Trade Shocks and Investments in Corporate Social Responsibility · 2019-08-26 · Trade Shocks and Investments in Corporate Social Responsibility Shantanu Banerjeea;, Swarnodeep Homroyb

Trade Shocks and Investments in Corporate Social

Responsibility

Shantanu Banerjeea,∗, Swarnodeep Homroyb and Aurélie Slechtena

aLancaster University, United Kingdom, bUniversity of Groningen

Abstract

This paper investigates the role of stakeholder preference on corporate social respon-

sibility (CSR). We find that Indian firms increase CSR expenses when trade restrictions

are initiated against competing Chinese exports from countries with high stakeholder

preference for CSR but not when these shocks open up other export markets. Capital

investments and R&D of Indian firms increase due to the same shocks, irrespective

of their country of origin. Finally, CSR has a bigger impact on firm value when the

demand shocks originates from countries with higher CSR preference. Collectively, our

results provide empirical evidence of investment motives for CSR.

JEL Codes: D22, O12, M14, G32

Key Words: Corporate social responsibility, Trade, Anti-dumping, India.

Acknowledgement: We thank Janis Berzins, Sudipto Dasgupta, Shubhashis Gan-

gopadhyay, Mohamed Ghaly, Maitreesh Ghatak, Ian Gregory-Smith, Colin Green,

Swami Kalpathy, Maurizio Zanardi, Alminas Zaldokas, and Gijsbert Zwart for their

suggestions on previous versions of this paper. We are also grateful for comments

from the participants at Lancaster University Economics and Finance seminar series,

University of Groningen EEF Seminar series, Baltic Economic Conference, Emerging

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Market Corporate Finance Conference, Financial Management Association-Asia Pa-

cific Conference, Royal Economic Society Annual Conference, EEA Women in Retreat

and Work, Pension and Employment Group Annual Conference.

* Corresponding author: [email protected]

1 Introduction

In this paper, we attempt to disentangle the investment motive of corporate social respon-

sibility (CSR) from the agency motives. Discretionary corporate spending on philanthropic

causes are substantial and increasing over time. Understanding the motivations of CSR is,

therefore, an important question. There are two competing views of corporate philanthropy.

First, the investment view argues that CSR enhances a firm’s reputation among customers,

workers and other legislators, and is therefore consistent with shareholder value maximiza-

tion (Brown, Helland and Smith, 2006; Besley and Ghatak, 2007). The benefits of reputation

through CSR engagements accrue in the long term (Brown, Helland, and Smith, 2006; Porter

and van der Linde, 1995).1 The alternative viewpoint is that CSR expenses reflect agency

costs arising out of managerial entrenchment (Masulis and Reza, 2015; Tirole, 2001). Man-

agers use this form of discretionary expenses to advance their personal preferences and image,

to the detriment of shareholder value.2

Against this backdrop, we aim to contribute to the debate on the motives of such discre-

tionary expenses. Like any other long term investments, CSR initiatives can reduce short-

term profits but such expenses can be consistent with the objective of long-term shareholder

wealth maximization. However, it is econometrically challenging to isolate the investment

motive due to possible reverse causality in financial performance and CSR expenses. There-

fore, our approach is based on exogenous changes in the determinants of corporate philan-

thropy. Specifically we investigate the firms’response to changes in stakeholder preference

for CSR, triggered by trade-shocks in the export market.

1The benefits of these philanthropic investments may include building brand loyality (Kitzmueller andShimshak, 2012), attracting and retaining high skilled employees (Turban and Greening, 1997), charginghigher rent for buildings (Eichholtz, Kok and Quigley, 2010), and insurance from regulatory monitoring(Baron, 2001; Maxwell, Lyon, and Hackett, 2000).

2We do not examine the causal effects of corporate philanthropy on profitability. Several studies examinethe effect of corporate philanthropy on firm performance (see Margolis, Elfenbein and Walsh (2009) for ameta-analysis of this literature), but it is hard to infer causal evidence of performance effect of corporatephilanthropy due to endogenous associations.

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Stakeholders’preferences for ethical behaviour varies across countries, and firms in dif-

ferent countries are exposed to different levels of stakeholder preference for CSR (Arora and

Gangopadhyay, 1995. When firms export to foreign markets, they encounter preferences of

the foreign stakeholders (consumers, buyers of intermediate products, and governments). In

a recent study, Newman, Rand, Tarp and Trifkovic (2018) find that Vietnamese exporters to

the U.S. engage in more CSR activities than Vietnamese exporters to China.3 If stakeholders

in certain countries, like the US and the EU, have a higher preference for corporate phil-

anthropy, then firms exporting to these countries will have higher CSR expenses than firms

exporting to countries with lower stakeholder preference for CSR. When positive demand

shocks originate from countries with higher (lower) preference for corporate philanthropy,

exporting firms will increase (not change) their CSR expenditure.4

Our empirical strategy is based on the adjustment of CSR expenses by Indian firms

when faced with an exogenous shock to their export demand. In particular we are interested

to examine if the adjustment of CSR expenses depend on which export destinations the

demand shock originates from. Our empirical tests rely upon data from top five hundred

Indian listed firms for the period 2006—2013.5 Our use of Indian data is motivated by

two important considerations. First, Indian firms face asymmetric preference for corporate

philanthropy in the domestic and the export markets. Indian firms are exposed to relatively

higher stakeholder preference for CSR compared to the domestic market when they export to

destinations like the US and the European Union (EU). According to a report by Bain and

Company (2015), individual and institutional charitable donations form 0.6% of India’s GDP.

3This is related to the cross-country variation in individual philanthropy: India and China’s ranks 106and 144 in the World Giving Index, while US is ranked 2nd, UK 6th and the Netherlands 7th.

4This argument holds if CSR expenses are undertaken as investments. If agency motives drive CSRchoices, then a positive demand shock will increase managerial discretion and, hence, CSR expenses irre-spective of the origin of the shock.

5In 2013, India passed a mandatory CSR regulation whereby listed firms are obliged to donate 2% oftheir net profits to corporate philanthropy, subject to some threshold conditions from 2014. Our sampleperiod ends in 2013 to prevent possible confounding effects of these regulations. Nevertheless, we check therobustness of our results by limiting the sample period to earlier dates.

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Comparative figures for the US, UK and China are 2.2%, 1.3%, and 0.1%, respectively.6 The

difference in the stakeholder preference for corporate philanthropy in the export markets

is central to the our empirical design. Second, inspite of the low domestic stakeholder

preference, CSR expenses by Indian firms are substantial: the average CSR expense of

Indian firms is about 3% of the net profit. To use a benchmark, the average R&D expense

of Indian firms in our sample is 2.93% of net profit.

We identify cases of antidumping initiations by all export destinations against Chinese

products. We do a product-level matching of Indian exporters to these countries. Anti-

dumping (AD) is a form of trade barrier whereby an importing country (e.g. the US)

can unilaterally impose anti-dumping duties on products exported by firms from another

country (e.g. China) based on evidence that these exporting firms are charging lower price

for their exports than for their domestic sales, and that the dumping practices are injuring the

interests of the domestic producers in the importing country. AD duties are aimed to increase

the price of imported products from the target country and weaken their competitiveness

relative to the domestic producers. However, this also increases the relative competitiveness

of other exporters of the same product.

AD is a commonly used countervailing measure. The number of countries using AD

doubled between 1980 and 2003, with Australia, Canada, the EU, New Zealand and the

US historically being the largest users of this form of trade barrier. Emerging economies

like Brazil, Argentina, and South Africa are also increasingly using AD (Vandenbussche and

Zanardi, 2010).

AD petitions are initiated by domestic producers of the goods and not export market

competitors. Therefore, AD initiations on Chinese exports are unrelated to actions of foreign

competing firms (e.g. Indian exporters). Thus AD initiations on Chinese products are ex-

6This cross-country variation in individual philanthropy is reflected in India and China’s rank of 106 and144 in the World Giving Index, while US is ranked 2nd, UK 6th and the Netherlands 7th.

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ogenous demand shocks to competing Indian exporters and should not affect their corporate

giving directly. These trade barriers on Chinese products from the U.S. and the EU not

only make Indian exports more competitive, but also increases the exposure of the Indian

firms to customers with a higher preference for corporate philanthropy (Bown and Porto,

2010; Kitzmueller and Shimshak, 2012). Indian firms do not face an increased stakeholder

preference for CSR when AD on Chinese products are initiated from other large exporting

destinations (e.g. United Arab Emirates, South Africa, Brazil, Argentina, etc.)

In recent years, China experienced the largest number of antidumping duty initiation

from a wide cross-section of countries and Indian exporters benefitted significantly in the

majority of these events. The theoretical underpinning of our quasi-natural experiment is

the trade deflection in favour of Indian firms by an exogenous decrease in the competitiveness

of similar Chinese products in the export market. To cite an example, before 2004, Chinese

exports of polyethylene terephthalate (a thermoplastic polymer resin, commonly known as

PET) products was 150% that of India. Following an anti-dumping petition filed against

Chinese PET products by US manufacturers in 2004, Indian exports of PET products to

the US overtook those from China so that by 2008 Indian exports was thrice that of China.

This illustrates how anti-dumping can adversely (positively) affect exports for the affected

(competing) countries.

We find that Indian firms increase their CSR expenses when US and EU initiate anti-

dumping duties against competing Chinese products. We then investigate how charitable

donations of Indian firms change when anti-dumping measures are initiated on Chinese

products by India’s other large trading partners, excluding the US and the EU. For every

year, we identify the top five trading partners of India (other than the US, EU, and China)

and estimate the effect of AD on Chinese firms from these countries.7 We find no significant

increase in charitable donations of Indian firms in response to anti-dumping initiations from

7The following countries are the largest export markets for Indian firms over the sample period: UAE,Saudi-Arabia, Brazil, South Africa, Argentina, and Japan.

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these countries on Chinese products.

Our research design explicitly takes account of the agency and legacy motives of CSR

by comparing between firms that are closely held through cross ownership within a business

group structure with standalone firms. Coexistence of firms with these two types of owner-

ship structures in India provides us with an ex-ante variation in motives for CSR. Khanna

and Palepu (2000), and Bertrand, Mehta, and Mullainathan (2002) suggest that charitable

donations of group affi liates can reflect agency costs and can be motivated by rent-seeking in

the form of private benefits for the controlling shareholders. On the other hand, corporate

philanthropy can lead to a reputational gain in the product market over a long time horizon

and the lower participation constraint might make such investment more viable for the busi-

ness group affi liates (Bénabou and Tirole, 2010). The CSR spending group affi liates can also

reflect better access to financing through the internal capital market (Khanna and Yafeh,

2007; Gopalan, Nanda, and Seru 2007). These studies indicate that business group firms

are expected to spend more on CSR but they do not provide a clear prediction on how CSR

strategy will differ across the two groups in response to shocks to stakeholder preferences.

We find that business group affi liates, on average, have higher levels of CSR compared

to unaffi liated firms but both types of firms changes their CSR in response to AD shocks in

similar ways. The extent to which firms adjust their CSR expenses depend on the access to

finance and planning horizon. We find that Indian firms’reaction to AD shocks are similar

controlling for these differences. The results also do not differ between firms producing

final goods and intermediate goods. This mitigates the concern that our results are driven

primarily by a subset of firms.

One concern is that the above results do not reflect CSR preferences of stakeholders in

the US and the EU, but is simply an artefact of the relative importance of the US and the EU

as export markets for Indian products. The share of exports of Indian producers to the US

and EU, and other main markets are reasonably balanced: Brazil is just as large as the EU,

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whilst the United Arab Emirates is the largest export destination for India. Nevertheless,

to address this concern, we examine whether other investments of Indian firms vary by the

origin of the anti-dumping initiation on Chinese products. Autor et al (2017) show that

import competition has a significant impact on R&D expenditure and other investments. If

export-shocks from non-US, non-EU countries are relatively less important, we expect to see

no significant changes in other investments of Indian firms. Our results suggest that Indian

firms increase both capital expenditure, and R&D in response to AD on Chinese products,

regardless of the origin of the export shock. These results corroborate the investment motive

for corporate philanthropy. Additional R&D and capital investments are likely reactions

to meet additional demand but are uncorrelated with stakeholder preference for CSR. In

contrast, firms only increase CSR when they expect to benefit from stakeholder preference

for such expenses. These results reinforce the idea that CSR expenses reflect investment

motives.

Our paper adds to the literature by examining the motives of corporate philanthropy

using the interaction of domestic firms with foreign stakeholders. In a related paper, Masulis

and Reza (2015) focus on the association between corporate philanthropy and the private

preference of the CEO, and the channels through which corporate giving affects firm value.

They show that corporate giving to sources closely linked to the CEO is value-reducing

for the firm, which is consistent with the agency motive of corporate philanthropy. By

contrast, Ferrell, Liang and Renneboog (2016) find no evidence that CSR is a function of

a firm’s agency problem (measured with two ex-ante incentive mechanisms of corporate

governance). We employ a different approach in which we use an exogenous shock to the

exposure to foreign stakeholders and provide evidence in favor of the investment motives of

corporate philanthropy. Our results do not invalidate the agency motive hypothesis as we

cannot disentangle the motive for corporate giving in the absence of a demand shock but we

establish that such expenses respond to investment demand from the export market.

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The remainder of the paper proceeds as follows: Section 2 describes the institutional

framework for corporate governance in India. Section 3 reviews the main drivers of corporate

philanthropy under the investment and agency motives and develops hypotheses. Section 4

presents the data and key variables used in our empirical analysis. Section 5 discusses the

main results and our robustness checks. Section 6 concludes.

2 Institutional background

The institutional framework for corporate governance in India dates back to 1875 with the

establishment of the Bombay Stock Exchange (BSE). The Companies Act of 1956 governed

the activities of listed firms in India, which was subsequently replaced by the Companies Act

of 2013. Since the liberalization of the economy in 1991, Indian firms have been increasingly

reliant on external sources of finance and the role of government has decreased. There has

been a shift away from the traditional interventionist approach and toward a more Anglo-

American style of governance. Similar in spirit to the 2002 Sarbanes-Oxley Act, the Securities

and Exchange Board of India (SEBI) in 2001 implemented Clause 49 for all firms listed in

the BSE 200 index and subsequently to all listed firms. Clause 49 lays down a range of

governance imperatives for listed firms, from board composition to independence of audit

committee, to enhanced disclosure norms.

The dispersed shareholding pattern, with a relatively small equity ownership of managers

such as in the US or the UK, is not the only form of corporate holding in India. It repre-

sents about 53% of the firms listed in BSE. About 11% of the firms are controlled by the

government (federal and state), and three of the top six Indian firms in 2014 is one of these

public sector firms. Finally, about 36% of the largest Indian firms are parts of diversified

family-owned business groups.

Business group affi liates, often controlled by a family through cross-holdings are common

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in the emerging economies. The strategic choices and financial outcomes for family firms

are well documented (Shleifer and Vishny, 1997). A common characteristic of these business

groups is the presence and influence of promoters. The term is commonly used to mean

controlling stakeholder, which can be an individual or a family. Promoters collectively hold

about 54% of the shares in business group firms. Consequently, tunnelling of assets can be a

source of ineffi ciency and loss of profitability. Bertrand, Mehta, and Mullainathan (2002) find

evidence that controlling stakeholders in the business groups use their entrenched positions

to benefit at the expense of minority shareholders. However, Khanna and Palepu (2000) find

that affi liate firms of diversified business groups outperform stand-alone firms in the same

industry.

Although Indian business groups share some characteristics of the pyramidal structures

in Japanese keiretsu, several key differences make them unique. Similar to keiretsu, individ-

ual firms within an Indian business group are legally separate entities, they are primarily

responsible to their own shareholders, and their accounts are audited separately. However,

unlike in keiretsu, in which the affi liate firms are connected and coordinated through a

common group-specific bank, firms within an Indian business group are coordinated by in-

terlocked boards and by members of the promoter family, similar to the holding structure of

Korean chaebols (Khanna and Palepu, 2000). A typical Indian business group has dozens

of firms with complex cross-holdings. The complexity of cross-holdings makes it diffi cult to

accurately compute the cash flow rights of the promoters.

The combination of dispersed shareholding, such as in the US and the UK, and an insider-

dominated structure, such as in China and Japan within the same institutional framework

and macroeconomic structure, allow us to compare discretionary spending by firms with

different levels of entrenchments and access to internal capital markets. As shown in the next

section, we will exploit these differences to control for the ex-ante variations in the motives for

CSR. Moreover, market and non-market institutions in India are relatively stable, allowing

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for results that are comparable with extant corporate social responsibility and corporate

governance literature, which is based predominantly on evidence from US and UK firms

(Sarkar and Sarkar, 2000). The presence of stand-alone firms with dispersed shareholding

and South Korean chaebol-type business group affi liates with complex cross-holdings within

the same regulatory and accounting framework allows us to overcome many shortcomings of

the cross-country comparisons of socially responsibility of firms. At the same time, India’s

financial system bears resemblance to many emerging markets (Gopalan and Gormley, 2013),

which makes our results comparable to the empirical evidence on corporate governance of

other emerging economies.

3 Conceptual framework and related literature

A commonly agreed view on CSR is that it constitutes a form of corporate expenditure.

Therefore an important question is why firms voluntarily incur that cost. Two broad motives

for corporate philanthropy are discussed in the literature. First, although being costly, CSR

could be part of a long-term profit-maximizing strategy. CSR may increase customer’s

willingness-to-pay for a product or create some brand loyalty (Baron, 2001; Besley and

Ghatak, 2007). By spending resources on CSR, firms then make an investment to build

their image and cater to the preferences of certain group of consumers which they expect will

increase sales and profits over time. This first motive, which we will refer to as the investment

motive, is consistent with shareholders’wealth maximization. The second motive of CSR

stems from manager’s personal preference and it is a cost of managerial entrenchment. In

this case, corporate giving is at the expense of shareholder wealth creation.

The implications in terms of financial performance are opposite, depending on which of

the two motives dominates. However, it is diffi cult to isolate the financial returns to CSR

because it is endogenous: high-profit firms can spend more on CSR than low-profit ones. In

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this section, we first review the main drivers of CSR and how they differ under each motive.

We then explain how we use these differences and an exogenous demand shock to identify

the dominant motive for CSR.

3.1 CSR as an Investment

Under the investment motive, CSR is assumed to increase consumers’willingness-to-pay for a

product and profit-maximizing managers use CSR tactically as part of an overall advertising

strategy designed to promote the firm’s image (Baron, 2001; Besley and Ghatak, 2007). One

main driver of CSR is then consumers’preferences for CSR. Firms selling their product in

a country where consumers (and more generally) are more responsive to CSR should spend

more on corporate giving.

The variability in stakeholder preferences across countries has been attributed to differ-

ences in terms of purchasing power of final consumers (McWilliams and Siegel, 2001; Arora

and Gangopadhyay, 1995). As a result, increased engagement in foreign market where final

consumers have higher purchasing power should lead to more CSR activities from Indian

firms. At the same time, Newman et al (2018) argue that CSR practices are transmitted

through international trade, irrespective of the nature of the product. This implies that

even firms exporting intermediate goods may adjust their CSR practices following an export

shock. As argued by Manasakis et al. (2017), when CSR started becoming widespread,

its further encouragement along the supply chain became a central policy objective in both

the US and the EU. If the exporting firms are part of an integrated supply chain they may

have no choice but to adhere to higher standards in terms of CSR. Additionally, firms from

emerging economies, such as India, are likely to face liabilities of origin from other firms in

the US and the EU; that is negative perceptions about their ability to conduct their busi-

ness responsibly (Marano et al., 2016). Investing in CSR has been found to be an effective

strategy to overcome such liabilities.

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Additionally, corporate philanthropy can be viewed as a long-term investment, trading

off current profitability with longer-term customer loyalty and corporate legacy. Such social

investments are likely to be facilitated by longer planning horizon, and lower constraints

to investment financing. Business group affi liation could constitute a good proxy for both

planning horizon and access to financing. Oh, Chang, and Martynov (2011) find that long-

term shareholders are more likely to drive corporate philanthropy in South Korean firms.

At the same time, investment financing can be relatively easier for group affi liates because

of the access to internal capital markets (Masulis, et al. 2011; Gopalan, et al. 2007).

Therefore, on balance, business group affi liates may be more willing and able to invest in

corporate philanthropy for long-term reputation building. Banerjee and Homroy (2018) also

show that Indian group affi liates emphasize longer term investments, while stand-alone firms

emphasize shorter-term effi ciency measures. Our empirical strategy exploits these variations

in stakeholders’preferences across India’s main trading partners to provide evidence of the

investment motive for CSR. In particular, the origin of an export shock is likely to be an

important predictor of the firms’response to these shocks. A shock originating from the

EU or the US opens up investment opportunity for firms to cater to higher stakeholders’

preference for corporate philanthropy in the EU and the US. CSR expenses of firms should

then increase. However, if the demand shock originates from export markets with lower

stakeholders’ preference for corporate philanthropy, firms have little motives to increase

their expenses.

3.2 CSR as an Agency Cost

Previous studies have noted that corporate social contributions may fit into the argu-

ment that managerial discretion leads to expenses that reflect their personal preference

(Williamson, 1964; Jensen and Meckling, 1976; Navarro, 1988). In particular, CSR can be

viewed as a preferred expenditure designed to boost the manager’s prestige in the community

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or, more altruistically, simply as a way to generate some warm-glow effect (Baron, 2008).

The level of these preferred expenditures depends on the managers’entrenchment, which

is typically related to the ownership structure (Jensen and Meckling, 1976). If corporate

philanthropy is a manifestation of the agency problem, then it is likely to be correlated with

firm ownership. The direction of the association between firm ownership and CSR is not un-

ambiguous. It will depend on how ownership structure affects a firm’s level of entrenchment.

To formalize this idea, we use the concept of discretionary profit (Navarro, 1988). Share-

holders define a minimum level of earnings necessary to prevent either a change in manage-

ment by shareholders or a corporate takeover by outside buyers in the market for corporate

control. Any surplus above this minimum threshold is discretionary profit that can be used

to finance managers’preferred expenditures, including CSR. An increase in this minimum

threshold means a lower level of managerial entrenchment and a lower ability of managers

to use CSR for their own private benefits.

Although of a different nature, managers of both types of firms present in India can have

agency motives for corporate philanthropy. Managers of widely-held firms have a lower stake

in the firm and can use charitable donations to further their personal preferences. On the

other hand, business group affi liates with concentrated ownership can have more discretion

in spending if the managers are themselves part of the family. Whilst group-affi liated firms

are likely to have lower agency problems arising out of separation of ownership and control,

family ownership can lead to controlling shareholders engaging in corporate philanthropy

which gives them private benefits at the expense of minority shareholders. In that view,

some papers highlight the greater agency problems among group-affi liated firms (Bertrand

et al., 2002). Managers of widely-held firms should then be characterized by a lower initial

level of entrenchment and lower CSR spending.

From the above discussion, ownership structure and consumers’ preferences for CSR

stand out as two important drivers. Under both motives, group-affi liated firms are expected

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to spend more on CSR. Comparing CSR spending of group-affi liated and widely-held firms

won’t help us disentangle the motives for CSR. By contrast, changes in consumers’pref-

erences affect CSR spending only under the investment motive. Changes in consumers’

preferences within a country are diffi cult to observe and it can be affected by CSR strategies

of firms. However, as Indian firms also export to other countries, we can use cross-country

variations in consumers’preferences. Arora and Gangopadhyay (1995) show that customer

preference for corporate philanthropy is affected by purchasing power. Moreover, Newman

et al. (2018) find that stakeholders in China seem less concerned about corporate social

responsibility practices than stakeholders in the US or the EU. This seems consistent with

data on cross-country variation in corporate philanthropy: India and China’s ranks of 106

and 144 in the World Giving Index, while US is ranked 2nd, UK 6th and the Netherlands

7th.

Just comparing CSR spending of exporting and non-exporting firms is not suffi cient to

identify the motives for CSR, because exports, as financial performance, may be endogenous.

Our approach to disentangling the agency and investment motives of corporate philanthropy

is to examine the potentially asymmetric impacts of exogenous demand shocks originating

from export markets characterized by different stakeholders’preference for CSR: (1) shocks

originating from the EU and the US (high preference for CSR) and (2) shocks originating

from other main trading partners of Indian firms (low preference for CSR).

Under the investment motive, a shock originating from the EU or the US opens up export

opportunities for firms, but they need to cater to higher stakeholder preference for CSR in

these markets and such expenses of firms should then increase. However, if the demand

shock originates from export markets with lower stakeholder preference for CSR, firms do

not have an investment motive to increase their charitable expenses. Therefore, the origin

of the demand shock is likely to be an important predictor of the firms’strategic response

to these shocks.

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The difference in terms of ownership structure between both types of firms will affect

the size of the impact of the shock on CSR spending. Given lower financial constraints

and easier access to internal capital markets, business group affi liates are likely to scale up

corporate philanthropy compared to unaffi liated widely held firms. This is our second hy-

pothesis. From an agency standpoint, a positive demand shock should increase profits and

so relaxes constraints on discretionary spending and hence both types of firms can increase

their philanthropic expenses, no matter what the stakeholder preference for corporate phil-

anthropy at the export market is. Moreover, given that managers from group-affi liated firms

are more entrenched, they should have a level of preferred expenditure relatively close to

their optimum. A positive demand shock, whatever its origin, could have a stronger impact

on CSR expenses of widely held firms, which have lower initial entrenchment and are then

ex ante more constrained regarding their preferred expenditures.

4 Data and Key Variables

In this section, we present the data and key variables that we will use to test our hypotheses

and investigate the agency and investment motives for corporate philanthropy.

4.1 Sample

A major challenge to research on corporate strategy in emerging economies is the availability

of reliable and consistent data. India has a mature capital market with internationally

comparable financial information and industry classifications. The main source of our data

is Prowess, maintained by the Centre for Monitoring the Indian Economy (CMIE). The

sample period is from 2006 to 2013. Although data on Indian firms are available before that,

the coverage and the consistency of the data are better 2006 onward. For example, Siegel and

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Choudhury (2012) note that historical Prowess data had survivor bias, which is corrected for

in later years. Additionally, the Indian Companies Act of 2013 mandates that firms spend

a minimum of 2% of the average net profit made during the three immediately preceding

financial years on CSR. By limiting our sample period up to 2013, we minimize potential

confounding effects of the enforcement of this act from April 1, 2014.8 Our sample consists

of the top five hundred listed firms on the BSE, which represent over 95% of the total market

capitalization. We identify firms that have been listed at least once in BSE 500 within our

sample period, and include all available years for each of these firms. We exclude publicly

owned as they lend themselves poorly to comparison in our context.9 We also exclude firm-

year observations with missing data on ownership, as well as firm performance measures.

Our final sample is an unbalanced panel of 677 firms with 4,143 firm-year observations.

Table 1 presents the summary statistics on firm and board characteristics and philanthropic

expenses. All monetary values are winsorized at 1% levels and expressed terms of US$ as of

the year 2000. Description of key variables is presented in appendix A.

[Insert Table 1 around here]

4.2 Corporate Social Responsibility

We measure corporate social responsibility (CSR) aggregating the annual charitable dona-

tions, expenses in environmental causes and pollution control, and investments on social

infrastructure. Firms report expenses in corporate social responsibility initiatives to the

Securities and Exchange Board of India as part of their financial filings. Corporate social

expenses includes spending on charitable donations, the building, and maintenance of public

8It is possible that Indian firms anticipated this new regulation and, because of that, decided to increasetheir CSR spending before 2013. However, as the anti-dumping initiatives we use in our empirical analysis arespread over the all sample period (2006-2013), this should not qualitatively affect our results. Nevertheless,we check the robustness of our results by limiting our sample till 2012.

9For example, CEOs or Managing Directors of public sector firms are fixed term bureaucratic appoint-ments and the pay is contingent on tenure and rank.

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services (parks, primary schools, etc.), and expenditures on environmental and pollution con-

trol.10 Our main dependent variable is the log of the linear addition of charitable donations,

environmental expenses, and expenditure on social and community infrastructure. CSR is

zero in 38% of the firm-year observations. The median CSR spending is $ 19,054, which is

about 3% of net profits. While the nominal values of CSR of our sample firms may seem

small relative to studies based on US firms, it is important to view it with respect to the

size of the firm, and other corporate investments. Mean CSR expenses of Indian firms are

of the same order of magnitude as the mean R&D expenses ($ 18,271) , and approximately

50% of that of mean capital expenditure ($ 44,108). In these terms, incurring CSR expenses

are of significant financial and strategic implications for Indian firms.

4.3 Anti-Dumping

Anti-Dumping initiations targeted at Chinese products is an exogenous demand shock to the

competing Indian firms. The data on AD is obtained from the World Bank’s Global Anti-

Dumping database (Bown, 2016), which provides information on all anti-dumping petitions

initiated by each country. Importing countries can choose to initiate an AD case against a

product, a firm, or all firms in a given industry from a particular exporting country. This

can initially lead to the imposition of a primary AD measure. Once dumping and damage

to the domestic industry are established, a final AD measure is imposed on the goods under

investigation. These measures are generally in effect for a three to five-year period. We use

AD initiations as a dummy, and not the imposed measures because the different types of

final anti-dumping measures are not directly comparable.11

The AD measures are designed to make the targeted goods less competitive in the im-

porting country. There is no plausible reason to expect the AD initiations on Chinese firms

10In unreported results, we check the robustness of our results to the individual components of CSR.11For example, AD penalties can be in the form of ad-valorem tax, minimum import price, quotas, etc.

The economic effects of these penalties are not straightforward to compare.

16

by an importing country to be affected by Indian firms. AD petitions are initiated by do-

mestic producers against targeted imports, and not by competitors in the export market.

Our empirical design works through the trade-deflection channel: there is some evidence

that trade barriers imposed against one exporter increase market access to other exporting

countries (Bown and Porto, 2010). Therefore such penalties, irrespective of their exact de-

sign, are likely to impose the intended adverse demand shock on the targeted exporters and

a positive and exogenous demand shock to competing firms from other countries.

We employ a product-level matching algorithm to identify Indian firms affected by anti-

dumping initiations on Chinese products. First, we collect information on anti-dumping

initiations against Chinese products by the United States, and the European Union from

2003-2013 (countries characterized by relatively high stakeholders’preference for CSR). To-

gether, 24% of Indian exports go to the US and EU. We match the Chinese products under

anti-dumping investigation to products sold by our sample of Indian firms.12 We then gen-

erate a binary measure, Anti − dumping − US/EUit−1 ,for Indian firms who export those

products to the US and the EU which are subject to anti-dumping investigation for Chinese

exporters. This gives us the ‘treatment group’of firms who are exposed to the positive de-

mand shock. Within the sample period, we have 73 events of anti-dumping initiations from

the US and the EU on Chinese products which are also exported by Indian firms to the US

and the EU. This gives us 722 firm-year observations of affected Indian firms. The value of

Anti− dumping−US/EUit−1 equals to 1 in only the years for which anti-dumping petition

was under investigation and the years when anti-dumping measures were in effect.

Next, we identify AD initiations on Chinese products from India’s other large export

partners (excluding US, EU, and China). To do that, we look at the top 5 export destinations

of Indian products for every year of the sample period. These countries are United Arab

Emirates (UAE), Brazil, Mexico, South Africa, and Argentina (countries characterized by

12The detailed matching algorithm and the dataset with the matched products are available upon request.

17

lower stakeholders’preference for CSR). Together these countries account for 17% of Indian

exports. We use this to construct a binary measure, Anti − dumping − Othersit−1 ,which

gives us the treatment group of firms who are exposed to a positive demand shock from

non-US/EU export destinations.13 Within the sample period, we have 41 events of anti-

dumping investigations from these countries on Chinese products. These give us 281 firm-

year observations on affected Indian firms. In figure 1, we present a map of India’s export

destinations and the stakeholder preference for CSR in those regions, and in table 2 we

present the volume of India’s exports and the number of anti-dumping initiations against

Chinese products from those countries.


FIGURE 1 India’s Export Destinations and Foreign Stakeholder Preference for CSRIn this figure, darker shades of grey represent the large export destinations of Indian productsand the red borders show the countries with higher stakeholder preference for corporate phila-.thropy. In our empirical analysis, we attempt to compare the effects of export shocks fromcomparably large export markets but with different stakeholder preference for CP.

13There are 12 instances of Chinese products being simultaneously subjected to AD investigations byUS/EU and India’s other major export destination. We drop these observations to focus only on non-overlapping shocks.

18

4.4 Ownership Measures

We use a binary variable, Bu sin essGroup, to account for differences in ownership structures.

Business groups with a network of public firms, often controlled by a family, is a common

ownership structure in India. Group affi liates are likely to be characterized by concentrated

shareholding, cross-holdings of equity, greater access to an internal capital market, and

potentially higher control of the promoter family. This classification is consistent with the

measures used in the literature on emerging market finance (Khanna and Palepu, 2000;

Bertrand, Mehta, Mullainathan, 2002; Siegel and Choudhury, 2012).

Prowess provides information to accurately identify the shareholders who control a firm

either directly through their own shareholding, or indirectly through cross-holdings. We also

create a variable, %Shareholding − Promoters, which combines the direct shareholding by

promoters and the proportion of shares held by persons acting in concert with the controlling

shareholders. It is a measure of direct and indirect control of a firm by the promoters. Of the

677 firms in our sample, 267 (39.44%) are group affi liates and 410 (60.56%) are stand-alone

firms with dispersed shareholding.

4.5 Control Variables

We use the relevant accounting information from annual financial statements reported in

Prowess, cross-checked with information collected from Datastream using a string-matching

algorithm by firms’names. A firm’s profitability is measured by returns on assets (ROA),

and we control for firm size using natural log of sales.14 Information on board size and the

number of independent directors is collected from Prowess. Following the implementation of

the Clause 49 of SEBI in 2009, the mean proportion of independent directors on the board

14We also check the robustness of our estimates with alternative measures of firm size (total assets) andincluding another measure of firm performance (Tobin’s Q approximated by MTBV).

19

is expected to be at least 50% for all firms in our sample period. We also control for the

export intensity of a firm. Another strand of research suggests that institutional ownership

is positively associated with social responsibility (Shleifer and Vishny, 1997; Sethi, 2005;

Siegel and Vitaliano, 2007). Therefore, we also control for institutional shareholding by

the percentage of equity shares held by financial institutions such as mutual funds, banks,

insurance companies, and pension funds (%Shareholding − Institution).

In panel A of table 3, we compare the key variables for firms with different ownership

structure. Columns 1 and 2 present the mean values of key variables for group affi liates

and stand-alone firms, respectively and Column 3 reports the difference in means. The

mean CP for group affi liates is $19,180; for stand-alone firms, it is $8,675. The mean is

affected by the fact that about 30% of concentrated shareholding firm-years and about

40% of dispersed shareholding firm-years have no charitable donations. Group affi liates

are on average larger than widely held firms in terms of sales revenue and total assets.

However, no statistically significant difference in profitability and performance seems to exist

between business group firms and widely held private stand-alone firms. Also, no statistically

significant differences are evident in board-level characteristics. In panel B of table 3, we

compare the characteristics of firms for firm-years with and without philanthropic expenses.

Firms with charitable donations are, on average, bigger in terms of total assets, have a

higher proportion of exports to sales, and have a higher shareholding of both promoters and

institutional investors. No significant difference emerges in the size and the proportion of

independent directors on the board.


20

5 Empirical Results

The central focus of our empirical analysis is to study the investment motives of CSR. In this

section, we consider the econometric issues and present the results of our baseline models

and robustness tests.

5.1 Univariate Analyses

5.1.1 Export orientation and corporate social responsibility

One important observation from the univariate analyses is that CSR is higher in export-

oriented firms. Since our exogenous shocks originate from the export markets of Indian

products, we investigate the relationship between the export orientation of firms and corpo-

rate philanthropy more closely using propensity score matching. To compare CSR of business

group affi liates and widely-held firms with similar characteristics, we match firms from the

two ownership categories on sales, ROA, MTBV for each industry and year. We use the

nearest neighbourhood, radius, kernel, and Mahalanobis distance matching methods.


The results are presented in table 4 for subsamples of firms with high (above the 75th

percentile) and low exports (below the 25th percentile). In both the subsamples, the differ-

ence in CSR is positive and statistically significant at 5% level. However, the difference in

outcomes is much larger in the subsample of firms with low exports. The difference in CSR

of business group affi liates and firms with dispersed holding is mitigated by exports. We

have checked that the smaller difference in outcomes for the high-exports subsample stems

from higher CSR of widely-held firms with high export-orientation.

21

5.1.2 AD initiations on Chinese products and Indian exports

Our empirical design to identify the investment motive relies on the impact of export-driven

demand shocks on CSR expenses. For that design to be appropriate, we need to ensure that

additional necessary conditions are satisfied. First, anti-dumping as a trade barrier needs

to have a significant effect on exports. Second, anti-dumping initiations on Chinese prod-

ucts need to meaningfully affect the competing Indian exports. Vandenbussche and Zanardi

(2010) show that anti-dumping measures depress imports from the targeted country signifi-

cantly. Additionally, Bown and Porto (2010) show that Indian steel manufacturers benefited

in the forms of higher exports and profits when the US and the EU imposed safeguard trade

barriers on Chinese steel imports. They also show that Indian steel manufacturers expanded

existing capacity in response to this positive trade shock. Before systematically testing the

significance of the shock on the export in the treated group, we use two examples from our

data to highlight this point. PET-products exported by Chinese firms were brought under

anti-dumping investigations in 2004 from the US. As shown in figure 2a, Chinese exports of

PET-products were double that of Indian exports in the pre-2004 period. After 2004, Indian

exports of PET to the US overtakes Chinese exports and becomes twice that of Chinese

exports by 2008. Figure 2b shows a similar trade-deflection in favor of Indian products when

an anti-dumping petition was filed from Brazil against Chinese exports of steel-lined pipes

in 2011. These examples highlight the impact of anti-dumping on trade and the deflection

of trade to competing exporters.

22

Figure 2A AD on PET products from US on China and trade deflection to IndiaThis figure presents the time-series variation of Indian and Chinese exports ofPET products to US before and after anti-dumping initiations on Chinese exportsin the year 2004. Post-2004, Indian exports of PET to US overtakes that ofChina’s and becomes twice as large by 2008.

23

Figure 2B AD on Steel Products from Brazil on China and trade deflection to IndiaThis figure presents the time-series variation of Indian and Chinese exportsof steel-lined pipes to Brazil before and after anti-dumping initiations on Chineseexports in the year 2011. Post-2004, Indian exports of steel lined pipe products.overtake that of China

In table 5, we present a triple difference estimate of the effect of AD initiations on

competing Chinese products from the US and the EU on exports of group affi liates and

unaffi liated firms. We find that exports increase significantly in the post-AD periods for

both types of firms, but the difference in the increase is not statistically significant. To

quantify, exports (as a percentage of sales) of Indian firms increase by about 4% following

AD initiations on competing Chinese products by the US and the EU. A similar result

holds for anti-dumping initiations on competing Chinese products from other large export

geographies, where exports of Indian firms increase by about 5.6%. This suggests that the

anti-dumping shock has a statistically significant effect on exports through which it can affect

discretionary expenses of Indian firms.


24

Third, AD needs to be among the preference set of trade barriers that the importing

countries choose from. The United States and the European Union account for about half

of the global anti-dumping petitions filed (Moore and Zanardi, 2009). Zanardi (2006) shows

that developing countries like Brazil and Argentina are increasingly using anti-dumping as

a trade barrier. Finally, Indian exports to the countries that initiate anti-dumping petitions

against Chinese products needs to be substantial. Exports to the US and EU comprise about

24% of India’s overall exports. The non-US, non-EU countries chosen for the analyses are

the other top 5 export destinations of Indian products and comprise 17% of overall exports.

5.1.3 AD initiation on Chinese products and CSR of Indian firms

Having satisfied these necessary conditions, we compare the CSR expenses of group affi liates

and dispersed shareholding firms, before and after they are affected by AD initiations on

Chinese products. In effect, this gives us the triple difference in mean CSR. In table 6,

we present the difference in 3-year averages of CSR for periods before and after periods

of AD. Unconditionally, there are statistically significant differences in CSR across the two

types of firms. In periods after AD, both types of firms increase social expenses by similar

amounts (these increases are also statistically significant at 1%-level), so that the difference-

in-difference is statistically not significant at conventional levels.

To quantify, the CSR-to-profit ratio of Indian firms go up by 5% (on a baseline of 3%)

following anti-dumping investigations on competing Chinese products by the US and the

EU. In times of increased demand, managers of all firms increase CSR expenses, which we

interpret as preliminary evidence for the investment motives of CSR. We examine these

competing hypotheses using multivariate analyses in the following section.


25

5.2 Multivariate Analyses

5.2.1 Anti-dumping and Corporate Philanthropy

In this section, we extend the univariate analyses by controlling for a range of factors, and

test for alternative explanations. We regress natural log of CSR expenses on an indicator for

business group affi liates and controls for firm and board characteristics (size, performance,

board size, the proportion of independent directors, etc.) in column 1 of table 7. All results

are for the pooled sample, with the year and industry controls, and robust standard errors

are clustered at the firm levels. The Business Group indicator has a positive and statistically

significant coeffi cient indicates that the group affi liates have higher CSR than unaffi liated

firms. This can be driven by both higher entrenchment through control, and by investment

motives with an aim to build a long-term reputation, financed through an internal capital

market.

Next, we attempt to identify the investment motive using export shocks to Indian firms

originating from anti-dumping initiations against Chinese products from the US and the

EU. These results are presented in column 2, where the main variables of interest are the

indicatorAntiDumping−US/EUit−1 and the interaction term ofAntiDumping−US/EUit−1

with the indicator for Business Group. Anti-dumping shocks have a positive and statistically

significant effect on CSR, and the interaction term is also positive and statistically significant

at 10% level. Therefore, it seems that Indian firms, in general, spend more in charitable

donations when AD on Chinese products increase export market access. Both group affi liates

and unaffi liated firms seems to increase CSR expenses in times of favourable export demand

from the US and the EU. This result provides further support for the investment motive of

CSR.


26

As the next step to understand the motives of corporate behavior, we examine philan-

thropic expenses of business group affi liates and unaffi liated firms around events of anti-

dumping initiation on Chinese products by India’s other major export destinations. Stake-

holder preference for CSR in India’s other large export destinations is, on average, lower than

that of the US and the EU. Therefore, if the increase in CSR of Indian firms in reaction to

anti-dumping on Chinese products from US and EU were driven by the investment motives

of catering to stakeholder preferences of the export market, such motives will be weaker in

this test. We present this result in column 3. We find no statistically significant association

of Anti− dumping −Othersit−1 with CSR in the pooled sample.

If corporate philanthropy reflects agency cost, and managers increase consumption of

private benefits of corporate philanthropy when the firm’s investment financing is easier, we

will expect to see an increase in CSR expenses irrespective of the source of the AD initiations

on Chinese products. That all firms seem to systematically differ in their adjustment of

corporate philanthropy to the origin of the export-market shock indicates that such spending

is aimed to cater to the demands of the foreign stakeholders.

The results reported in columns 1-3 are cross-sectional estimates of firms that are affected

by AD initiations on Chinese products with respect to firms that are not. In columns 4 and 5,

we compare differences in CSR adjustments between the two groups of ownership structures

following AD shocks. These estimates compare within-firm spells before and after exposure

to the export shock. In column 4, we find that the interaction term, Anti − dumping −

US/EUit−1 ∗ BusinessGroup is positive and only marginally statistically significant. Firms

increase CSR expenses when they are exposed to positive export-demand shock from the US

and the EU but there is no significant change in philanthropic expenses when similar export

shocks originate from other large export destinations.

27

5.2.2 Effect on Firm Value

How does the increase in philanthropic expenses in response to the demand shocks affect firm

value? We examine the value effects of firms that increase corporate philanthropy during

the positive demand shocks compared to firms that do not. In our firm-fixed effects models,

we compare the average market value of firms before and after periods of anti-dumping on

competing products. The results are presented in table 8. Unconditionally, higher corporate

philanthropy is correlated with higher firm value and the value of exporting firms increase

after the anti-dumping period. In addition, the interaction of CSRit−1 and Anti−dumping−

US/EUit−1 is positive and statistically significant. Therefore it seems that firms with higher

CSR have additional value gains from the demand shock. When we estimate a similar model

for the anti-dumping initiations from other export destinations, the parameter estimates and

the interaction of CSRit−1 ∗Anti− dumping−Othersit−1 are not statistically significant at

conventional levels. These results seem to reinforce the investment motives, insofar as the

value gain reflects the investor perception of the philanthropic expenses.


5.3 Alternate Explanations and Robustness tests

In this section, we summarize a battery of tests to rule out alternative explanations for the

increase in CSR expenses of Indian firms following AD initiations on Chinese products from

the US and the EU but not when the AD initiation is from other large export markets.

5.3.1 Magnitude of the demand shocks

First, it is possible that the increase in corporate philanthropy in reaction to positive export-

shocks from the US and the EU is not related to stakeholder preference for CSR, but because

28

trade shocks from US and EU are significantly stronger than export shocks from other

markets. Therefore it is plausible that firms adjust CSR in reaction to the magnitude of

the shock rather than the nature of it. In addition, if India’s other major export partners

are not heavy users of AD, then the insignificant results for CSR will be an artefact of the

low power of these tests rather than any underlying economic reason. We approach this

issue by examining how firms adjust other investments that are likely to be affected by

positive demand-shocks. Bown and Porto (2010) show that Indian firms expand capacity in

reaction to trade safeguard against Chinese steel products. We estimate the effect on Indian

firms’capital expenditure (Capex), and research and development expenditure (R&D) in

reaction to anti-dumping initiations on Chinese exports by US and EU, and by other large

export-destinations of Indian products. The results are presented in table 9.


In columns 1 and 2, we present the results for Capex and R&D of Indian firms when

Chinese exports are under anti-dumping investigation from the US and the EU, and in

columns 3 and 4 results when Chinese exports are under anti-dumping investigation from

India’s other large export destinations. We find that AD is associated with an increase in both

Capex and R&D, irrespective of the source of the AD initiation on Chinese products. Firms

expand capacity, and increase R&D in reaction to positive export-market shock, irrespective

of the source of the anti-dumping initiation but they increase CSR expenses only when the

shock originates in US or EU. This indicates a strategic investment motive rather than weak

shocks from the other major importers. Also, if the statistically insignificant association of

CSR with AD shocks from non-US, non-EU export destinations were due to the low power

of the test, we will expect that to affect the regressions with Capex and R&D as well.

29

5.3.2 Origin of the demand shocks

Second, it is possible that the effect of AD shocks on corporate philanthropy is driven by

a single country within the groups due to a spurious association. Therefore, we run our

basic specifications separately for the US and the EU, and Brazil (the heaviest anti-dumping

users in the other export destinations) and rest of the exporting destinations. The results

presented in table 10 show that our baseline results hold in all of these specifications. Of

particular interest is the comparison of the effects on the corporate philanthropy of anti-

dumping initiations from EU and Brazil which are similar in market size for Indian exports.

Whilst anti-dumping initiations from EU on Chinese exports increase philanthropic expenses

of Indian firms, such effects are absent for anti-dumping initiations on Chinese exports from

Brazil.


We also examine effects on Capex and R&D of anti-dumping initiations on competing

Chinese products by different export destinations separately. The results are presented in

table 11 and show that Indian firms increase Capex and R&D in response to anti-dumping

initiations on Chinese products, irrespective of the source of the anti-dumping initiation. If

we compare similarly sized export markets for Indian products like the EU and Brazil, in

this case, we find similar increases in Capex and R&D of Indian firms. These results are

supportive of the investment motives of corporate philanthropy.


30

5.3.3 Intermediate vs. Final Goods

It is plausible that differences in the product market brand image provide an alternate

explanation of our results. Firms selling consumer goods, and more visible brands may have

higher corporate philanthropy (Servaes and Tamayo, 2013) compared to firms producing

intermediate goods. If the product category and the ownership structure are correlated,

then our baseline results may be an artefact of the industry classifications. In our baseline

specifications, we use a set of industry dummies to control for this possibility. Further, we test

the difference in means of CSR for firms producing consumer goods, and firms producing

intermediate goods based on the main product category of the firm recorded in Prowess.

This difference is not statistically significant at conventional levels. This is consistent with

anecdotal evidence suggesting that CSR of Indian firms producing intermediate goods have

historically not been insignificant (e.g. Tata Steel, Reliance Petrochemicals, etc.). We present

these results in table 12.


5.3.4 Additional robustness checks

We finally run a battery of robustness tests. To begin with, we examine a subsample of

cases where AD initiation on Chinese products has led to final anti-dumping duties being

imposed. Only 66% of the AD initiations affecting our sample of firms led to a final AD

measure being imposed. Our main results (reported in appendix B) hold when we restrict

our treated group to these cases only.

Next, we check for mean-reversion in CSR after anti-dumping duties are revoked. We

do this by creating an alternative indicator for anti-dumping which equals to 1 for all years

after an anti-dumping petition was filed against a Chinese competitor of an Indian exporter.

31

If there is mean reversion in CSR, we will see a smaller positive, or indeed no significant,

effect of AD in this specification. Our estimates with this new indicator are similar to that

of our baseline results and do not suggest a reversion to mean, at least in the short term.

This result is consistent with Vandenbussche and Zanardi (2010) who show hysteresis effect

of anti-dumping measures on imports. These results are presented in appendices B and C.

In unreported results, we examine the possibility that institutional shareholding drives

corporate philanthropy (Smith, 1996; Shleifer and Vishny, 1997). From table 3, institutional

shareholding is higher in group affi liates compared to widely held firms. To attenuate this

concern, in our baseline specifications, we control for institutional shareholding. Further,

we partition the data for firms with high (greater than p75) and low (lesser than p25)

institutional ownership. Increases in CSR in response to demand shocks are not significantly

different between the two groups. We do a similar analysis for foreign shareholding, and our

main results persist.

Our baseline specifications contain industry dummies, but in alternate specifications, we

control for the industry competitiveness using the Herfindahl-Hirschman index (HHI). Our

main results remain unaltered. Finally, we test for the robustness of our results to estimation

techniques because not all firms in our sample engage in corporate philanthropy. Using a

censored dependent variable is likely to underestimate the parameter estimates. We check

for the robustness of our baseline results using Tobit regressions. The ordinary least squares

(OLS) estimates are likely to be biased only in the censored region. Therefore, we compare

the Tobit results with the OLS estimates for the subsample of firms with non-zero CP, and

our baseline results are not affected by the choice of estimation technique. These results are

omitted in the interest of brevity.

32

6 Conclusion

We examine the impact of foreign stakeholder preference on the CSR expenses of Indian

firms by exploiting trade deflections towards Indian exporters when AD investigations are

initiated against competing Chinese products. On average export (as a percentage of sales)

of affected Indian firms increase by about 4% following anti-dumping initiations on Chinese

products by the US and the EU, and by 5.6% following similar shocks from other major

export markets. Using firm level CSR data, we find that Indian firms increase philanthropic

expenses when the AD shocks originate from the US and the EU where average stakeholder

preference for CSR is relatively higher. In contrast, when the shocks originate from other

export destinations with lower stakeholder preference for corporate philanthropy, there is no

change in the CSR expenses of Indian firms. The effects of AD shocks on CSR expenses

are economically meaningful, and they are persistent. On average, Indian firms in our

sample increase corporate philanthropy by 5% (on the baseline average of 3% of net profits)

in response to anti-dumping investigations on competing Chinese products by the US and

the EU, and there is evidence of hysteresis in the increase of corporate philanthropy. The

effects are also similar across the ownership structure, i.e. Indian business group affi liates

vs. unaffi liated firms with dispersed shareholding, and similar for firms producing both final

goods and intermediate products.

It is important to highlight that our results do not establish any causal relationship of

corporate philanthropy with profitability, and only examines the strategic motives of CSR.

In addition, we do not have consistent information on the destination of the philanthropic

expenses of Indian firms within our sample period. The destination of these expenses can

be informative as it can shed light on the modes of CSR expenses in response to overseas

stakeholder preference. Following the regulation on mandatory corporate social expenses in

India, such data are likely to be increasingly available, although the regulation itself can

confound the strategic motives for CSR.

33

We also examine other investments of Indian firms in response to AD initiations on

Chinese products. Indian firms increase capital expenditure and R&D in response to AD

against Chinese products, irrespective of the origin of the shocks. Firms invest in capacity

expansion and R&D when there is a positive demand shock from any export destinations

but they increase philanthropic expenses only when such activities are likely to cater to

stakeholder preference. These results are important as they provide empirical evidence in

favor of the investment motives of CSR.

34

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39

Table 1

Descriptive Statistics of Key Variables

This table presents the summary statistics of the key variables used in the

empirical analysis. The sample period is 2006-2013 and all monetary values

are in ’000 US$ as of year 2000.

Variables N Mean p50 Std. Dev p10 p90

Panel A: CSR

Corporate Social Expenses 3,785 19.054 23.622 83.173 0 87.352

Panel B: Export and Antidumping variables

Anti-Dumping-US/EUit−1 4,143 0.161 0 0.367 0 1

Anti-Dumping-Othersit−1 4,143 0.023 0 0.415 0 1

Exports/Sales (%) 4,143 22.538 7.361 42.663 0.000 76.090

Panel C: Ownership Variables

%Shareholding-Promoters 4,143 41.577 51.122 20.847 25.186 74.235

%Shareholding-Institutions 4,143 17.806 15.199 14.496 6.000 37.113

Panel D: Board Variables

Board Size 4,143 9.949 9.000 3.328 6.000 33.000

% Independent Directors 4,143 51.799 50.000 16.181 16.181 92.487

Panel E: Financial Variables

ROA 4,143 0.083 0.077 0.111 0.0006 0.207

MTBV 4,143 1.419 2.360 2.542 0.006 5.278

R&D 3,762 18.271 12.867 19.670 0.258 69.901

CapEx 1,582 44.108 10.029 21.067 0.668 101.68

Sales (/1,000) 4,143 522.592 166.457 229.18 21.401 976.148

Total Assets (/1,000) 4,143 77.121 84.452 264.824 57.100 594.113

40

Table 2

Antidumping (AD) initiations by India’s major trading partners

In this table we present the number of AD initiations on China and India by

India’s large export destinations, and the mean of Indian exports to each

of these countries over the sample period 2006 - 2013.

Countries Indian Exports AD Initiations AD Initiations- AD Initiations-

(’000,00 US$) All China India

USA 286,325.30 445 116 28

EU 25,769.28 288 94 20

UAE 263,704.60 0 0 0

Argentina 4,012.81 218 71 11

Brazil 41,006.48 316 83 16

Mexico 12,302.43 100 48 03

South Africa 36,747.16 99 28 12

41

Table 3Univariate Comparison of MeansIn panel A, we compare performance, size, board characteristics, and CSRexpenses of business group affi liates and unaffi liated firms. The reportedmeans are calculated based on the subgroups of the full sample of 4,143firm years between 2006-2013. In panel B, we compare firms with andwithout CSR expenses. All variables are winsorized at 1% levels.***, **,and * denotes significance at 1%, 5% and 10% levels, respectively.

Panel AVariables Group Unaffi liated

Affi liates Standalones Difference

%Shareholding-Institutions 19.652 15.967 3.685**ROA 0.080 0.089 -0.009MTBV 1.532 1.501 0.031EPS 0.462 0.605 -0.143Sales (/1,000) 697.781 404.465 293.316***Total Assets (/1,000) 114.964 51.611 63.353**Export/Sales (%) 20.781 23.723 -2.942Board Size 10.137 9.195 0.222% Independent Directors 51.020 51.764 -0.744Corporate Philanthropy 19.180 8.675 10.505***

Panel BVariables Mean-No Mean- Difference

CSR CSRReturn on Assets 0.080 0.086 -0.006MTBV 1.553 1.780 -0.227EPS 0.513 0.558 -0.045Sales (/1,000) 667.104 650.722 16.372Total Assets (/1,000) 91.030 68.940 22.09**%Shareholding-Promoters 19.551 49.854 -30.303**%Shareholding-Institutions 16.705 18.518 -1.813**Exports/Sales (%) 17.660 21.924 -4.264**Board Size 9.548 10.210 -0.662% Independent Directors 50.656 50.892 -0.236

42

Table 4Propensity Score Matching ModelsWe match business group affi liates with stand-alone firms with dispersedshareholding using nearest neighbourhood (Panel A), radius =0.1 (Panel B)Gaussian kernel (Panel C), and Mahalanobis (Panel D) matching methods.The variables used in the matching are firm size, firm performance,market-to-book ratio for each industry and year. Firms are split into sub-samples of below and above median exports. ***,**, and * denote significan-ce at the 1%, 5%, and 10% levels, respectively.

Dependent Variable:Mean CSR as % of Net ProfitFirms with Firms withhigh exports low exports

Panel A: Nearest Neighborhood Match

Business Group - Standalone 3.42** 10.19**No. of Observations 2,129 2,017

Panel B: Radius Match (0.1)


Panel C: Kernel Matching


Panel D: Mahalanobis Distance Matching

Business Group - Standalone 9.20** 15.08*No. of Observations 1,962 1,998

43

Table 5

Effect of AD on Chinese products on Indian Exports (as % of Sales)

In this table we present univariate results of the differential impact of anti-dump

-ing penalties on exports. We compare the 3-year moving average of exports for

group affi liates and firms with dispersed shareholding, in periods before and after

anti-dumping initiation on competing Chinese products by the US and the EU.

***, **, and * denotes significance at 1%, 5% and 10% levels, respectively.

Anti-Dumping Firm Type Difference

Concentrated Dispersed

Before Anti-Dumping Yes 21.65 25.41 -3.76***

No 20.23 23.77 -3.54***

After Anti-Dumping Yes 25.98 28.57 -2.59**

No 21.67 24.81 -3.14***

After-Before Yes 4.33*** 3.16*** 1.17

No 1.44 1.04 0.40

Table 6

Effect of AD on Chinese exports on CSR (as % of Net Profits) of Indian firms

In this table we present univariate results of the differential impact of anti-dump

-ing penalties on CSR. We compare the 3-year moving average of CSR for

group affi liates and firms with dispersed shareholding, in periods before and after

anti-dumping initiation on competing Chinese products by the US and the EU.

***, **, and * denote significance at 1%, 5%, and 10% levels, respectively.

Anti-Dumping Firm Type Difference

Concentrated Dispersed

Before Anti-Dumping Yes 3.69 2.68 1.01***

No 3.55 2.58 0.97***

After Anti-Dumping Yes 3.86 2.81 1.05***

No 3.57 2.59 0.98***

After-Before Yes 0.17** 0.13** 0.04

No 0.02 0.01 0.01

44

Table 7Effect of Anti-dumping on Corporate Social ResponsibilityIn this table we present the results for the effect of anti-dumping initiations on Chineseexports on CSR of Indian firms who compete in the product market. The dependentvariable is Ln(CSR) in all columns. In column 1 we present the differences between busi-ness groups and unaffi liated firms, in columns 2 and 3 we add the effect of the ADinitiations on Chinese products from US/EU and other importing countries with the intera-ctions of the indicators for AD with the business group indicator, and in columns 4 and5 we report results with firm fixed effects.. Huber-White standard errors clustered atthe firm levels are in the brackets. ****, **, and * indicate significance at the 1%, 5%and 10%levels, respectively.

Dependent Variable: Ln(CSR)(1) (2) (3) (4) (5)

Anti-Dumping-US/EUit−1 0.692*** 0.937***(0.106) (0.082)

Anti-Dumping-Othersit−1 -0.0244 -0.074(0.133) (0.124)

Business Group 0.286*** 0.190*** 0.128**(0.040) (0.052) (0.060)

Anti-Dumping-US/EUit−1∗ 0.477* 0.386*Business Group (0.250) (0.197)Anti-Dumping-Othersit−1∗ 0.285 0.249Business Group (0.208) (0.216)Ln(Sales) 0.486*** 0.311*** 0.519*** 0.168*** 0.231***

(0.035) (0.025) (0.042) (0.0220) (0.030)ROA 0.390*** 0.296*** 0.472*** 0.477** 0.724**

(0.045) (0.011) (0.069) (0.178) (0.265)% Shareholding- 0.002** 0.002** 0.005** 0.005** 0.004**Promotersit (0.0010 (0.001) (0.002) (0.002) (0.002)Board Size 0.087*** 0.087*** 0.075*** 0.004 0.015

(0.013) (0.013) (0.010) (0.007) (0.012)% Independent Directors 0.001 0.001 -0.004 0.002* 0.005**

(0.003) (0.003) (0.005) (0.001) (0.002)Family CEO 0.024 0.024 0.118** 0.024 0.033

(0.037) (0.037) (0.047) (0.047) (0.084)%Shareholding-Institutions 0.017 0.017 0.019 0.007*** 0.009**

(0.013) (0.013) (0.016) (0.001) (0.004)Export / Sales (%) 0.002* 0.002* -0.004 0.003* 0.000

(0.001) (0.001) (0.004) (0.002) (0.000)Year Dummies Yes Yes Yes Yes YesIndustry Dummies Yes Yes Yes No NoFirm fixed effects No No No Yes YesConstant -3.085*** -3.417*** -5.99** -0.293** -0.843**

(0.330) (0.299) (2.41) (0.132) (0.034)Observations 3,762 3,762 3,762 3,762Adjusted-R2 0.388 0.314 0.307 0.245 0.211

45

Table 8Firm Value Effects of CSRIn this table, we present the results for the value effects of CSR expe-

nses after anti-dumping on competing Chinese firms. The dependent

variable is MTBV and we focus on the interactions of the AD indicators

with LnCSRit−1.The full set of control variables are used. Robust

standard errors clustered at firm level are in brackets.***,**, and *

indicate significance at the 1%, 5% and 10% levels, respectively.

Dependent Variable: MTBV

(1) (2)

Anti-Dumping-US/EUit−1 0.224***

(0.056)

Anti-Dumping-Othersit−1 0.109*

(0.058)

LnCPit−1 0.035** 0.023**

(0.016) (0.010)

Anti-Dumping-US/EUit−1∗ 0.143**

LnCPit−1 (0.062)

Anti-Dumping-Othersit−1∗ 0.092

LnCPit−1 (0.071)

Control Variables Yes Yes

Year Dummies Yes Yes

Industry Dummies Yes Yes

Constant 2.119*** 1.656***

(0.049) (0.036)

Observations 3,762 3,762

Adjusted-R2 0.328 0.250

46

Table 9Effect of Anti-Dumping on Other Corporate InvestmentsIn this table we present the results for the effect of anti-dumping initiations

on Chinese products on other firm investments viz. CapeEx and R&D. In

panel A we present the results for AD initiations from US and the EU, and

in panel B we present results for AD initiations from other major export

destination of Indian products. The full set of controls are used. Huber-White

standard errors clustered at firm level are in brackets.***,**, and * indicate

significance at the 1%, 5% and 10% level, respectively.

Dependent Variable Anti-Dumping-US/EU Anti-Dumping-Others

Panel A Panel B

CapEX R&D CapEX R&D

(1) (2) (3) (4)

Anti-Dumping-US/EUit−1 0.575*** 0.300**

(0.147) (0.132)

Anti-Dumping-Othersit−1 0.362** 0.219**

(0.156) (0.105)

Business Group 0.063** 0.008 0.060** 0.010

(0.030) (0.006) (0.029) (0.006)

Anti-Dumping-US/EUit−1∗ 0.014** 0.002*

Business Group (0.005) (0.001)

Anti-Dumping-Othersit−1∗ 0.012** 0.002*


Control Variables Yes Yes Yes Yes

Year Dummies Yes Yes Yes Yes

Industry Dummies Yes Yes Yes Yes

Constant -3.413*** -3.049** -3.417*** -5.990**

(0.299) (0.433) (0.2999) (2.41)

Observations 3,762 1,582 3,762 1,582

Adjusted-R2 0.314 0.307 0.290 0.261

47

Table 10

Effect of AD on CSR for different stakeholder preferences

In this table we present the results for effect on CSR of anti-dumping initiations

on competing Chinese exports from different export destinations. In panel A

we present results separately for the US and the EU, and in panel B we present

the results for Brazil and the rest of India’s large export destinations separately.

The full set of controls are used. Huber-White standard errors clustered at the

firm level are in the brackets. ***, **, and * denotes significance at the 1%, 5%,

and 10% level, respectively.

Dependent Variable: Ln(CSR)

Panel A Panel B

US EU Brazil Rest

(1) (2) (3) (4)

Anti-Dumping-US/EUit−1 0.710*** 0.583***

(0.234) (0.209)

Anti-Dumping-Othersit−1 -0.038 0.022

(0.141) (0.098)

Business Group 0.163*** 0.211*** 0.120*** 0.125***

(0.069) (0.083) (0.041) (0.056)

Anti-Dumping-US/EUit−1∗ 0.484* 0.473*


Anti-Dumping-Othersit−1∗ 0.277 0.289





Observations 3,762 3,762 3,762 3,762

Adjusted-R2 0.303 0.292 0.290 0.275

48

Table11-

EffectofADon

othercorporateinvestmentsfordifferentstakeholderpreferences

WepresenttheresultsforeffectonCPofanti-dumpinginitiationsonCapexandR&D.InpanelAwepresent

thebaselineresultsfortheUSandtheEUseparately,andinPanelBwepresenttheresultsforBrazilandIndia’s

otherlargeexportdestinations.Thedependentvariablesarementionedatthetopofeachcolumns.Huber-White

standarderrorsclusteredatfirm-levelareinthebrackets.***,**,and*denotessignificanceatthe1%,5%

and

10%levels,respectively.

PanelA

PanelB

US

EU

Brazil

Rest

DependentVariable

CapEx

R&D

CapEx

R&D

CapEx

R&D

CapEx

R&D

Anti-Dumping-US/EUit−1

0.512***

0.328**

0.591**

0.286***

(0.234)

(0.155)

(0.253)

(0.117)

Anti-Dumping-Others it−1

0.344**

0.200**

0.378**

0.239**

(0.156)

(0.099)

(0.146))

(0.111)

BusinessGroup

0.070**

0.062**

0.005

0.007

0.060**

0.009

0.012**

0.014

(0.031)

(0.023)

(0.004)

(0.006)

(0.021)

(0.006)

(0.006)

(0.008)

Anti-Dumping-US/EUit−1∗

0.018**

0.003*

0.013*

0.002*

BusinessGroup

(0.009)

(0.002)

(0.006)

(0.001)

Anti-Dumping-Others it−1∗

0.015**

0.001

0.011**

0.003**

BusinessGroup

(0.004)

(0.001)

(0.004)

(0.001)

ControlVariables

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

YearDummies

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

IndustryDummies

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Observations

3,762

3,762

3,762

3,762

3,762

3,762

3,762

3,762

49

Table 12Intermediate vs Final Goods

We present the results for the effect of anti-dumping on Chinese products by

the US and the EU (panel A) and by India’s other large trading partners (panel B)

stratified by intermediate and final goods. Huber-White robust standard errors

clustered at firm level are in brackets.***,**, and *indicate significance at the 1%,

5%, and 10% level, respetively.

Dependent Variable: Ln(CSR)

Panel A Panel B

Intermediate Goods Final Goods

(1) (2) (3) (4)

Anti-Dumping-US/EUit−1 0.382*** 0.593***

(0.107) (0.108)

Anti-Dumping-Othersit−1 -0.023 -0.033

(0.048) (0.025)

Business Group 0.187*** 0.125*** 0.192*** 0.138***

(0.059) (0.033) (0.051) (0.030)

Anti-Dumping-US/EUit−1∗ 0.390*** 0.501***


Anti-Dumping-Othersit−1∗ 0.270 0.287





Observations 2,521 2,521 1,241 1,241

Adjusted-R2 0.364 0.340 0.239 0.223

50

AppendixA

DataAppendix.Thistablepresentsthedescriptionsofourkeyvariables.

Variables

Description

Anti-Dumping-US/EUit−1

Indicatorforananti-dumpingpetitionbeingfiledagainsta

ChineseproductbytheUSandtheEU

Anti-Dumping-Others it−1

Indicatorforananti-dumpingpetitionbeingfiledagainsta

ChineseproductbyIndia’sotherlargeexporters

BusinessGroup

Indicatorforbusinessgroupaffiliates

Corporatesocialexpenses

Spendingonbuildingandmaintenanceofpublicservices(parks

primaryschools,etc.),expendituresonenvironmentaland

pollutioncontrol-relatedissues,anddonationstoalocalauthority

oraninstitutionforasocialorhumanitariancause

Export/Sales(%)

Annualexports,scaledbyannualsales

%Shareholding-Promoter

%ofsharesoutstandingownedbyandassociatedwiththe

promoterfamily.

%Shareholding-Institutions

%ofsharesoutstandingownedbyinstitutionssuchasbanks,

insurancecompanies,hedgefunds,andmutualfunds.

BoardSize

Numberofdirectorsontheboard

%IndependentDirectors

Numberofdirectorsclassifiedasindependentnon-executive

directors,scaledbyboardsize.

R&DExpenditures

Researchanddevelopmentexpenses,scaledbytotalassets.

CapitalExpenditures

Annualcapitalexpenditures,scaledbytotalassets.

Ln(Sales)

Naturallogofannualsales

TotalAssets(/1,000,000)

Linearsumofcurrentandfixedassets.

ROA

Netincome,scaledbytotalassets.

MTBV

MarketCapitalisation+BookvalueofDebt

TotalAssets

EPS

NetIncome-Dividends

AverageOutstandingShares,scaledbyclosingprice

51

Appendix B. Subsample of AD petitions that led to duties

In this table we present results for the subsample of AD

initiations that led to a final AD duty. In column 1 we present

results for AD initiations on Chinese products from

the US and the EU, and in column 2 we present results

for AD initiations on Chinese products from India’s other

major export destinations. Robust standard errors clustered

at firm level are in brackets. ***, **, and * indicate significan-

-ce at 1%, 5% and 10% levels, respectively.

Dependent Variable

Ln(CSR)

(1) (2)

Anti-Dumping-US/EUit−1 0.602***

Final Duties (0.198)

Anti-Dumping-Othersit−1 -0.044

Final Duties (0.029)

Business Group 0.170*** 0.081***

(0.051) (0.030)

Anti-Dumping-US/EUit−1∗ 0.436***

Business Group (0.198)







Adjusted-R2 0.260 0.213

52

Appendix C. Test for mean reversion after AD is revoked

In this table we test for mean reversion in AD after the

AD petition has been resulted. We set the AD indicator=

1 for all periods after the AD initiation. Column 1 shows

the results for AD on Chinese products from the US and

the EU and column 2 for AD initiations on Chinese products

from India’s otherlarge trading partners. Robust standard

errors clustered at the firm level are in the brackets.

***, **, and * represent significance at 1%, 5% and 10%

levels, respectively.

Dependent Variable

Ln(CP)

(1) (2)

Anti-Dumping-US/EUit−1− 0.703***

All after Years (0.076)

Anti-Dumping-Othersit−1− -0.037

All after Years (0.058)

Business Group 0.173*** 0.120***

(0.057) (0.038)

Anti-Dumping-US/EUit−1∗ 0.452***








Adjusted-R2 0.328 0.306

53

54

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Trade Shocks and Investments in Corporate Social Responsibility · 2019-08-26 · Trade Shocks and Investments in Corporate Social Responsibility Shantanu Banerjeea;, Swarnodeep Homroyb