It also raises awareness of the challenges faced by newly compliant firms, encouraging policymakers to support smoother transitions. The findings contribute to understanding how regulatory mandates can shape corporate behavior, fostering a more sustainable and socially responsible business environment. Originality/value This research provides original insights into the under explored area of mandatory CSR and its implications for audit fees. While prior studies primarily focus on voluntary CSR and its signaling effects on governance and risk, this study highlights the distinct compliance driven costs of mandatory CSR. By leveraging India’s Section 135 CSR mandate as a quasi-natural experiment, the research identifies significant audit fee premiums for newly compliant firms, offering a nuanced understanding of regulatory impacts. The study contributes to both stakeholder and agency theory, providing valuable implications for policymakers, auditors and firms navigating the challenges of CSR regulations.

PurposeThis paper aims to examine the diverse levels of corporate social responsibility (CSR) expenditure among Indian companies and its influence on their performance. The study aims to determine whether exceeding the mandatory CSR spending limit provides an edge to companies that outperform in enhancing corporate firm value.Design/methodology/approachA dynamic model using system generalized method of moments (GMM) was used to analyze a balanced panel data set of 191 firms over seven years, spanning from 2016 to 2022. Return on assets was used as a proxy to gauge financial performance. At the same time, the study also examined the robustness of the results by considering return on equity and Tobin’s Q as additional measures.FindingsThe study results indicate that, in a mandatory CSR setting, all companies are generally perceived as performing and reporting on CSR equally. Hence, it will not make any payoff, although few companies outperform. Therefore, companies should differentiate themselves regarding CSR spending and reporting to claim a competitive advantage in the market. The study also suggests that the payoff of mandatory CSR expenditure for both performing and outperforming companies is reflected more in non-quantifiable firm characteristics than in measurable performance metrics.Research limitations/implicationsThe period of study covers 7 years, i.e. 2015–2016 to 2022–2023. This may limit capturing long-term CSR practices and firm performance trends. Additionally, data from only 191 Indian companies restrict generalizability; future research should include diverse geographic regions with mandated CSR spending to provide a more comprehensive view. In subsequent studies, contextual factors like regulatory changes and macroeconomic conditions could be considered moderating variables.Practical implicationsThe study provides valuable insights to top management, indicating that spending beyond the threshold limit of mandatory CSR spending does not enhance corporate firm value. Instead, this additional investment may yield benefits in the form of goodwill and reputation over the long term.Social implicationsThis study assists corporations in optimizing their CSR strategies to enhance their social and financial performance impact. Moreover, the study suggests ways to improve the CSR payoff and the need for increasing stakeholder satisfaction.Originality/valueThe study provides original insights into the relationship between mandatory CSR spending and firm performance in the Indian context, revealing that CSR spending does not significantly impact financial metrics, and it highlights the importance of considering a non-quantitative matrix to enhance the firm value in a mandatory CSR setting.

PurposeIn this paper, the authors examine the relation between cross-listing and the noncompliance with the mandatory corporate social responsibility (CSR) expenditure regulation in India, the first country to legally mandate the CSR expenditure.Design/methodology/approachThe authors apply panel logit and ordinary least square (OLS) regression models to examine the impact of cross-listing on the noncompliance with the mandatory CSR expenditure regulation because panel regression has lesser multicollinearity problems and has the benefit of controlling for individual or time heterogeneity mostly present in cross-section or time series data.FindingsUsing a sample of 1,027 listed Indian firms, the authors show that the cross-listed firms are more likely to comply with the mandatory CSR expenditure than non-cross-listed firms. The authors further show that this relation holds only for those firms which are exposed to higher agency problems, for firms affiliated to business groups and for firms operating in high litigation risk industries. Finally, the authors show that cross-listed firms complying with the mandatory CSR expenditure command more valuation premiums.Practical implicationsThis study’s results suggest that the noncompliance of the Indian firms with the mandatory CSR expenditure regulation comes down once they cross-list their shares in the US or the UK since such firms have to bond to the stronger corporate governance standards of the listed country. Hence, the authors recommend that merely making the investment in CSR activities mandatory may not serve the purpose and the convergence in corporate governance as well as compliance with the CSR expenditure can be achieved through cross-listing in US and UK markets.Originality/valueOne, the authors analyze the effect of cross-listing on the likelihood and magnitude of noncompliance with the CSR mandate. Two, this study is based in India where CSR expenditure has been made mandatory under the Companies Act, 2013. Using CSR mandate as a natural experiment, the authors have access to a richer data set on CSR in terms of the actual expenditure made by the company on CSR activities and the mandatory amount to be spent in a particular year.

Post privatization of high-speed rail with corporate social responsibility (CSR) in an international transportation market: Mandatory CSR versus voluntary CSR

PurposeThe purpose of this study is to investigate the role and impact of state regulation of corporate social responsibility (CSR) spending on company actions and to examine whether making mandatory CSR encourages businesses to engage in social welfare projects. Additionally, the authors also investigate whether these CSR expenditures can enable India to meet the Sustainable Development Goals (SDGs) 2030.Design/methodology/approachCSR expenditure data from the government repository of 22,531 eligible companies in India were studied from FY2014–2015 to FY2019–2020. CSR spending is further classified according to development areas of Schedule VII of the Companies Act, 2013, and mapped with the SDGs to see which ones the corporations have prioritized.FindingsCSR spending increased from INR 10,066 crore in 2014–2015 to INR 24,689 crore in 2019–2020. Companies have prioritized CSR expenditure on education, followed by health care and rural development. The number of companies spending more than the mandated expenditure increased by around 75% from 2014–2015 to 2019–2020. However, the “comply or explain” approach of the law has led to a major number of companies spending zero on CSR. Companies have generally concentrated on moving CSR funds to designated funds rather than using them for capacity development to instill social responsibility culture.Originality/valueThis study provides evidence of the impact of mandatory CSR expenditure on welfare activities and SDGs. Unlike previous research, the results of this study are based on CSR expenditures rather than voluntary CSR scores.

Purpose The study examines the impact of Corporate Social Responsibility (CSR) spending on financial performance among India’s top CSR-spending firms, following the introduction of mandatory CSR under the Companies Act, 2013. It explores whether CSR contributes to firm profitability and efficiency, with a focus on Return on Assets (ROA), Return on Equity (ROE), and Profit After Tax (PAT). Design/methodology/approach An explanatory research design was adopted using secondary data for the period of 10 years (FY 2014-15 to 2023-24). Pool Regression analysis was employed to examine the relationship between CSR spending and firm-level financial performance indicators. Findings Results show a significant positive relationship between CSR spending and PAT, suggesting that CSR investments enhance long-term profitability. However, the effects on ROA and ROE are negative and statistically insignificant, indicating that CSR may not immediately improve short-term accounting returns. Practical implications The findings emphasize the importance of sustained CSR investment as a strategic tool for enhancing firm profitability. Policymakers are encouraged to continue supporting mandatory CSR provisions, while managers should recognize CSR as an investment in long-term value creation rather than short-term efficiency gains. Originality/value This study advances the CSR–financial performance debate by providing evidence from India’s mandatory CSR based on actual CSR spending, rather than content analysis. Unlike prior industry-specific studies, it spans multiple sectors and uses a decade of post-mandate data, showing how CSR builds reputational capital and stakeholder trust, translating into long-term financial benefits.

PurposeThis paper aims to examine the relation between promoter ownership (PO) and corporate social responsibility (CSR) expenditure in India, the first country to legally mandate the CSR spending.Design/methodology/approachThis paper applies panel regression to examine the impact of PO on actual and excess CSR expenditure because panel regression has lesser multicollinearity problems and has the benefit of controlling for individual or time heterogeneity mostly present in cross-section or time series data. The results are robust to testing the CSR expenditure decision (to engage or not to engage in CSR) by using the binary choice logit model.FindingsBased on the agency theory, this study shows a nonlinear relation between PO and CSR expenditure, which suggests that promoters start extracting private benefits of control at the expense of outside shareholders and engage in lesser CSR expenditure only when their ownership crosses a threshold level of 52% approximately. This study further shows that the nonlinear relation between PO and CSR expenditure is more pronounced for firms that are more prone to agency problems, for business group firms than standalone firms and for firms not following the Companies Act 2013 CSR mandate.Practical implicationsThe findings shed light at the idea of how promoters’ incentive alignment should be proposed and followed to encourage a firm’s social investment activities.Originality/valueFirst, this study argues that the relation between PO and CSR expenditure is nonlinear in nature, by showing that the impact of PO on CSR expenditure is adverse only at higher level of PO. Second, this study’s richer data set on CSR expenditure not only allows the authors to analyze the relation for actual CSR spending by the firms but also helps to examine the excess spending made over and above the mandatory spending, as directed by the Companies Act, 2013.

This paper aims to investigate whether firms that comply with corporate social responsibility (CSR) expenditure and undertake voluntary sustainability reporting will have lower systematic risk and higher stock returns—the proxies for measuring firm performance—in mandatory CSR regimes in India. The instrumental approach of stakeholder theory asserts that firms considering stakeholders’ interests, including societal interest, are likely to show better firm performance compared to others. Therefore, on the basis of such a theory, this study attempts to link sustainability reporting and CSR compliance with firm performance. One-way Analysis of Variance (ANOVA) and post-hoc tests were used to examine the proposed hypotheses and analyze the results for firms meeting the criteria of CSR provisions and are listed in the National Stock Exchange (NSE) of India. The period of study covers four financial years from 2015–16 to 2018–19, after India mandated CSR expenditure on April 1, 2014. Results reveal that markets value those firms that meet the mandatory CSR expenditure requirement but do not undertake voluntary sustainability reporting. The findings offer important implications for firms, investors, and policymakers of countries, including those that are planning for CSR legislation.

The impact of mandated corporate social responsibility: Evidence from India’s Companies Act of 2013

The Impact of Mandated Corporate Social Responsibility: Evidence from India's Companies Act of 2013

We examine the value‐relevance of corporate social responsibility (CSR) expenditure utilizing the Indian setting of mandatory CSR spending regulation which commenced in 2014. India is the only country where regulators mandate both CSR reporting and spending. Our interest is in two types of firms that meet the minimum specified thresholds: firms that voluntarily made CSR expenditures pre‐regulation (voluntary spenders) and firms that did not (forced spenders). This separation in revealed preference allows researchers and investors to observe, at least on average, a firm's true CSR strategy type (proactive/leader versus reactive/follower) through their pre‐regulation expenditure strategy. This unique quasi‐experimental setting allows us to investigate whether CSR spending is positively associated with shareholders’ value, both when spending was voluntary pre‐regulation (for voluntary spenders) and after it became mandatory post‐regulation (for voluntary and forced spenders). We find that for voluntary spenders, the markets assess CSR expenditure as valuation‐enhancing pre‐regulation, but post‐regulation the valuation benefits are significantly weakened. The market's assessment is that a forced spender's (imposed) CSR expenditure is, on average, less valuable than that of voluntary spenders, consistent with such spending being viewed as a form of corporate taxation. Further, we find that shortfalls from the required spending amount are penalized by the market for voluntary spenders but rewarded for forced spenders. We also find that advertising appears to play an important communication role both pre‐ and post‐regulation. We view the results as being consistent with the notion that mandated expenditures are viewed differently than those made voluntarily.

PurposeThis study aims to investigate the influence of institutional investors on corporate social responsibility (CSR) spending among Indian firms, focusing particularly on distinctions between domestic and foreign institutional ownership. It examines how institutional ownership shapes CSR spending in different contexts of firm profitability and size and during external shocks such as the COVID-19 pandemic, thus contributing to understanding investor activism’s role in emerging markets under mandatory CSR regulatory frameworks.Design/methodology/approachThe study analyzes data from 2,171 Indian firms over 2014–2023, comprising 11,134 firm-year observations. It applies a two-stage least squares (2SLS) regression model to address potential endogeneity between institutional ownership and CSR spending effectively. Additional robustness analyses evaluate the consistency of findings across contexts, including profitability, firm size and the impact of the COVID-19 pandemic, ensuring a holistic understanding of the institutional ownership–CSR relationship.FindingsResults indicate a significant positive impact of institutional ownership on CSR spending, with domestic institutional investors exhibiting stronger influence than foreign investors. Institutional influence is more pronounced in smaller, loss-making firms and intensified during the COVID-19 pandemic. These findings suggest institutional investors use CSR strategically to enhance firm legitimacy and stability, especially under economic distress or uncertainty, highlighting their critical role in driving sustainable governance practices in the Indian context.Research limitations/implicationsThis study focuses solely on listed Indian firms subjected to CSR mandates, limiting generalizability beyond regulated CSR environments. Further, the analysis mainly captures financial and institutional dimensions. Future research could incorporate qualitative analyses or comparative cross-country studies to deepen understanding of institutional investors’ motivations and strategies behind CSR engagement.Practical implicationsThe findings underscore the importance of fostering institutional investor engagement, especially domestic institutions, to promote sustainable and accountable CSR practices. Policymakers are recommended to create targeted regulatory frameworks incentivizing institutional investments in CSR, particularly in financially vulnerable or smaller firms. Firms can strategically leverage CSR initiatives to strengthen legitimacy and governance during crises. Educational initiatives highlighting CSR’s long-term benefits could also encourage responsible institutional investment behavior.Originality/valueThe study uniquely addresses the gap concerning endogeneity in the relationship between institutional ownership and CSR through advanced econometric techniques (2SLS). It differentiates between domestic and foreign institutional investor impacts, particularly under crises like COVID-19. Examining moderating roles of profitability and firm size provides insights into investor-driven CSR. This enriches theoretical and empirical perspectives on institutional activism and corporate governance within mandatory CSR frameworks in emerging economies.

We investigate the nexus between corporate social responsibility (CSR) and firms' stock market liquidity. Using actual firm-level CSR expenditure data and a quasi-natural experiment setup of a mandated CSR regulation in India, we find that firms complying with the mandate experience significantly higher stock market liquidity, relative to non-CSR firms in the post-CSR mandate period. This effect seems to be more pronounced among CSR firms not affiliated to business groups, with concentrated promoter ownership, with low institutional ownership, with foreign sales and having operations in multiple locations. Further, we find that firms spending more on education and healthcare projects as part of their mandatory CSR engagement have higher stock market liquidity. Our results are in line with the conjecture that mandatory CSR regulation could lead to reduced information asymmetry and improved social and reputational capital, and thus improve the stock market liquidity of CSR firms. Finally, we show that mandated CSR firms, having superior stock market liquidity, obtain higher market valuations in the long run.