Social Heart and Business Sense: Translating Corporate Social Responsibility into Gross Margin Premium per Mandatory Corporate Social Responsibility Law in India

Abstract

This research assesses the impact of Indian government-mandated firms’ corporate social responsibility (CSR) related investments on gross margins. Using a multimethod approach, we show (a) a positive relationship between CSR investments and gross margin and (b) the moderating role of advertising investment. The contribution of our research is three-fold. First, our results suggest that mandating firms to spend on CSR can be a win-win situation for firms and governments, as opposed to the view of considering mandatory CSR as an additional burden. Second, our inquiry is one of the first to analytically and empirically show CSR contribution positively affects gross margin premium, which is based on price, important revenue-generating marketing, and operations construct. Third, we show the moderating role of advertising in achieving CSR-related gross margin premium. We discuss our study's implications for marketing and operations managers and policymakers.

Keywords

Corporate Social Responsibility Quasinatural Experiment CSR Law Causal Inference Multimethod

1. Introduction

The Business Roundtable, a group comprising chief executive officers of nearly 200 major U.S. corporations, stated a new definition of the purpose of a corporation (Wall Street Journal, 2019). The reimagined idea of a corporation drops the age-old notion that they function first and foremost to serve their shareholders and maximize profits. Investing in employees, delivering value to customers, dealing ethically with suppliers, and supporting outside communities seem to be at the forefront of new and evolving business goals (Bhattacharya, 2019). While much of the corporate social responsibility (CSR) efforts are voluntary, India—the world's largest democracy with over one billion people, has gone a step further and made spending on CSR activities mandatory (Manchiraju and Rajgopal, 2017).

The quasinatural experimental setting provided by the passage of the mandatory CSR rule, coupled with the variation in the CSR spending choices by firms, helps us draw credible causal inferences about whether consumers reward (or penalize) spending (or nonspending) on CSR activities. Based on the variation in CSR spending, we categorize firms that are affected by the CSR rule into three groups—“NEWSPENDER,” “PROSOCIAL,” and “NONSPENDER,” respectively. Once the mandatory CSR regulation was effective, many firms that were previously not undertaking CSR activities started spending on CSR activities. We classify these firms as NEWSPENDERs. However, India's large and old business groups were already undertaking philanthropic activities even before the mandatory CSR rule and continued to do so after the regulation.¹ We term these firms as PROSOCIAL. Finally, the third group consists of firms that took advantage of the “comply or explain” provision of the regulation and did not spend on CSR activities but operationally explained why they have not made such spending. We term these firms as NONSPENDER. Not surprisingly, a KMPG survey of the CSR practices of the top 100 Indian firms (as per market capitalization) in 2015 (the first year in which this rule was effective) found that nearly 50% of the surveyed firms do not spend the required amount on CSR activities.²

In this paper, we examine the impact of mandatory CSR spending by firms in an emerging economy. From an operations perspective, this issue is particularly relevant for regulatory bodies in emerging economies because firms’ CSR investments in developing markets have been much lower relative to those in developed economies. On the one hand, it can be argued that forcing firms to spend on CSR takes away the strategic nature of CSR and adds to the cost of doing business (Dharmapala and Khanna, 2018), thereby leading to a “tick-the-box” mentality among firms (Rajgopal and Tantri, 2023). Yet, on the other hand, the coordination mechanism and externalities associated with mandatory CSR activities (Christensen et al., 2021) may enhance awareness of CSR activities undertaken by firms, particularly via advertising. Thus, in this research, we examine whether firms that do begin (do not begin) CSR investments per the mandated law have a pricing power in terms of charging (not charging) a price premium relative to the industry average. In essence, mandatory CSR spending in emerging markets can be seen as an innovative regulatory approach related to business operations. This is because, compared to developed economies, the consideration of social impact by profit-seeking organizations is still in its nascent stages in developing economies.

We first develop a stylized analytical model and compare the behavior of the three groups of firms. In this context, NEWSPENDER firms maximize their profitability (net of CSR contribution) while PROSOCIAL companies maximize a convex combination of their profitability (net of CSR contribution) and consumer surplus. On the other hand, NONSPENDER firms maximize profitability without making CSR contributions. In this regard, NONSPENDER firms are akin to NEWSPENDER firms prior to the law. Our model suggests the following relation between a firm's CSR spending and its gross margin (price minus variable cost). First, postlaw, it is optimal for NEWSPENDER firms to charge a higher price (and therefore realize a higher gross margin) relative to pro-social companies. Second, the PROSOCIAL firms’ optimal price (and gross margin) would be higher than NONSPENDER firms in pre- and postlaw regimes. As a corollary, since the NONSPENDER firms are similar to NEWSPENDER firms’ prelaw, NEWSPENDER firms’ price (and hence gross margin) would be higher postlaw relative to prelaw. Finally, we conjecture that advertising moderates the positive impact of CSR contributions on gross margin such that the impact is greater for the NEWSPENDER firms that spend more on advertising where they emphasize their CSR activities.

In our empirical analysis, we employ a difference-in-difference (DID) design. Our sample period is from the fiscal year ending 2012 to the fiscal year ending 2017, covering three years before and after the mandatory CSR rule. Our main analysis is based on a sample of 12,409 firm-year observations relating to 2320 unique firms. The NEWSPENDER, PROSOCIAL, and NONSPENDER firms comprise 39%, 11%, and 50% of our sample, respectively.³ Our dependent variable, gross margin premium, is computed as the gross margin percent of a firm less the corresponding industry median, where gross margin percent is sales less the cost of goods sold, divided by sales. Our empirical analysis provides three main results and supports our analytical model results. First, in the POST period, the gross margin premium for the NEWSPENDER group is higher than that for the NONSPENDER as well as the PROSOCIAL group. Furthermore, the gross margin premium for the NONSPENDER group is lower than that for the PROSOCIAL group. Our DID estimation includes firm and year-fixed effects suggesting that unobservable firm characteristics or time trends do not drive our results. We show there are no preexisting trends in the gross margin premium for the three sub-groups, thus ruling out a trend possibility. As an additional test, we find that our results are robust to a more stringent regression discontinuity design (RDD). In RDD analysis, we restrict the sample to firms that are in the close range around the profitability, book value, and sales thresholds as prescribed by the CSR law. Firms just above the threshold are affected by the regulation and hence form the treatment group, whereas firms just below the threshold are not affected by the law and hence comprise the control group. In this design, any difference in the gross margin premium between the two groups can credibly be attributed to the regulation that created the discontinuity.

Second, we find that within the NEWSPENDER group, the gross margin in the POST period is statistically significantly higher for firms that have invested more in advertising than those with less investment in their advertising expenditures. This result highlights the important role of advertising in moderating the relationship between CSR contributions and gross margin premium. To support this finding further, we perform textual analysis on advertisement content for randomly chosen 60 firms each in the PROSOCIAL, NEWSPENDER, and NONSPENDER groups, respectively. We find that in the POST period, compared to NONSPENDER firms, a significantly greater proportion of NEWSPENDER firms highlight their CSR-related activities in their advertisements. Third, for the NEWSPENDER group, there is a significant year-to-year price increase during the POST period (relative to the PRE period). However, there is no significant change in the corresponding unit quantities sold by these companies during the POST and PRE periods, suggesting that postlaw, consumers reward socially responsible, profit-maximizing companies and absorb the corresponding price increases without reducing their purchase quantities. In contrast, there is no significant year-to-year price change during the POST period for the NONSPENDER group relative to the PROSOCIAL group. But more interestingly, there is a significant decline in the quantity sold by the NONSPENDER group, suggesting that in the POST period (relative to the PRE period), consumers may either be under a budget constraint or penalize firms for not being socially responsible by buying less of their products.

The contribution of our research is three-fold. First, the CSR mandate in India provides us with an experimental setting where we take advantage of an exogenous event (the CSR Rule), compare outcomes postevent, and examine the difference as the treatment effect. A mandated CSR spending allows us to examine key marketing and operations actions of three types of companies that are affected by the law and whether they follow the law in spirit vs in letter. We empirically demonstrate that post-CSR rule, the gross margin premium of NEWSPENDERs is greater than that of PROSOCIAL firms, which, in turn, is higher relative to the NONSPENDERs. This result suggests that forcing firms to spend on CSR may be a win-win situation for firms and governments, as opposed to the view of considering mandatory CSR as an additional burden. Second, our inquiry is one of the first to analytically and empirically show CSR contribution positively affects gross margin premium, which is based on price, important revenue-generating marketing, and operations construct. This is in contrast to existing literature (Margolis et al., 2009) that examines the relationship between CSR and a firm's overall financial performance using stock returns or accounting profitability (return on assets [ROA]). While these are important finance-related measures, our focus on gross margin premium is better suited to examine the impact of CSR on marketing and operations-related outcomes. Third, we show the moderating role of advertising among NEWSPENDERs in achieving their gross margin premium. We conjecture that the joint impact of regulation and advertising leads to a coordination mechanism that nudges consumers to reward firms engaging in CSR activities. With CSR being mandatory, a firm's advertising efforts can enhance its impact by increasing both consumer and public awareness of the firm's CSR activities. This is crucial as CSR can enhance gross margin premium, particularly when consumers are aware of the firm's CSR efforts. Moreover, CSR efforts when combined with advertising, can serve as a signal of product quality and overall corporate reputation to various stakeholders. Advertising can bridge the information gap between firms and consumers, enabling them to learn about a firm's CSR engagements and be more likely to reward firms for their CSR efforts. We emphasize that without consumer awareness, CSR activities may not translate into a gross margin premium, as consumers are not informed enough to respond to these initiatives. However, this increased consumer inquiry can benefit companies with CSR commitments, potentially leading to a gross margin premium.

In sum, we offer marketing and operations managers’ practical insight regarding the extent to which they should pursue CSR-based pricing and advertising strategies, and translate those to a gross margin premium. Our results have operations related to implications for regulators with particular attention to NONSPENDERs to ensure they follow the CSR law and are truthful in their advertising. The following section provides a broad overview of the literature that examines the relationship between CSR and firm performance. Next, we present a stylized analytical model to derive optimal prices (and gross margin) for the three types of firms we consider and conjecture the corresponding role of advertising. We then describe our research method, analysis, and results. Here, we use a quasi-experimental setting and conduct robustness checks to arrive at our conclusions. Thus, whether and how CSR-compliant firms in an emerging market can translate their CSR investments into higher gross margins is an important, relevant, and empirically under-researched question that we explore in this paper. Finally, we conclude with a discussion of the implications of our research for both theory and practice.

2. Background

The mandatory CSR rule of India is often hailed as “the beginning of a new wave of development in the realm of corporate social responsibility” (Van Zile, 2012) as it led to a significant increase in the funds committed towards social causes. As per the India CSR data portal, companies’ total spending on CSR activities increased from around $1.43 billion in 2014 to $2.67 billion in 2019 (an 85% growth over 5 years).⁴ In 1970, Milton Friedman published an article in The New York Times Magazine titled, “The Social Responsibility of Business Is to Increase Its Profits.” Back then, CSR was just an afterthought. Since then, times have changed, and so has the importance given to CSR activities by firms. In the developed economies, in 2011, about 20% of S&P 500 firms issued separate reports to discuss their CSR activities. By 2018, that number increased to 86%.⁵ Keeping up with these developments in the United States, a large stream of research in marketing and operations has emerged that examines firms’ motivations for engaging in CSR, as well as the consequences thereof (e.g., Kang et al., 2016; Kitzmueller and Shimshack, 2012; Li et al., 2021; Lu et al., 2021). In contrast, in our dataset of about 3000 publicly traded companies in India, about 10% of them contributed to CSR in 2012. From an operations perspective, the passage of the CSR law in India in 2013 may be viewed as an innovative regulatory tool in emerging markets and make profitable companies to be more socially responsible, given the low level of voluntary participation in CSR activities.

Prior literature suggests several motivations for a firm to undertake CSR activities.⁶ These reasons include financial flexibility (McGuire et al., 1988), good management practices (Hillman and Keim, 2001; Hull and Rothenberg, 2008), clear past misconduct (Kang et al., 2016), and attempt to build goodwill to temper negative reaction when things go wrong (Godfrey et al., 2009). One key insight that emerges from this literature is that the impact of CSR on firm performance depends on the ability of CSR to influence its stakeholders.

Consumers are important stakeholders of any company. Hence, to the extent CSR activities can influence consumer demand, they can positively impact marketing and operations metrics such as price and gross margin. Several studies in marketing suggest that while making their purchase decisions, consumers consider firms’ CSR activities (see, for example, Brown and Dacin, 1997; Sen and Bhattacharya, 2001). Extending this rationale, studies have found that CSR activities affect firm performance through various channels, such as customer satisfaction (Homburg et al., 2013; Luo and Bhattacharya, 2006), R&D (Luo and Bhattacharya, 2009), advertising (Hull and Rothenberg, 2008; Servaes and Tamayo, 2013), and marketing capabilities (Mishra and Modi, 2016).

A key distinction of our study from prior literature is that the CSR activities undertaken by firms in our research setting are a response to a certain regulatory requirement in an emerging market where voluntary CSR contribution by firms is low. Our context and data enable us to leverage a quasinatural experiment that exploits a regulatory change aimed directly at CSR contribution by firms. Accordingly, we isolate the impact of CSR regulation on gross margin premium for different types of firms in India. Additionally, we test the interplay between advertising and a CSR mandate's regulatory and coordination roles. As detailed in the next section, advertising raises consumer awareness about firms’ commitment to CSR activities, and the regulatory CSR mandate provides a coordinated mechanism with appropriate operational checks and balances.

2.1. Interplay Between Advertising and Regulatory/Coordinating Roles of CSR Mandate

In general, advertising is likely to increase product awareness and induce a positive image among customers (Little, 2004). This, in turn, would expand customers’ loyalty and preference for the product/brand. Advertising augments consumers’ perception of a company and strengthens the firm's unique aspects, and its offerings may stand out in the consumer's mind (Erdem et al., 2008). A similar intuition may be garnered from a social approval perspective, where CSR activities enhance a company's reputation and social standing. However, most consumers may not be aware of all the larger social causes that a business stands for (Auger et al., 2008). Operationally, firms must deploy targeted advertising to spread awareness about their socially responsible activities. When firms advertise their CSR initiatives, they invoke a positive mental image of the organization and its offerings to customers (Bhattacharya, 2019). That is, customers develop a sense of “the firm doing good things, the firm being kind and generous.” Hence, when consumers buy products from firms that advertise their CSR initiatives, they feel a sense of social approval leading to a favorable image of the products and are willing to reward such offerings. Customers develop a feeling of self-respect from the firm offerings when the firm is doing good and advertises accordingly, and their identity with the firm and its offerings further strengthens (Brown and Dacin, 1997).

Thus, we theorize that under a government-mandated CSR law, advertising investments by a firm that are supported by corresponding actual CSR investments may be rewarded by consumers by paying a premium price. Our argument is based on three simple premises. One, the mandated CSR law may act both as a national regulatory mechanism, i.e., being able to implement the law, and a coordination mechanism, i.e., providing a clear and an umbrella framework for companies in terms of who should be making CSR contributions and how much (Christensen et al., 2021). In other words, the qualifying firms would know that there may be significant direct and indirect negative externalities if the regulatory authorities find them in violation of the mandated CSR investments. Thus, a regulatory mandate that is strict in its operational enforcement would play the role of a coordinated and enforceable governmental mechanism.

Second, if some firms are mandated by law to invest in CSR activities, we expect such firms to advertise to consumers about their CSR investments and, accordingly, make consumers aware of their social responsibility. That is, firms that follow the corresponding CSR law may send a credible signal to society at large via their advertising investments. In other words, firms that are (a) impacted by the mandatory CSR law and (b) accordingly invest in CSR activities may signal to their respective customers that they are socially responsible companies. That is, due to the joint emergence of regulatory and coordination mechanisms, firms affected by the law have an incentive to invest in advertising. They credibly advertise their CSR to customers. Third, given a credible advertising mechanism, customers may be more willing to pay a premium for products that fulfill CSR responsibilities and conveyed to their customers through advertising. Advertising brings visibility and credibility to the CSR investments, making the CSR activities more visible to customers. Therefore, consumers would find such advertising more credible relative to a scenario where such governmental mandate does not exist. Accordingly, consumers may be more willing to pay a premium for their products.

3. Analytical Model

To explain how a mandatory CSR contribution translates to optimal firm behavior, we begin our analysis by developing a stylized model that is grounded in basic economic theory and derive testable propositions and a conjecture about how firms impacted by the CSR law can benefit by translating CSR-related investments into higher gross margins.

3.1. Demand Function

CSR activities are a type of ethical marketing-operations practice that enhance perceived value, customer satisfaction, and loyalty by fostering a sense of connection between consumers and socially responsible companies (Bhattacharya and Sen, 2003; Luo and Bhattacharya, 2006, 2009). Firms engaging in CSR initiatives enjoy favorable consumer attitudes, leading to increased demand as socially conscious consumers reward such firms by purchasing their products (Trudel and Cotte, 2009; White et al., 2019). CSR also strengthens corporate identity and builds consumer bonds through nonproduct aspects like core values and ethical actions (Brown and Dacin, 1997). Under India's mandatory CSR rule, companies must allocate at least 2% of their net income to CSR activities. Consequently, consumer demand is modeled as a function of CSR contributions, csr, the price of the product, p, and the advertising expense, ad. Thus, the demand for the product is given by⁷:

\begin{aligned} Q (a d, c s r, p) & = b_{0} + b_{1} c s r + b_{2} p + b_{3} a d \\ + b_{4} a d^{2} + b_{5} a d \times c s r, \end{aligned}

(1)

where

b_{0}

(> 0) is the intercept,

b_{1}

(> 0) is the impact of csr contribution,

b_{2}

(< 0) is the price sensitivity,

b_{3}

(> 0) is a measure of the advertising efficiency,

b_{4}

(< 0) captures the diminishing returns on advertising, and

b_{5}

(> 0) captures the impact of csr investment related advertising. We capture consumer behavior concerning CSR investments via the well-known downward-sloping linear demand function where the demand curve shifts upward with a firm's CSR contribution where consumers purchase more from a company making net profit contributions to CSR versus from a company not making any CSR contributions.

3.2. CSR and Firm Behavior

Here, we consider three types of firms. The first type of firm (denoted by subscript 1) is a NEWSPENDER that begins spending in CSR activities due to the CSR mandate and is a profit-maximizing firm. The second type (denoted by subscript 2) is a PROSOCIAL firm that always contributes to CSR activities, takes into consideration consumer surplus in its objective, and accordingly maximizes both its profit and consumer surplus (Goering, 2007; Liu and Weinberg, 2004). The third type (denoted by subscript 3), NONSPENDER, is a profit-maximizing firm but does not contribute to CSR activities even though it is expected to and instead provides an operational explanation for its nonparticipation per the CSR mandate. Let c denote the variable cost of manufacturing a product and FC denote a firm's fixed costs of operation, which includes advertising expenditures. While firm revenue is pq, the profit for the new spender or the pro-social firm, net of its CSR contribution (where $c s r \times 100$ denotes the CSR percent contribution, i.e., $c s r$ = .02 per the CSR mandate in India) is given by:

\begin{aligned} π_{1} & = (1 - c s r) [(p_{1} - c) q - F C_{1}] \\ = (1 - c s r) [(p_{1} - c) (b_{0} + b_{1} c s r + b_{2} p + b_{3} a d \\ + b_{4} a d^{2} + b_{5} a d \times c s r) - F C_{1}] . \end{aligned}

(2)

The NEWSPENDER (denoted by subscript 1) maximizes its utility that focuses exclusively on profit (i.e., post-CSR contribution) given in equation (2). Accordingly, solving the first-order condition with respect to price,

p_{1}

, we get (see Web Appendix C for proof):

\begin{aligned} p_{1}^{*} = \frac{(- b_{0} - b_{1} c s r - b_{3} a d - b_{4} a d^{2} - b_{5} a d \times c s r + b_{2} c)}{2 b_{2}} . \end{aligned}

(3)

For the PROSOCIAL firm (denoted by subscript 2), the consumer surplus, CS, is given by:

\begin{aligned} C S & = \int_{0}^{q_{2}} [p_{2} (q_{2}) - p_{2}) d q_{2}] \\ = \int_{0}^{q_{2}} ((\frac{1}{b_{2}}) (q_{2} - (b_{0} + b_{1} c s r + b_{3} a d + b_{4} a d^{2} \\ + b_{5} a d \times c s r)) - p_{2}) d q_{2} \\ = \frac{q_{2}^{2}}{2 b_{2}} - (b_{0} + b_{1} c s r + b_{3} a d + b_{4} a d^{2} \\ + b_{5} a d \times c s r) \times \frac{q_{2}}{b_{2}} - p_{2} \times q_{2} \\ = \frac{q_{2}^{2}}{2 b_{2}} - \frac{q_{2}}{b_{2}} [(b_{0} + b_{1} c s r + b_{3} a d + b_{4} a d^{2} \\ + b_{5} a d \times c s r) + p_{2} b_{2}] \\ = \frac{q_{2}^{2}}{2 b_{2}} - \frac{q_{2}^{2}}{b_{2}} = - \frac{q_{2}^{2}}{b_{2}} . \end{aligned}

(4)

The PROSOCIAL firm maximizes its utility, which is a convex combination of its profit (post-CSR contribution), similar to equation (2), and the corresponding consumer surplus in equation (4) (Moon and Shugan, 2020). Let

α

denote its weight on profit and (1 −

α

) on consumer surplus.⁸ That is,

\begin{aligned} U t i l i t y_{2} & = [α \times (1 - c s r) \times ((p_{2} - c) \times q_{2} - F C_{2}) \\ + (1 - α) \times (\frac{- q_{2}^{2}}{2 b_{2}})] . \end{aligned}

(5)

Solving the first-order condition with respect to price,

p_{2}

, we get:

\begin{aligned} p_{2}^{*} = \frac{\begin{array}{l} (- b_{0} - b_{1} c s r - b_{3} a d - b_{4} a d^{2} - b_{5} a d \times c s r \\ + 2 b_{0} α + 2 b_{3} a d \times α + 2 b_{4} a d^{2} \times α - b_{2} c \\ \times α - b_{0} c s r \times α + 2 b_{1} c s r \times α - b_{3} a d \times c s r \times α \\ - b_{4} a d^{2} \times c s r \times α + 2 b_{5} a d \times c s r \times α + b_{2} c \\ \times c s r \times α - b_{1} c s r^{2} \times α - b_{5} a d \times c s r^{2} \times α) \end{array}}{(b_{2} (1 - 3 α + 2 c s r \times α))} . \end{aligned}

(6)

In our analysis, please note that we optimize three decision variables: (a) price, (b) advertising expenditure, and (c) CSR contribution, for each type of firms.

Thus, sufficient conditions for $p_{1} * - p_{2} *$ to be positive are as follows: $b_{1} > 0$ , $b_{2} < 0$ , $b_{4} < 0$ , ${b_{0}, b_{3}, b_{5} \in R} \Rightarrow 0.3378 < α < 1,$ i.e., the PROSOCIAL firm should weigh its post-CSR profit by at least 34%. Additionally, we show the values of $α$ for various $c s r$ contribution strategies in Figure C1 in Web Appendix C.

Finally, for the Type 3 firm, NONSPENDER, which does make the cut but does not make any CSR contribution, the corresponding price is given by (see Web Appendix C for proof):

\begin{aligned} p_{3} * = \frac{- b_{0} + b_{2} c - b_{3} a d - b_{4} a d^{2}}{2 b_{2}} . \end{aligned}

(8)

Sufficient condition for

p_{2} * - p_{3} * > 0

is (see Web Appendix C for proof):

\begin{aligned} α > \frac{a_{1} + a_{2} c s r + c_{1} c s r^{2}}{a_{1} + 2 a_{2} c s r + c_{2} cs r^{2} - c_{1} cs r^{3}}, where, \end{aligned}

\begin{aligned} a_{1} = b_{3}^{2} - 4 b_{0} b_{4}, \end{aligned}

\begin{aligned} a_{2} = 4 (b_{3} b_{5} - 2 b_{1} b_{4}), \end{aligned}

\begin{aligned} c_{1} = 2 b_{5}^{2}, \\ c_{2} = 8 b_{1} b_{4} + 4 b_{3} b_{5} + 4 b_{5}^{2} . \end{aligned}

Given the complexity of the above equations, we rely on numerical optimization. We use Kopalle and Lehmann's (2015) study as a starting point for this analysis, and use their parameters (

b_{0}

= .5,

b_{2}

= −.25,

b_{3}

= .5) as a base case and augment it with results from some meta-analyses (Schamp et al., 2023; Sethuraman et al., 2011) such that we have

b_{1}

= .5,

b_{5} =

.28, and

b_{4}

= −.1. We vary parameter values but get similar results for

α

and

c s r

as shown in Figure C2 in Web Appendix C.

A closer examination of equations (3), (6), (7), and (8) reveals the following. First, the NEWSPENDER (Firm type 1) charges a higher price relative to the PROSOCIAL firm (Type 2) and therefore obtains a higher contribution margin (price minus cost) relative to the PROSOCIAL firm. Second, the PROSOCIAL firm charges a higher price and hence obtains a higher contribution margin relative to the NONSPENDER (Firm type 3) that does not contribute to CSR activities. Third, the gross margin contribution for the NEWSPENDER (a profit-maximizing firm contributing to CSR) would be the highest, followed by that of the PROSOCIAL firm, and then the NONSPENDER, which is also a profit-maximizing firm but does not contribute to CSR. Thus, we have (proofs in Web Appendix C): Proposition 1

All else equal, the gross margin contribution of a NEWSPENDER is higher than that of a PROSOCIAL firm.

Proposition 2

All else equal, the gross margin contribution of a PROSOCIAL firm is higher than that of a NONSPENDER, a firm that does not contribute toward CSR activities.

Furthermore, as noted earlier, we expect that consumers would be responsive to firms’ CSR-based advertising messages.⁹ For a qualifying firm that makes CSR investments, this implies that the benefit of informing consumers about its socially responsible behavior via a greater emphasis on advertising is higher than the benefits of not making consumers aware of its CSR activities through advertising. For a nonqualifying firm that does not make CSR investments, this implies that the benefit of trying to make consumers aware of its nonexistent CSR activities, which is tantamount to lying and engaging in deceptive advertising, is lower relative to the benefit of not incurring the costs of misleading or deceptive advertising. This would lead to a separating equilibrium where a qualifying firm that makes CSR investments would spend more on advertising relative to a nonqualifying firm that does not make CSR investments. Hence, we offer the following conjecture:

Conjecture: CSR-related advertising moderates the positive impact of CSR activities on gross margin such that the impact is greater for firms that spend more on advertising.

Note that gross margin is an important concept in the marketing and operations interface. It is a basic, direct, and fundamental metric for managers in measuring and driving profitability (e.g., Ailawadi et al., 2003; Fisher and Raman, 2018). To our knowledge, our analytical results and the corresponding empirical findings are the first of their kind to formally link a firm's CSR investments to its gross margin and examine the corresponding nuances across different types of firms with respect to their differing objective functions and CSR contributions.

4. Method and Data

4.1. DID Design

In establishing the causal impact of CSR activities on firm performance outcomes (such as ROA, cash flows, gross margin, and operating margin), endogeneity is a major concern. One could argue that firms that are doing well and hence are less financially constrained are more likely to spend on CSR activities. Thus, firm performance could cause higher CSR instead of the other way around. Studies have also shown that the observed association between CSR and firm performance could be due to model misspecification or due to the influence of unobserved firm characteristics related to CSR (McWilliams and Siegel, 2000). To overcome these inferential problems, we exploit India's CSR law as an exogenous shock and employ a DID design to causally identify the impact of CSR activities on gross margin premiums.

The DID estimation technique is frequently used in estimating the treatment effects arising from sharp changes in the economic environment brought about by changes in government policy, institutional environment, announcements, etc. (Bertrand et al., 2004; Janakiraman et al., 2018). In our research setting, per Indian government's CSR law, firms meeting certain financial parameters must spend on CSR activities. Among such firms that are required to comply with the regulation, some have already been spending on CSR activities and continue to do so. In contrast, others have either begun spending on CSR or have operationally explained their nonparticipation despite being required to do so per the law. This quasinatural experiment thus partitions firms into different groups that we study. By comparing the change in gross margin premium for the different groups before and after the regulation and across the groups postregulation, we identify the impact of CSR activities on gross margin premium. Thus, our DID estimator combines the advantages of both the cross-sectional and time-series comparisons. Specifically, we estimate the following model:

\begin{aligned} Y_{i, t} & = α_{0} + β_{1} N E W S P E N D E R_{i . t} \times P O S T \\ + β_{2} N O N S P E N D E R_{i . t} \times P O S T + γ X_{i . t} \\ + α_{i} + δ_{t} + ε_{i, t}, \end{aligned}

(9)

where i and t denote firm and year, respectively. The dependent variable Y is gross margin premium defined as the gross margin percent of the firm less the corresponding industry median gross margin, and gross margin percent is sales less cost of goods sold, divided by sales. NEWSPENDER variable equals 1 if a firm did not spend any amount on CSR activities in the premandatory CSR law period and spent amount on CSR activities in the postmandatory period, and 0 otherwise. Similarly, NONSPENDER variable equals 1 if a firm did not spend any amount on CSR activities in the premandatory CSR law period as well as in the postmandatory period even though they are required to do so, and zero otherwise. The control groups of firms are those that spend on CSR activities both before and after the mandatory CSR law implementation. We term these firms as PROSOCIAL firms and the

α_{0}

coefficient captures the average gross margin premium for these firms. POST is a categorical variable that equals 1 for fiscal years (2015–2017) after the mandatory CSR law adoption and equals 0 for years 2012–2014. The

β_{1}

and

β_{2},

estimates of the interaction terms “NEWSPENDER × POST” and “NONSPENDER × POST,” respectively capture the DID estimator, i.e., in the postlaw period, the incremental difference in the gross margin premium for the NEWSPENDER and NONSPENDER groups relative to the changes in gross margin premium for the PROSOCIAL group of firms. We include firm (

α_{i}

) and year-fixed effects (δ_t) in the estimation to control for firm-specific time-invariant factors as well as time trends. Since these fixed effects are included, the individual terms, NEWSPENDER, NONSPENDER, and POST get absorbed.

Furthermore, following prior studies that examine the impact of CSR on performance outcomes (Luo and Bhattacharya, 2009; Mishra and Modi, 2016), we include relevant control variables, $X_{i . t}$ in equation (9). Firms with more resources are likely to perform better (Slotegraaf et al., 2003). Hence, we use firm size, profitability, leverage, and cash holdings as proxies for resources. Larger, more profitable, less leveraged, and more liquid firms are likely to have more resources. We measure firm size as the natural logarithm of the total assets at the end of the fiscal year. Profitability is captured by ROA defined as income before extraordinary items divided by the total assets at the end of the fiscal year. Leverage is measured as total debt divided by the total assets at the end of the fiscal year. Cash holding is defined as cash and cash equivalents divided by the total assets at the end of the fiscal year. Firms that spend more on advertising are likely to better communicate their products to customers and build brand image (Sethuraman et al., 2011). Such firms are more likely to garner higher margins. Hence, we include advertising expenses divided by total assets at the end of the fiscal year in the model. Firms with better product quality are likely to have better margins (Tellis et al., 2009). We use R&D spending as a proxy for product quality and include R&D expenses divided by the total assets at the end of the fiscal year in the model. We also estimate another specification of this equation that includes firm and year-fixed effects.

DID analysis is based on an important parallel-trend assumption. To test if any preexisting trends exist, we estimate the following equation:

\begin{aligned} Y_{i, t} & = α_{0} + γ_{1} N E W S P E N D E R_{i . t} \times P R E [- 2] \\ + γ_{2} N E W S P E N D E R_{i . t} \times P R E [- 1] \\ + γ_{3} N E W S P E N D E R_{i . t} \times P O S T [1] \\ + γ_{4} N E W S P E N D E R_{i . t} \times P O S T [2 - 3] \\ + γ_{5} N O N S P E N D E R_{i . t} \times P R E [- 2] \\ + γ_{6} N O N S P E N D E R_{i . t} \times P R E [- 1] \\ + γ_{7} N O N S P E N D E R_{i . t} \times P O S T [1] \\ + γ_{4} N O N S P E N D E R_{i . t} \times P O S T [2 - 3] \\ + γ X_{i . t} + α_{i} + δ_{t} + ε_{i, t}, \end{aligned}

(10)

where PRE[−2], PRE[−1], POST[1], and POST[2–3] relate to years t − 2, t − 1, t + 1, and t + 2 and 3, relative to the year t when regulation was applicable. All other variables are previously defined in equation (9). The intercept term in this model captures the average gross margin premium for all firms in year t − 3. The

γ_{1}, γ_{2}

γ_{5}

, and

γ_{6}

coefficients capture the incremental change in the gross margin premium for NONSPENDER and NEWSPENDER firms in the year before the implementation of the CSR regulation. If these coefficients are insignificant, it will suggest that the average gross margin premium for NONSPENDER and NEWSPENDER firms in the year t − 1 and t − 2 before the regulation is no different than the average gross margin premium for all other firms in year t − 3. The significant

γ_{5}

and

γ_{6}

coefficients suggest that there is a change in the average gross margin premium for NEWSPENDER firms in the POST periods relative to the PRE periods and such change cannot be attributed to any preexisting trends.¹⁰

To examine the moderating effect of advertising on the CSR-gross margin relation, we augment equation (9) with the interaction term of advertisement spending with the DID coefficient. Specifically, we estimate the following model:

\begin{aligned} Y_{i, t} & = α_{0} + δ_{1} N E W S P E N D E R_{i . t} \times P O S T \\ + δ_{2} N E W S P E N D E R_{i . t} \times A D_{i . t} \\ + δ_{3} N E W S P E N D E R_{i . t} \times P O S T \times A D_{i . t} \\ + δ_{4} N O N S P E N D E R_{i . t} \times P O S T \\ + δ_{5} N O N S P E N D E R_{i . t} \times A D_{i . t} \\ + δ_{6} N O N S P E N D E R_{i . t} \times P O S T \times {A D}_{i . t} \\ + γ X_{i . t} + α_{i} + δ_{t} + ε_{i, t} . \end{aligned}

(11)

The

δ_{3}

and

δ_{6}

coefficients of the three-way interaction terms—“NEWSPENDER × POST × AD” and “NONSPENDER × POST × AD,” respectively, capture the differential impact of advertising on the gross margin premium for NEWSPENDERs and NONSPENDERs due to the CSR law, relative to the impact of CSR law in the PROSOCIAL firms.

4.2. Data

We obtain accounting data from the COMPUSTAT Global database and the CSR data from the Prowess database by the Centre for Monitoring Indian Economy (CMIE). We join these two databases using the unique International Securities Identification number (ISIN) code. Our initial sample comprises 17,489 firm-year observations relating to 3304 unique firms for which nonmissing sales, cost of goods sold (COGS), and total assets data are available on the COMPUSTAT Global database. Since our dependent variable, gross margin premium, is computed as the gross margin of a firm less the industry median of the gross margin, we require at least five observations in every industry-year grouping. Furthermore, we drop observations for which sales are less than COGS as such observations are likely to be erroneous. These filters lead to a final sample of 12,409 firm-year observations.

Table 1.
Sample description: Yearly distribution of sample.

Year	PROSOCIAL	NEWSPENDER	NONSPENDER	TOTAL
2011	213	795	1008	2016
2012	226	829	1067	2122
2013	231	801	1103	2135
2014	227	793	1096	2116
2015	229	829	1051	2109
2016	226	752	933	1911
Total	1352	4799	6258	12,409
Percent	10.97	38.67	50.43	100

Table 2.

Sample description: Descriptive statistics for the full sample.

	M	SD	P25	P50	P75
CSR SPENDING	0.006	0.016	0.000	0.000	0.000
GROSS MARGIN PREMIUM	−0.001	0.140	−0.066	0.000	0.070
SIZE	7.923	1.967	6.452	7.756	9.210
ROA	0.019	0.137	0.001	0.023	0.060
DEBT	0.115	0.115	0.035	0.084	0.158
AD	0.002	0.018	0.000	0.000	0.000
RD	0.311	0.242	0.106	0.292	0.464
CASH	0.077	0.116	0.012	0.031	0.086

Table 1 and the Appendix provide a detailed description of our sample and variables respectively. Table 1 presents the yearly distribution of the sample and shows that we have a stable distribution of firms across the three groups of NEWSPENDER, NONSPENDER, and PROSOCIAL, based on the CSR law. Table 2 provides descriptive statistics of the study's variables including gross margin premium, and the control variables. Table 3 presents the univariate differences in the CSR spending and gross margin premium for the three subgroups in the pre- versus postmandatory CSR law periods. In the preregulation period, PROSOCIAL firms spend on average 2.5% of their net income on CSR activities. The average CSR spending as a % of net income in the post regulation period for these firms was 2.7%. This increase in CSR spending is statistically insignificant. In contrast, NEWSPENDER firms were not spending in the preregulation period but on average spent 1.6% of their net income in the postregulation period. The increase in CSR spending on the NEWSPENDER is significantly greater than the increase in CSR spending of the PROSOCIAL. The changes in gross margin premium also follow the same pattern. For the NEWSPENDER firms, there is a statistically significant increase in the gross margin premium from 1.5% in the pre regulation period to 5.1% in the post regulation period. Whereas, for PROSOCIAL firms, the gross margin premium does not show a significant increase in the pre- versus postregulation period. When it comes to NONSPENDER firms, they do not spend on CSR activities in both pre- and postregulation period and show a statistically significant decline in the gross margin premium from −1.7% in the preregulation period to −4.9% in the postregulation period. The significant difference across the three groups of firms, provides model-free evidence of our focal variables—gross margin premium and CSR spending.

Table 3.

Sample description: Univariate differences in CSR spending and gross margin premium across the three subsamples.

	PROSOCIAL	NEW SPENDER	NONSPENDER
Mean CSR SPENDING
PRE	0.025	0.000	0.000
POST	0.027	0.016	0.000
Diff	0.003	0.016***	0.000
Diff-in-Diff relative to PRO-SOCIAL		0.014***	−0.002***
Mean GROSS MARGIN PREMIUM
PRE	0.023	0.015	−0.017
POST	0.031	0.051	−0.049
Diff	0.008	0.036***	−0.032***
Diff-in-Diff relative to PRO-SOCIAL		0.030***	−0.038***

Note. All variables are defined in the Appendix. The significance of differences in means is evaluated based on the t-test (p-values for the t-statistics are two-tailed).

*p < .01, **p < .05, *** p < .01.

Table 4.

CSR and gross margin premium: DID analysis.

	1		2
Dep. Var.=Gross Margin Premium	Coeff	SE	Coeff	SE
NEWSPENDER × POST	0.015**	(0.006)	0.016***	(0.006)
NONSPENDER × POST	−0.031***	(0.007)	−0.025***	(0.007)
SIZE			0.007	(0.005)
ROA			0.147***	(0.024)
AD			0.155***	(0.044)
RD			0.005	(0.029)
DEBT			−0.040**	(0.016)
CASH			0.039*	(0.020)
Year FE	Yes		Yes
Firm FE	Yes		Yes
Observations	12,375		12,375
Adjusted R²	0.615		0.633

Note. The sample period is 2012–2017, relating to 3 years before and after the passage of the mandatory CSR rule. The standard errors shown in the parenthesis are clustered at firm level. Coefficients on year and intercept are not shown for brevity.

*p < .01, **p < .05, *** p < .01.

5. Results

5.1 Main Results

Table 4 provides the main results of estimating equation (9)—DID analyses. Results from models estimated with firm- and year-fixed effects are reported. The parameters of interest are the interaction terms “NEWSPENDER × POST” and “NONSPENDER × POST.” The coefficient on “NEWSPENDER × POST” is positive and statistically significant at .016 (p < .05), supporting our analytical model result that NEWSPENDER firms experience a greater increase in the gross margin premium after the implementation of CSR law, compared to changes in the gross margin premium of PROSOCIAL firms over the same time period.¹¹ However, the coefficient on “NON-SPENDER × POST” is negative and significant at −.025 (p < .01). This shows that compared to the PROSOCIAL group of firms, the effect of CSR law on gross margin premium for the NONSPENDER groups of firms is significantly lower (see Web Appendix D for a detailed graph).

Table 5 shows the absence of any preexisting trends in our data. As the coefficients for the interaction terms – “NEWSPENDER × PRE[i]” and “NONSPENDER × PRE[i]” are insignificant, there is no evidence for a significant difference in trends between the different categories of firms in the pre-CSR law period. Figure 1 plots the average gross margin premium over time for the three groups of firms and corroborates the evidence presented.

Table 5.
Trend test for the impact of CSR on gross margin premium.

Dep. Var. = gross margin premium Coeff. SE

NEWSPENDER × PRE[2] 0.005 (0.004)

NEWSPENDER × PRE[1] 0.003 (0.006)

NEWSPENDER × POST[1] 0.014 (0.007)

NEWSPENDER × POST[2–3] 0.021 (0.009)

NONSPENDER × PRE[2] 0.001 (0.005)

NONSPENDER × PRE[1] −0.002 (0.007)

NONSPENDER × POST[1] −0.014* (0.008)

NONSPENDER × POST[2–3] −0.033* (0.010)

SIZE 0.007 (0.005)

ROA 0.147* (0.024)

AD 0.160* (0.044)

RD 0.006 (0.029)

DEBT −0.037 (0.016)

CASH 0.039* (0.020)

Year FE Yes

Firm FE Yes

Observations 12,375

Adjusted R2 0.634

Dep. Var. = gross margin premium	Coeff.	SE
NEWSPENDER × PRE[2]	0.005	(0.004)
NEWSPENDER × PRE[1]	0.003	(0.006)
NEWSPENDER × POST[1]	0.014**	(0.007)
NEWSPENDER × POST[2–3]	0.021**	(0.009)
NONSPENDER × PRE[2]	0.001	(0.005)
NONSPENDER × PRE[1]	−0.002	(0.007)
NONSPENDER × POST[1]	−0.014*	(0.008)
NONSPENDER × POST[2–3]	−0.033***	(0.010)
SIZE	0.007	(0.005)
ROA	0.147***	(0.024)
AD	0.160***	(0.044)
RD	0.006	(0.029)
DEBT	−0.037**	(0.016)
CASH	0.039*	(0.020)
Year FE	Yes
Firm FE	Yes
Observations	12,375
Adjusted R2	0.634

Note. The standard errors shown in the parenthesis are clustered at firm level. Intercept is not shown for brevity.

*p < .01, **p < .05, *** p < .01.

Figure 1.

Average gross margin premium over time for CONTROL, NEWSPENDER, and NONSPENDER firms. Note. Figure 1 shows the trends in the average GROSS MARGIN PREMIUM for the PROSOCIAL(CONTROL), NEWSPENDER, and NONSPENDER firms over the sample period 2012–2017, relating to 3 years before and after the passage of the mandatory CSR rule.

5.1.1 Endogeneity Correction

As we report the results of our model estimation, we note that there may be two reasons why the classification of firms into three categories might not be entirely exogenous. First, unobserved time-varying factors, such as changes in top management or competitors’ CSR strategies, could influence both a firm's gross margin and CSR spending, leading to endogeneity bias. Second, firms could strategically choose their CSR spending, effectively self-selecting into one of the three categories. Hence, mandatory CSR spending could initially impact firms’ CSR decisions, subsequently affecting performance metrics like gross margins, raising potential endogeneity issues.

We address endogeneity concerns using an instrument variable (IV) approach, with board size and institutional ownership as our IVs. First, we validate our IVs. A valid IV must (a) explain significant variation in a firm's CSR spending decision and (b) satisfy the exclusion restriction, i.e., it impacts the firm's gross margin only through its effect on CSR spending decisions. The economic rationale for our IVs is as follows: India's CSR regulation mandates firms to establish board-level CSR committees responsible for framing CSR policies and planning expenditure. This additional responsibility imposes a significant burden on the board. Therefore, we argue that postregulation, firms with larger boards are more likely to immediately start CSR activities, while firms with smaller boards will first establish necessary organizational structures and processes. Thus, board size likely influences CSR spending, but we do not anticipate a direct link between board size and gross margin premium. Similarly, prior research (Chen et al., 2020; Dyck et al., 2019) indicates that institutional ownership (IOWN) influences firms’ decisions to engage in CSR activities. IOWN refers to the percentage of a company's outstanding shares that are owned by institutional investors. We posit that postregulation, firms with greater institutional ownership are more likely to spend on CSR activities, as institutional investors can influence corporate behavior by promoting responsible business practices that align with broader social and environmental goals (cf. Chen et al., 2020; Dyck et al., 2019). However, we do not expect a direct relationship between institutional ownership and gross margin premium.

Table 6.
CSR and gross margin premium: IV regression (control function).

First stage Second stage

NEWSPENDER NONSPENDER Gross margin premium

Dep. Var. Coeff. SE Coeff. SE Coeff. SE

BOARD SIZE −0.058* (0.011) −0.157* (0.012)

IOWN 2.583* (0.276) 1.639* (0.355)

NEWSPENDER × POST 0.013 (0.006)

NONSPENDER × POST −0.025* (0.006)

SIZE −0.137* (0.024) −0.766* (0.028) −0.010 (0.006)

ROA −0.454 (0.336) −12.861* (0.512) −0.054 (0.077)

AD 2.838* (0.349) −0.206 (0.378) 0.100 (0.046)

RD −1.297 (1.220) −7.307 (2.921) −0.049 (0.090)

DEBT 0.348 (0.176) 1.356* (0.187) 0.001 (0.016)

CASH 0.174 (0.280) −0.462 (0.323) 0.026 (0.020)

IMR1 0.009*** (0.002)

IMR2 −0.003* (0.001)

Year FE Yes Yes

Firm FE No Yes

Observations 12,407 12,392

Pseudo R²/adjusted R² 0.256 0.640

	First stage	Second stage
BOARD SIZE	−0.058***	(0.011)	−0.157***	(0.012)
IOWN	2.583***	(0.276)	1.639***	(0.355)
NEWSPENDER × POST					0.013**	(0.006)
NONSPENDER × POST					−0.025***	(0.006)
SIZE	−0.137***	(0.024)	−0.766***	(0.028)	−0.010	(0.006)
ROA	−0.454	(0.336)	−12.861***	(0.512)	−0.054	(0.077)
AD	2.838***	(0.349)	−0.206	(0.378)	0.100**	(0.046)
RD	−1.297	(1.220)	−7.307**	(2.921)	−0.049	(0.090)
DEBT	0.348**	(0.176)	1.356***	(0.187)	0.001	(0.016)
CASH	0.174	(0.280)	−0.462	(0.323)	0.026	(0.020)
IMR1					0.009***	(0.002)
IMR2					−0.003*	(0.001)
Year FE	Yes				Yes
Firm FE	No				Yes
Observations	12,407				12,392
Pseudo R²/adjusted R²	0.256				0.640

Note. Standard errors in second stage are clustered with 1,000 bootstrap replications.

IMR = inverse mills ratio; IOWN = institutional ownership.

*p < .01, **p < .05, *** p < .01.

Following Shi et al. (2017), we account for the nonrandomness in the assignment of firms in the three categories by using a control function approach.¹² In the first stage, we model the strategic choice of the firm using a multinomial logit model. For identification purposes, we include board size and institutional ownership as IVs in the first stage and estimate the following model:

\begin{aligned} C S R_S T R A T E G Y_{i, t} & = α_{0} + β_{1} B O A R D S I Z E_{i . t} \\ + β_{2} I O W N_{i . t} \times P O S T + X_{i . t} + ε_{i, t}, \end{aligned}

where CSR_STRATEGY refers to one of the three categories that a firm can be categorized into PROSOCIAL, NEWSPENDER, and NONSPENDER.

In the second stage, we include the inverse Mills ratio (IMR) calculated from the first-stage selection equation and then include it as a covariate in equation (9) to control for the endogeneity arising due to firm's CSR strategy. Table 6 provides the results of this endogeneity-corrected analysis. As seen in Table 6 (Column 2), consistent with the results in Tables 4 and 5, the results from the second-stage model demonstrate the positive association between gross margin premium and the NEWSPENDER × POST.

To further uncover the underlying process for the role of advertising expenditures, we randomly select firms in the PRE- and POST-CSR law period to investigate any changes in CSR-related advertisements. For a random sample of 180 firms, we carefully perused the text of these advertisements to classify them as CSR-related or not. For instance, Ashok Leyland, India's second-largest commercial vehicle producer, in its advertisements focused on taking education to the last mile under the “Road to School” initiative as part of its CSR activities (see Web Appendix F for representative ads PRE- and POST-law). The emphasis was on how the initiative helps underprivileged children in remote villages’ access schooling. We classify such advertisement as CSR-related. On the other hand, Dabur, one of India's major CPG players, primarily advertised the launch of its new brands and the promotion of brands such as the launch of wearable mosquito repellent wristbands. Such advertisements are classified as not being related to CSR.

Table 7 shows the proportion of firms with CSR-related advertisements in the PRE and the POST periods for the PROSOCIAL, NEWSPENDER, and NONSPENDER firms (for 60 randomly selected firms in each category). In the PRE period, the proportion of firms doing CSR-related advertisements in the NEWSPENDER category (6.7%) is statistically not different (p > .05) from the proportion of firms doing CSR-related advertisements in the NONSPENDER (1.7%) and PROSOCIAL (15%) category. We find that in the POST period, NEWSPENDER significantly increased CSR-related advertisements (increase from 6.7% to 40% is significant; p < .05). Also, in the POST period the proportion of firms doing CSR-related advertisements in the NEWSPENDER category (40%) is significantly (p < .05) higher than the proportion of firms doing CSR-related advertisements in the NONSPENDERS category (3.3%). However, in the POST period, there is no significant increase in the CSR-related advertisements for NONSPENDER relative to the PRE period (1.7% versus 3.3%). This further strengthens our prediction that firms affected by the CSR law and followed the law, i.e., firms in the NEWSPENDER category, significantly increased their CSR-related advertisements to spread awareness about their societal activities with larger stakeholders and the marketplace.

Table 7.

CSR-related advertisements in PRE and POST law period.

	PROSOCIAL	NEWSPENDER	NONSPENDER
Pre-CSR Law Period
Total Firms	60	60	60
Number of firms with CSR-related ads	9	4	1
Proportion of CSR ads	.150	.067	.017
Post CSR Law Period
Total Firms	60	60	60
Number of firms with CSR-related ads	27	24	2
Proportion of CSR ads	.450	.400	.033

The motivation for this cross-sectional analysis comes from Servaes and Tamayo (2013), who argue that firms that are more successful in raising awareness about their CSR activities are more likely to reap the benefits of these activities.¹³ They use advertising expenditure as a proxy for consumer awareness. However, advertisement expenses for Indian firms are unavailable on the Compustat Global database, which provides only a comprehensive view of SG&A (Selling, General, and Admin) expenses of which advertising expenditure is a part. Nevertheless, to overcome this limitation, following Rajgopal and Tantri (2023), we consider the CSR-related tweets as a percentage of the total tweets of the company to proxy a company's efforts to popularize its CSR activities. However, the sample size is low for the model using CSR-related tweets. We find that NEWPSENDER firms with more CSR-related tweets as a percentage of the total tweets have significant improvement in the gross margin premium after the regulation (cf. Columns 3 and 5 in Table 8).

Table 8.

CSR and gross margin premium: impact of advertising.

	AD = SG&A/total assets				AD = CSR-related tweets/total tweets
Dep. Var. = gross margin premium	Coeff.	SE	Coeff.	SE	Coeff.	SE
NEWSPENDER × POST	0.002	(0.009)	−0.001	(0.009)	−0.020	(0.017)
NEWSPENDER × AD	0.020	(0.113)	0.034	(0.110)	−0.061	(0.069)
NEWSPENDER × POST × AD	0.144**	(0.069)	0.150**	(0.070)	0.278***	(0.103)
NONSPENDER × POST	−0.043***	(0.010)	−0.043***	(0.010)	−0.032	(0.035)
NONSPENDER × AD	0.116	(0.128)	0.134	(0.126)	−0.205	(0.180)
NONSPENDER × POST × AD	0.215***	(0.075)	0.225***	(0.076)	0.065	(0.205)
POST × AD	−0.138**	(0.066)	−0.143**	(0.067)	−0.098	(0.072)
SIZE	0.008	(0.005)	−0.010	(0.007)	0.001	(0.009)
ROA	0.149***	(0.025)	−0.048	(0.078)	0.369***	(0.116)
AD	0.067	(0.109)	−0.003	(0.106)	0.055	(0.055)
RD	0.004	(0.029)	−0.048	(0.096)	−0.107	(0.262)
DEBT	−0.039**	(0.016)	0.002	(0.016)	−0.065	(0.041)
CASH	0.035*	(0.020)	0.022	(0.020)	0.058	(0.055)
IMR1			0.009***	(0.002)
IMR2			−0.003*	(0.002)
Year FE	Yes		Yes		Yes
Firm FE	Yes		Yes		Yes
Observations	12,375		12,392		670
Adjusted R²	0.635				0.766

Note. Control function based IV model is shown for results with IMR as shown in Table 4 using 1,000 bootstrap replications.

IMR = inverse mills ratio.

*p < .01, **p < .05, *** p < .01.

5.2 Additional Analysis and Robustness Tests

We undertake several additional analyses to test the robustness of our results. First, we reestimate equation (9) by replacing the indicator variable for CSR spending with firm's actual CSR spending. In Table 9, we report the impact of CSR on gross margin premium using (a) firm's CSR spending amount scaled by the average of the last 3 years of net profit and (b) CSR spending amount scaled by net profit (CSR_PCT). We find positive and significant effects, strengthening our earlier finding and argument that CSR spending in the postperiod increases gross margin premium.

Table 9.
CSR and gross margin premium: analysis based on level of spending.

1 2

Dep. Var. = gross margin premium Coeff. SE Coeff. SE

CSR SPENDING 0.007 (0.128)

CSR SPENDING × POST 0.314 (0.123)

CSR_PCT −0.020 (0.070)

CSR_PCT × POST 0.137 (0.067)

SIZE 0.013 (0.005) 0.014 (0.005)

ROA 0.145* (0.024) 0.145* (0.024)

AD 0.153* (0.046) 0.153* (0.046)

RD 0.001 (0.030) 0.002 (0.030)

DEBT −0.051* (0.016) −0.053* (0.016)

CASH 0.040* (0.021) 0.040* (0.021)

Year FE Yes Yes

Firm FE Yes Yes

Observations 12,098 12,097

Adjusted R² 0.632 0.632

	1	2
CSR SPENDING	0.007	(0.128)
CSR SPENDING × POST	0.314**	(0.123)
CSR_PCT			−0.020	(0.070)
CSR_PCT × POST			0.137**	(0.067)
SIZE	0.013**	(0.005)	0.014**	(0.005)
ROA	0.145***	(0.024)	0.145***	(0.024)
AD	0.153***	(0.046)	0.153***	(0.046)
RD	0.001	(0.030)	0.002	(0.030)
DEBT	−0.051***	(0.016)	−0.053***	(0.016)
CASH	0.040*	(0.021)	0.040*	(0.021)
Year FE	Yes		Yes
Firm FE	Yes		Yes
Observations	12,098		12,097
Adjusted R²	0.632		0.632

Note. CSR SPENDING is the amount spent on CSR-related activities, scaled by the average of the last 3 years of net profit. CSR PCT is the amount spent on CSR-related activities, scaled by net profit. Standard errors in parenthesis are clustered at firm level. Coefficients on year and intercept are not shown for brevity.

*p < .01, **p < .05, *** p < .01.

Second, we examine whether the impact of CSR activities on gross margin premium is driven by price or quantity. An increase in margin premium can come from two places: price and/or quantity. Given the sparse nature of the data on price and quantity in the CMIE-Prowess database, this analysis is based on a sample of 7333 product-year observations. Table 10 summarizes the effect of CSR spending on the change in unit price and quantity sold in a DID setting. The dependent variable in Columns 1–3 is ΔPRICE, which is defined as (PRICE_t – PRICE_t−1)/ PRICE_t−1. The dependent variable in Columns 4–6 is ΔQTY, which is defined as (QTY _t − QTY _t ₋₁)/ QTY _t ₋₁. We find a positive and significant effect on ΔPRICE of NEWSPENDER (.071, p < .05) but an insignificant effect on the change in the quantity sold. Next, we find no effect on ΔPRICE of NONSPENDER but a negative and significant effect on the change in the quantity sold (−.105, p < .01). This shows that a consumer's willingness to pay a price premium is the driving force behind an increase in margin premium for firms engaging in CSR without hurting unit sales.

Table 10.

CSR spending and changes in unit price and quantity sold.

	1	2	3	4
Dependent variable =	ΔPRICE	ΔPRICE	ΔQTY	ΔQTY
NEWSPENDER	0.001 (0.011)		0.041 (0.015)***
NONSPENDER	−0.005 (0.011)		−0.026 (0.017)
POST	−0.145***		−0.040**
	(0.012)		(0.016)
NEWSPENDER × POST	0.046 (0.015)***	0.071 (0.016)***	−0.002 (0.021)	0.004 (0.022)
NONSPENDER × POST	−0.008 (0.017)	0.030 (0.020)	−0.121 (0.025)***	−0.105 (0.030)***
SIZE		0.010 (0.021)		0.072 (0.030)**
ROA		−0.084 (0.092)		0.042 (0.074)
AD		−0.207 (0.097)**		0.161 (0.174)
RD		−2.776 (1.453)*		0.108 (2.410)
DEBT		−0.030 (0.066)		−0.025 (0.101)
CASH		−0.031 (0.108)		0.071 (0.128)
Year FE	No	Yes	No	Yes
Firm FE	No	Yes	No	Yes
Observations	7245	6912	7245	6912
Adjusted R²	0.044	0.134	0.014	0.079

Note. This table summarizes the effect of CSR on the change in unit price and quantity (QTY) sold, in an DID setting. Δ PRICE is defined as (PRICE_t − PRICE_t−1)/PRICE_t₋₁. Δ QTY which is defined as (QTY_t − QTY_t₋₁)/QTY_t−1. The sample period is 2012–2017, relating to 3 years before and after the passage of the mandatory CSR rule. The standard errors shown in the parenthesis are clustered at firm and year level. Coefficients on year and intercept are not shown for brevity.

*p < .01, **p < .05, *** p < .01.

Finally, we employ a much tighter regression discontinuity (RD) design to ascertain the robustness of our research results.¹⁴ The basic intuition of RD design is as follows: treatment is assigned based on whether an underlying continuous variable crosses a certain cutoff that is exogenously imposed by an intervention. Observations close to the cutoff are likely to be comparable to one another. The observations with a rating variable above the cutoff receive treatment, whereas those below the cutoff do not. Since the only discontinuity at the cutoff is that of the treatment (in our setting, the CSR Law), any discontinuity in the outcome variable (here gross margin premium) at the cutoff can be attributed to the intervention that creates the discontinuity. The causal inference drawn using the RD design is often considered credible because the assignment of observations in treatment and control groups is “as good as randomized,” given that observations cannot precisely control whether they will receive the treatment (Lee and Lemieux, 2010).

In our setting, a firm is affected by the mandatory CSR law, if during any fiscal year, it has either (a) a net worth of INR 5000 million or more, (b) sales of INR 10,000 million or more, or (c) a net profit of INR 50 million or more. Since there are multiple rating variables, we use the binding-score-based multiple-RD design suggested by Reardon and Robinson (2012). Based on these cutoffs, we define three individual rating scores R1, R2, and R3 as (profit 50)/50, (book value 5000)/5,000, and (Sales – 10,000)/10,000, respectively, and thus center the scores around 0. These three individual rating scores determine the overall binding score rating variable M that (i) perfectly determines the treatment, and (ii) equals the rating variable that is closest to 0. To implement the RD-based regression, we only consider firms (RDD sample¹⁵ is reduced to 1245) close to the cutoff criteria. Thus, we consider the range of score ratings (M) from −0.50 to 0.50 as it allows us to be in a close range around the cutoff as per the best practices followed in the RD design-based studies (Lee and Lemieux, 2010). Firms with M > 0 are in the treatment group, and firms with M < 0 are in the control group. Formally, our RD design can be presented as

\begin{aligned} Y = α + τ TREATMENT + f (M) + ε, \end{aligned}

(12)

where Y is our dependent variable, gross margin premium. TREATMENT is an indicator variable that equals 1 if the firm is required to spend on CSR activities and 0 otherwise, and M is the overall binding score rating variable. It should be noted that the variable TREATMENT (in equation 12, Table 11, and Figure 2) refers to firms that are affected by CSR law. The effected firms can in turn be either NONSPENDER, NEWSPENDER, or PROSOCIAL groups (empirically we find that all treatment firms in the RDD analysis are NEWSPENDERs) and the control group is the firms that are unaffected by the CSR law. The term τ captures the effect of CSR spending on gross margin premium.

Table 11.

CSR and gross margin premium: RD analysis.

Dep. Var. = gross margin premium	1	2	3
TREATMENT (t-stat)	0.124 (7.633)***	0.117 (4.681)***	0.097 (2.901)**
Observations	1245	1245	1245
Polynomial order	1	2	3
Bins	36	36	36

*p < .01, **p < .05, *** p < .01.

Figure 2.

Gross margin premium and CSR spending: RDD analysis. Note: Figure 2 shows the GROSS MARGIN PREMIUM for the AFFECTED and UNAFFECTED firms. The variable M (binding score rating variable) is plotted on the X-axis and GROSS MARGIN PREMIUM is plotted on the Y-axis. The solid line plots predicted value of gross margin premium. STATA's RDPLOT command described in Calonico et al. (2014) is used to generate this graph.

We nonparametrically estimate equation (12) using RDROBUST command in STATA where the gross margin premium is estimated as a function of M, separately on both sides of the cutoff (i.e., where M = 0), using local polynomial estimation of various orders and triangular kernel as per Calonico et al. (2014). Table 11 shows the Treatment effect τ (from equation 12), which is the difference in estimated gross margin between both sides for three models with polynomial orders being 1, 2, and 3, respectively. This effect is statistically significant (p < .01) in all three models: .124, .117, and .097. Table 12 provides for the three groups of firms. We find a positive and significant coefficient in NEWSPENDER. Furthermore, the coefficient of NEWSPENDER is statistically greater than the coefficient of PROSOCIAL and NONSPENDER, consistent with our primary analysis results (cf. Table 4).

Table 12.

Parametric estimation.

Dep. Var. = gross margin premium	Coeff.	SE
PROSOCIAL	0.028	(0.048)
NEWSPENDER	0.089**	(0.045)
NONSPENDER	0.035	(0.032)
M	−0.122	(0.171)
M²	−0.106	(0.174)
M³	0.041	(0.338)
PROSOCIAL $\times$ M	0.319*	(0.180)
NEWSPENDER $\times$ M	0.228	(0.167)
NONSPENDER $\times$ M	0.096	(0.198)
Observations	12,244
Adjusted R²	0.025

Note. Table 11 employs a nonparametric estimation whereas Table 12 uses a parametric estimation approach. The GROSS MARGIN PREMIUM is estimated as a function of M, separately on both sides of the cutoff (i.e., where M = 0) using local polynomial estimation of various orders, triangular kernel as per Calonico et al. (2014) and the difference in estimated GROSS MARGIN PREMIUM for the two sides is shown. This difference corresponds to the jump (or drop) in the fitted curve at the cutoff point as documented in Figure 2.

*p < .01, **p < .05, *** p < .01.

Figure 2 plots the estimated values of gross margin premium from the RD analysis for the treatment and control firms. Firms with the variable M ranging between −0.50 to 0.50 comprise our sample. The sample period is the fiscal year ending 2015–2017, i.e., after the passage of the mandatory CSR rule, with a sample of 843 firm-year observations. The variable M is plotted on the X-axis, and the gross margin premium is plotted on the Y-axis. The solid line predicts the value of the gross margin premium, which is estimated as a linear function of M, estimated separately to the left and right of the cutoff point (M = 0). In sum, results from Tables 11 and 12 and Figure 2, show that the significant discontinuity in gross margin premium can be strongly attributed to the firm's CSR activities.

6. Discussion

Analytically, empirically, and qualitatively, we examine the impact of firms’ CSR investments on gross margin premiums and the role of marketing mix variables, especially price and advertising. We use a stylized model to demonstrate how mandated CSR investments affect gross margins for three types of firms: (a) those that start CSR spending due to the law, (b) those that continue CSR activities pre- and postmandate, and (c) those that cease CSR investment postmandate. We propose a conjecture on the moderating role of advertising on the impact of CSR investments on gross margins. Using the Indian government's mandated CSR law, we test our propositions and conjecture. The law's quasi-experimental design setup allows us to use DID and regression-discontinuity analyses to provide quasicausal evidence of the CSR-gross margin premium link and show the moderating impact of advertising on CSR investments and gross margin returns. To the best of our knowledge, our research is one of the first to provide causal evidence of actual CSR investments on a proximal result such as gross margin premium, an important marketing and operations outcome.¹⁶ Another novel contribution of our study is that almost all studies investigating CSR have a fundamental assumption of CSR behavior being a voluntary activity of a company. However, in our study, firms are mandated by the government to invest in CSR activities in an emerging market. Given that firms’ voluntary CSR contributions in emerging markets are still in their infancy, mandatory CSR contributions may be viewed as a regulatory innovation that has operational implications.

6.1 Synergistic Interplay of CSR, Margin Premium, and Operational Outcomes

Our study augments extant literature (cf. Web Appendix A, Table 1) that underscores a significant synergistic interplay between a firm's CSR initiatives, its ability to command a price premium, and its operational outcomes. CSR expenditures could drive operational improvements through efficiency gains and productivity enhancements. These CSR initiatives can influence how companies design and execute operational processes, such as implementing eco-friendly manufacturing techniques or establishing fair labor standards. Companies often incorporate CSR-related metrics into their performance evaluation systems, incentivizing employees to align their actions with CSR goals. These favorable operational outcomes, in turn, contribute to customer satisfaction and strengthen brand equity, justifying a higher price premium.

6.1.1 CSR-Driven Brand Differentiation and Price Premiums

On the other hand, the price premiums enabled by CSR-driven brand differentiation provide firms with resources to reinvest in further CSR efforts, perpetuating a virtuous cycle. CSR initiatives play a crucial role in shaping a company's reputation, building trust with stakeholders, and creating a unique value proposition that resonates with consumers seeking products or services aligned with their values and beliefs. Companies with strong CSR credentials often enjoy higher levels of customer loyalty, with satisfied customers being more likely to perceive the brand positively and be willing to pay a premium for its products or services, enhancing the company's margin premium.

6.1.2 Strategic Alignment for Maximizing Value Creation

To fully capitalize on this synergy, firms must strategically align their CSR initiatives with operational objectives, integrating CSR metrics into performance evaluation systems. This strategic alignment ensures CSR efforts directly influence operational processes such as sustainable manufacturing practices and environmentally friendly supply chain operations. By embedding CSR into their core business strategy, companies can create sustainable value for all stakeholders while maintaining a competitive advantage (Arya and Mittendorf, 2015) and commanding a premium position in the market. Furthermore, companies that prioritize operational efficiency often command a higher margin premium, as efficient operations result in cost savings, streamlined processes, and improved productivity, all of which contribute to higher profitability and shareholder value. The financial performance of a company, influenced by its operational outcomes, directly impacts its margin premium. Effective operational management includes robust risk mitigation strategies (Li et al., 2021), demonstrating resilience and reliability, reducing investor uncertainty, and increasing confidence in the company's ability to deliver sustained value.

Our results underscore that CSR laws have heightened the salience of CSR investments for firms and increased customer awareness about firms’ obligations to invest in CSR. This aligns with recent findings in cause marketing (CM) research (Kopalle et al., 2022), which suggest that CM campaigns are most effective when laws are in place to enforce and monitor a firm's charitable actions. Furthermore, our findings indicate that an implementable CSR law can incentivize firms to comply, particularly when operational monitoring is straightforward, such as CSR reporting in annual statements. This compliance is likely to occur as the policy benefits the public, leading customers to favor firms that comply. We find that this preference enables customers to pay slightly higher prices for the goods and services of complying firms, while purchasing less from firms that do not act in ways that benefit the public.

6.1.3 Implications for Policymakers and Firms

Our results have important implications both for policymakers and firms alike. For example, policymakers in emerging markets, where firm-level voluntary CSR contributions are low, may begin to realize that a mandatory CSR law can be an innovative operational tool for regulators to increase the number of companies contributing to CSR. Similarly, firms may view such a law as not an additional cost of conducting business but rather an innovative growth strategy because of the interplay between their advertising, the regulation, and the coordination mechanisms of a mandated CSR rule. This is because advertising builds consumer awareness, while the CSR regulation provides accountability, thus giving consumers confidence that their money is aiding a good cause. Thus, the CSR law represents a win-win for the government and profit-maximizing firms—a true case of doing better by doing good.

In essence, our findings have implications at the policy level, as the CSR law improves public welfare through the actions of Indian firms, while also perhaps boosting the morale of the government. Our findings provide the rationale for implementing CSR mandates in countries with low voluntary contributions, as we show that such mandates enable more companies to contribute to socially beneficial causes. As such, a CSR mandate may be a novel governmental innovation in emerging markets and repurpose corporate profits for the welfare of society. Prior empirical research has almost exclusively considered consumer-level perceptions or a broad shareholder value measure versus marketing and operations related to variables such as advertising and pricing decisions—variables of fundamental interest to managers. Modern marketers, however, need to balance business sense with a social heart and understand the degree to which they can leverage CSR-based advertising investments in terms of expenditures and content. They also need to develop corresponding pricing strategies to affect consumers’ willingness to pay a premium for their products in exchange for their CSR activities without hurting sales units. Much of the prior literature on the impact of CSR has focused on voluntary CSR. Research examining the impact of mandatory CSR, particularly in emerging markets, is in a nascent stage. Our findings suggest that consumers are likely to value such CSR activities, even though they are mandatory.

From a firm's standpoint, a company can create a certain level of product differentiation by endowing its products, services, or brands with CSR attributes (McWilliams and Siegel, 2001). Our findings support the argument that NEWSPENDER firms may be investing more in product innovation by incorporating CSR attributes. Research provides evidence that customers prefer goods with greater social attributes and perceive them as more valuable, while also trusting the firm to be socially responsible (Albuquerque et al., 2019; Flammer, 2015). Hence, customers would be willing to pay a premium price for such products. In contrast, due to their conventional involvement in CSR activities, PROSOCIAL firms might consider additional spending on CSR as a further expense and be reluctant to innovate beyond their existing CSR attributes/offerings. Therefore, customers would not notice a significant change or added value in their offerings related to CSR commitments, and their willingness to pay any price premium would be lower.

Similarly, our study's findings show that NEWSPENDER firms will spend more on advertising their product innovation to highlight the additional CSR attributes. They would use advertising as a signal to communicate their social intentions and contributions. On the other hand, PROSOCIAL firms that have traditionally invested in CSR might not feel it is necessary to spend more on advertising. Their logic may be as follows: customers are already aware of their existing CSR attributes, and any expenditure on CSR-centric advertising would be an added cost to the firm. Meanwhile, NEWSPENDER firms’ CSR engagement could positively affect customers’ perceptions of their brands and offerings, leading to a profitable and loyal customer base. CSR actions, reliably communicated and advertised, lead to a revenue premium (Habel et al., 2016), resulting in firms strengthening their brand equity by differentiating themselves from competitive alternatives (Ailawadi et al., 2003; Nickerson et al., 2022). In the long term, mandatory CSR requirements could lead companies to stabilize their competitive advantage by creating societal value (Porter and Kramer, 2006).

6.1.4 Limitations and Future Research

One limitation of our study is that it does not distinguish between different types of CSR activities. Future research could explore the differential impact of various CSR activities, such as the ten principles of CSR, as defined by the UN Global Compact.¹⁷ Relatedly, this could also shed light on heterogeneity in the effects of a firm's CSR commitments. As documented in Web Appendix E, in the post-CSR rule period, it appears that advertisements have become more socially relevant relative to the preperiod. Future research focusing on the scope, intensity, and value of CSR-specific ads would deepen our understanding of company–customer identification driven by CSR.

Since 2013, there has been a noticeable increase in CSR activity disclosures by firms. However, it is challenging to ascertain if these disclosures directly influence consumer purchases and subsequently affect gross margins. Future research should address whether CSR disclosures, when controlled for the level of CSR activities, have a separate impact on gross margin premium, especially as more data about the quality of CSR-related disclosures become available. The impact of CSR spending activities and CSR activity disclosure are intertwined, making them difficult to separate. CSR spending activities focus on implementing CSR initiatives and their direct effects on the firm and society, such as environmental protection impacting firm performance and pollution levels (Chen et al., 2018). Conversely, CSR activity disclosure is about the transparency and communication of these activities to stakeholders, influencing CSR fund allocation and firm value (Hasan et al., 2022; Roy et al., 2022). Both are crucial for a comprehensive CSR strategy.

Also, CSR disclosure could influence consumer purchases and, consequently, gross margins. Research suggests that consumers’ engagement and purchase intentions are significantly affected by their expectations of ethical and environmental responsibility from organizations (Al-Haddad et al., 2022; Sen and Bhattacharya, 2001). Moreover, CSR disclosure can reduce information asymmetry, improve stock market liquidity, enhance a firm's reputation and social capital, attract more customers, and improve profitability (Forbes, 2022). Hence, future research exploring the impact of CSR disclosure on consumer purchases and performance outcomes would be both relevant and pertinent.

Furthermore, this study, along with most of the extant literature, focuses on CSR from a firm's perspective while not objectively capturing consumer side benefits. However, the premise of CSR is based on giving back to the community, and future studies could focus on the benefits that employees, consumers, and other stakeholders would derive from CSR and how it would impact the firm's adoption of CSR. Outcome variables captured from varied stakeholders will be useful in measuring the ‘true’ impact and spread of CSR activities. Thus, while work remains to be done, empirically studying the role of leveraging mandatory CSR law in marketing strategy seems viable and worthy of the effort required to understand it completely.

Supplemental Material

sj-docx-1-pao-10.1177_10591478251329011 - Supplemental material for Social Heart and Business Sense: Translating Corporate Social Responsibility into Gross Margin Premium per Mandatory Corporate Social Responsibility Law in India

Supplemental material, sj-docx-1-pao-10.1177_10591478251329011 for Social Heart and Business Sense: Translating Corporate Social Responsibility into Gross Margin Premium per Mandatory Corporate Social Responsibility Law in India by S Arunachalam, Hariom Manchiraju, Rahul Suhag and Praveen K Kopalle in Production and Operations Management

Footnotes

Appendix: Variable definitions

Variable	Definition (with COMPUSTAT codes)
POST	An indicator variable equals 1 for observations in the years 2015–2017 which corresponds to years after the implementation of mandatory CSR rule, and 0 otherwise.
PROSOCIAL (CONTROL)	Firms that spend amount on the CSR-related activities in the pre- and postmandatory CSR rule period
NEWSPENDER	Firms that did not spend any amount on the CSR-related activities in the pre-mandatory CSR rule period but started spending on CSR activities in the postmandatory CSR rule period
NONSPENDER	Firms that do not spend any amount on the CSR-related activities in the pre- and postmandatory CSR rule period
GROSS MARGIN PREMIUM	Difference between a firm's gross margin and industry (two digits SIC code) median gross margin, where gross margin is (sales − COGS)/sales
SIZE	Natural log of the total assets at the end of the year (AT)
ROA	Income from continuing operations divided by the total assets at the end of the year (IB/AT)
DEBT	Long-term debt (including its current portion) divided by total assets at the end of the year (DLC + DLTT/AT)
AD	Advertisement expenses during the year divided by the total assets at the end of the year (XSGA/AT)
RD	Research and development expenses during the year divided by the total assets at the end of the year (XRD/AT)
CASH	Cash and marketable securities at the end of the year divided by total assets at the end of the year (CHE/AT)
Δ PRICE	(PRICE_t − PRICE_t−₁)/PRICE_t−₁
ΔQTY	(QTY_t − QTY_t−₁)/QTY_t−₁

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

ORCID iDs

Rahul Suhag

Praveen K Kopalle

Supplemental Material

Supplemental material for this article is available online (doi: ).

Notes

How to cite this article

Arunachalam S, Manchiraju H, Suhag R and Kopalle PK (2025) Social Heart and Business Sense: Translating Corporate Social Responsibility into Gross Margin Premium per Mandatory Corporate Social Responsibility Law in India. Production and Operations Management 34(10): 3042–3062.

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Supplementary Material

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Social Heart and Business Sense: Translating Corporate Social Responsibility into Gross Margin Premium per Mandatory Corporate Social Responsibility Law in India

Abstract

Keywords

1. Introduction

2. Background

2.1. Interplay Between Advertising and Regulatory/Coordinating Roles of CSR Mandate

3. Analytical Model

3.1. Demand Function

4.1. DID Design

Table 1. Sample description: Yearly distribution of sample.

5.1 Main Results

6.1 Synergistic Interplay of CSR, Margin Premium, and Operational Outcomes

6.1.1 CSR-Driven Brand Differentiation and Price Premiums

6.1.2 Strategic Alignment for Maximizing Value Creation

6.1.3 Implications for Policymakers and Firms

6.1.4 Limitations and Future Research

Supplemental Material

sj-docx-1-pao-10.1177_10591478251329011 - Supplemental material for Social Heart and Business Sense: Translating Corporate Social Responsibility into Gross Margin Premium per Mandatory Corporate Social Responsibility Law in India

Footnotes

Appendix: Variable definitions

Declaration of Conflicting Interests

Funding

ORCID iDs

Supplemental Material

Notes

How to cite this article

References

Supplementary Material

Table 1.
Sample description: Yearly distribution of sample.