Mandatory CSR spending and firm risk: New evidence from regulatory intervention in India

Abstract

We investigate the effect of mandatory Corporate Social Responsibility (henceforth CSR) spending regulation on firms' systematic risk. Using a difference-in-differences identification strategy, we find that firms subject to CSR regulation exhibit higher levels of systematic risk than firms not subject to CSR regulation. Furthermore, our analyses reveal that operating leverage is a potential mechanism by which mandatory CSR spending increases systematic risk. Overall, our findings show that a CSR-induced differentiation strategy is ineffective if all firms are mandated to engage in CSR. Instead, it imposes societal costs on firms at the expense of shareholders.