Compliance to the mandatory CSR regulation and leverage adjustment: A quasi-natural experiment

Abstract

This study examines the impact of mandatory corporate social responsibility (CSR) regulation in India on firms’ leverage speed of adjustment (SOA). Leveraging a dataset of 8564 firm-year observations from 1789 unique firms, we find that compliance with the 2014 CSR mandate accelerates SOA. Results reveal that compliant firms achieve faster SOA, particularly those facing higher asymmetry and constraints, highlighting the economic significance of regulatory compliance. Employing causal identification techniques, including two-stage least squares and a difference-in-differences framework, we ensure robustness against endogeneity concerns. Finally, considering that achieving the target capital structure enhances firm value, we observe that the accelerated SOA resulting from compliance correlates with increased firm value.