Bansal et Al

Summary: This study examines the effectiveness of the Companies Act in India, which mandates that
companies spend 2% of their profits on corporate social responsibility (CSR) initiatives. The study
analyzes the impact of the Act on firms’ reporting of CSR activities and their expenditures on CSR.

The study finds that the Act led to a significant increase in the likelihood of firms reporting their CSR
expenditures. Eligible firms, those required to comply with the Act, spent an average of 1% of their
profits on CSR. This suggests that the Act has been effective in Inducing firms to allocate a portion of
their profits towards CSR initiatives.

Furthermore, the study explores the role of peer pressure in motivating CSR. It finds that the positive
effect of peer pressure diminishes after the implementation of the Act. This suggests that the regulation
may have crowded out intrinsic motivations for CSR, as firms now focus more on meeting the
requirements set by the Act rather than being influenced by their peers.

The study also examines the impact of the Act on charitable donations that do not comply with the Act.
It suggests that the passage of the Act may lead to a decrease in expenditures on such donations.
However, the Act did not lead to a reduction in overall charitable donations, indicating that CSR
expenditures did not crowd out charitable expenditures.

The study uses econometric models to estimate the effects of the Act on firms near the threshold of
eligibility. It incorporates peer effects and controls for individual and time-varying characteristics. The
regression discontinuity design method is employed to estimate the treatment effect of the Act.

The data used in the analysis is obtained from the Prowess IQ database and includes firm-level financial
variables for publicly listed and unlisted companies in India. The sample includes observations from 2010
to 2016, with a total of 39,736 unique firms.

Overall, the study finds that the Companies Act had a positive impact on CSR reporting and
expenditures. However, there is still a substantial level of undercompliance. The Act has shifted the
motivation for CSR from peer influence to profit-driven compliance. While the Act has been effective in
increasing CSR expenditures, full compliance has not been achieved.

Data and summary statistics

The data used in this study is obtained from the Prowess IQ database compiled by the Centre for
Monitoring Indian Economy (CMIE). The database includes financial information for publicly listed and
unlisted companies in India, with a sample of 39,736 unique firms from 2010 to 2016.

The summary statistics show that eligible firms, those required to comply with the Companies Act, were
significantly larger in terms of average profits, net worth, and sales compared to non-eligible firms.
Eligible firms spent an average of Rs 8 million per year on CSR, while non-eligible firms had negligible
expenditures. Eligible firms also spent an average of Rs 4.4 million on charitable donations, compared to
Rs 0.2 million by non-eligible firms.

Figures 2 and 3 illustrate the trends in CSR expenditures. CSR expenditures by eligible firms remained
relatively flat until 2015 and then increased significantly in 2015 and 2016. Non-eligible firms had
negligible CSR expenditures throughout the period. Charitable financial donations by eligible firms were
larger than those by non-eligible firms and remained relatively unchanged even after the Companies Act
was passed.

Overall, the data and summary statistics provide insights into the CSR expenditures and charitable
donations of eligible and non-eligible firms, highlighting the impact of the Companies Act on these
variables.

Result

The results section of the paper (Bansal et al., 2021) presents the findings of the empirical analysis on
the impact of the Companies Act on firms’ CSR decisions.

The authors find that eligible firms, those required to comply with the Act, had significantly higher CSR
expenditures compared to non-eligible firms. The difference-in-difference analysis shows that the Act
had a positive and significant effect on eligible firms’ CSR expenditures. The estimated treatment effect
indicates that eligible firms increased their CSR expenditures by approximately Rs 8 million per year after
the implementation of the Act.

The regression discontinuity analysis confirms the positive impact of the Act on CSR expenditures. Firms
just above the threshold of eligibility had significantly higher CSR expenditures compared to firms just
below the threshold. The treatment effect of the Act at the threshold level is quantified, indicating a
substantial increase in CSR expenditures for eligible firms.

The Inclusion of peer effects in the analysis shows that the intrinsic motivation for CSR, driven by a desire
to imitate peers, became statistically insignificant after the Act was implemented. This suggests that the
Act influenced CSR expenditures based on profits rather than peer behavior. The Act did not lead to a
reduction in charitable donations, indicating that the increase in CSR expenditures was not accompanied
by a crowding out effect on charitable expenditures.

The results are robust to different definitions of eligibility and control groups, as sensitivity analyses yield
similar findings. The inclusion of additional firm characteristics, such as sales and net worth, in the
regression models does not significantly alter the main results.

Overall, the results indicate that the Companies Act had a positive and significant impact on firms’ CSR
expenditures, leading to increased corporate social responsibility among eligible firms in India.