The Politics of Mandatory Corporate Philanthropy

India requires certain companies to disclose corporate social responsibility (CSR) expenditures and meet CSR targets. However, these firms cannot classify political donations as CSR expenditures. I argue that firms belonging to business groups, which are dependent on political contacts, substitute between CSR expenditures and political donations. Business group members become less likely to meet CSR targets and they reduce CSR spending around the time of elections in the state where their headquarters are located.

Consistent with the substitutability thesis, these firms increase measures of official and illicit political donations around elections. The staggered and predetermined timing of state elections supports a causal interpretation of this substitution effect.