When doing good comes at a cost: What mandatory CSR means for investors in India
ATUL GHORPADE, SABUJ KUMAR MANDL AND ALBERTO POSSO |
Corporate social responsibility (CSR) is often seen as a win-win: companies contribute to society while strengthening their reputation, building stakeholder trust and creating value for shareholders.
But what happens when CSR is no longer a choice?
New research examining India’s mandatory CSR regime suggests the answer may be complicated. Rather than rewarding companies for their social spending, investors may view compulsory CSR expenditure as a cost – with consequences for stock returns.
When CSR becomes compulsory
India provides a unique setting for examining this question. Under Section 135 of the Companies Act 2013, companies meeting certain thresholds for net worth, turnover or profitability must spend at least 2 per cent of their average net profit over the previous three years on prescribed CSR activities.
The regulation came into effect in April 2014, requiring eligible companies to establish CSR committees, disclose their CSR policies and spending, and explain any shortfall in expenditure.
Researchers analysed actual CSR spending by listed companies in India between 2010 and 2022, covering 19,118 firm-year observations. Using the regulatory change as a quasi-natural experiment, they compared companies subject to the mandate with those that were not.
The results were striking: companies complying with mandatory CSR requirements experienced significantly lower stock returns than non-complying firms after the regulation was introduced.
Why would investors react negatively?
The finding does not necessarily mean investors oppose CSR.
Previous research has found that voluntary CSR can benefit companies by reducing information asymmetry, strengthening relationships with stakeholders and lowering the cost of capital. In some markets, socially responsible companies have also been associated with stronger stock performance.
The difference may lie in whether CSR is voluntary.
When a company voluntarily invests in social or environmental initiatives, that decision can signal management quality and a commitment to stakeholders. But when companies are required to spend a specified amount, that signalling value may disappear.
Instead, investors may interpret the expenditure as another regulatory cost – effectively a form of tax on the company.
The researchers describe this as the shareholder expense view, suggesting mandatory CSR can reduce shareholder value because it imposes costs while providing fewer of the reputational or signalling benefits associated with voluntary CSR.
More spending doesn’t change the picture
Interestingly, the negative relationship with stock returns was not simply a result of companies spending large amounts on CSR.
The effect remained across companies with higher and lower levels of CSR expenditure. Even exceeding the mandated 2 per cent threshold did not significantly change the stock-return outcome.
This suggests investors may be responding less to how much companies spend and more to the fact that the spending is mandated in the first place.
The researchers also identified a possible mechanism: mandatory CSR increased companies’ exposure to systematic risk without generating a corresponding increase in expected returns.
Finding the right balance
The findings raise an important question for governments considering mandatory CSR frameworks: can regulation intended to create social benefits unintentionally impose costs on the companies being regulated?
The researchers suggest policymakers could consider incentives for companies that voluntarily go beyond the mandated minimum, such as tax credits for additional CSR spending. This could help restore some of the signalling value that compulsory spending removes.
Importantly, the research does not suggest CSR itself destroys shareholder value. The researchers note that evidence from voluntary CSR regimes, including in the United States and China, has found more positive relationships between CSR and stock performance.
Instead, the findings highlight how the design of CSR regulation can influence how markets perceive and value corporate social responsibility.
The lesson from India is therefore not that companies should stop doing good. It is that governments may need to find the right balance between encouraging corporate responsibility and allowing businesses the flexibility to make CSR a genuine part of their strategy.
AUTHORS
Atul Ghorpade (Doctoral Researcher) and Professor Sabuj Kumar Mandal are from the Indian Institute of Technology Madras, and Professor Alberto Posso is Head of the Department of Accounting, Finance and Economics at Griffith University and a member of the Griffith Asia Institute.
This article is a synopsis of the journal article: Ghorpade, A., Mandal, S. K., & Posso, A. (2026). Impact of mandatory corporate social responsibility expenditure on stock return: empirical evidence from India. Applied Economics, 1–17. https://doi.org/10.1080/00036846.2026.2666391