Does institutional blockholders’ investment promote CSR spending? Evidence from Indian firms Open Access

Corporate Social Responsibility (CSR) has emerged as an essential component of corporate governance, especially following the 2013 enactment of India’s Companies Act mandating CSR spending for firms meeting specific financial thresholds. Unlike voluntary CSR frameworks prevalent globally, India’s mandatory approach provides an exceptional context to analyze institutional investors’ role in shaping CSR activities (Panicker, 2017; Tokas and Yadav, 2023). This unique regulatory setting highlights the originality and relevance of this research by offering insights distinct from those observed in voluntary CSR environments. Institutional investors are increasingly influential stakeholders, particularly during economic uncertainties such as the COVID-19 pandemic, demanding that firms align their strategies with broader societal expectations (Chen et al., 2020; Dyck et al., 2019). Indian firms present a distinct ownership structure, typically characterized by concentrated promoter holdings alongside significant institutional investors. This dual ownership complexity offers an intriguing landscape for analyzing investor activism’s implications on CSR, differing notably from Western contexts. Grounded in the Institutional Theory of Corporate Responsibility, which posits that corporate actions are shaped by governance structures and institutional pressures (Campbell, 2007; Armour et al., 2003), this study explores how institutional investors influence CSR spending decisions.

Despite extensive research on CSR, several critical gaps remain. Prior studies often overlook the endogeneity between institutional ownership and CSR, potentially biasing results (Moradi et al., 2018; Nofsinger et al., 2019). Additionally, limited attention has been given to distinguishing between domestic and foreign institutional investors’ roles in shaping CSR, particularly in emerging markets facing crises like the COVID-19 pandemic (Alda, 2025; Faysal et al., 2020). Furthermore, the differential effects of firm-specific attributes such as profitability and size on institutional ownership-CSR dynamics remain underexplored (Pradhan and Nibedita, 2021; Mishra et al., 2021).

This study addresses these gaps by analyzing 2,171 Indian firms over 2014–2023 using a two-stage least squares (2SLS) regression model to mitigate potential endogeneity issues. By incorporating econometric methods, the research provides robust evidence on how institutional ownership impacts CSR spending, explicitly differentiating between domestic and foreign institutions. The study also examines the moderating effects of firm profitability and size, shedding light on institutional investors’ preferences and behaviors under varying financial conditions.

Our analysis contributes significantly to existing literature and practical understanding of CSR governance in emerging markets. Results underscore the substantial role of institutional investors—particularly domestic institutions—in driving CSR spending and reveal their intensified engagement during the COVID-19 pandemic (Kim et al., 2019; Tokas and Yadav, 2023). Domestic institutions exhibit stronger influence relative to foreign investors, reinforcing the importance of localized institutional engagement (Moradi et al., 2018; Dissanayake et al., 2023). This finding suggests domestic investors’ closer alignment with national regulatory expectations and greater sensitivity to local societal norms. The findings further indicate that institutional ownership positively impacts CSR activities, irrespective of firms’ financial performance or size. Interestingly, this effect is even more pronounced among loss-making and smaller firms, highlighting how institutional investors potentially use CSR to enhance firm legitimacy and reputation during periods of distress or uncertainty (Nuvaid et al., 2017; Faysal et al., 2020). Such insights carry meaningful implications for policymakers and practitioners, underscoring the importance of promoting institutional investment to drive effective corporate governance and sustainable CSR practices. This study elucidates institutional investors’ vital role in fostering CSR in India, particularly amidst global disruptions, by employing advanced econometric techniques and addressing critical literature gaps. It provides timely and relevant policy recommendations, urging regulatory bodies and market participants to encourage institutional investment to enhance corporate accountability and social responsibility.

The rest of this manuscript is structured as follows: Section 2 presents a literature review and develops the research hypotheses. Section 3 outlines the evolution and status of CSR regulations in India. Section 4 describes the study’s methodology, including sample selection, data sources, and empirical modeling. Section 5 presents the empirical results and their discussion. Finally, Section 6 concludes by summarizing key findings and implications and providing suggestions for further research.

The Institutional Theory of Corporate Responsibility posits that corporate behavior, including CSR activities, is shaped by regulatory frameworks and institutional norms (Campbell, 2007). This theory provides the foundation for understanding CSR practices as responses to external pressures such as regulatory mandates and the influence of institutional investors (Davis et al., 2007). For instance, the 2014 amendment to India’s Companies Act mandating CSR spending underscores how regulatory pressures institutionalize CSR within corporate governance frameworks. Institutional investors play a pivotal role in advancing CSR, particularly in emerging markets like India, where institutional pressures have triggered substantial changes in corporate governance. These investors act as key stakeholders who promote CSR by enhancing transparency, monitoring firms, and aligning strategic goals with societal expectations (Chen et al., 2020; Moradi et al., 2018). Long-term institutional investors are linked to heightened CSR engagement, driven by their incentives to ensure sustainable firm performance (Kim et al., 2019). This is consistent with the findings of Dissanayake et al. (2023), who demonstrated that CSR disclosures, supported by governance mechanisms, can enhance corporate reporting quality. This highlights how institutional investors’ monitoring ensures the alignment of CSR activities with ethical governance practices.

Institutional blockholders with significant ownership stakes further exemplify the influence of institutional pressures. These blockholders often actively protect long-term investment value, as observed in contexts such as Korea (Chung et al., 2019). Their engagement aligns with the findings by Mahrani and Soewarno (2018), who noted that good corporate governance mechanisms enhance CSR’s positive impact on financial performance, especially when earnings management mediates the relationship. Furthermore, institutional investors improve information transparency and internal controls in their investee firms, which promote CSR activities, particularly in state-owned enterprises or firms with limited financial constraints (Xiong et al., 2022). Firm-specific characteristics also influence how institutional ownership affects CSR spending. Profitability and firm size are critical determinants of CSR engagement, with institutional investors often favoring larger, financially robust firms for such initiatives (Pradhan and Nibedita, 2021; Mishra et al., 2021). Similarly, Bidari and Djajadikerta (2020) identified firm size and profitability as significant predictors of CSR disclosures in the banking sector, reinforcing that institutional investors prioritize firms with greater resources and stability for CSR investment.

The COVID-19 pandemic has further highlighted the role of institutional pressures in driving CSR, particularly in financially distressed firms. Firms have increasingly engaged in CSR during crises to maintain legitimacy, aligning with the heightened societal expectations observed during the pandemic (Alda, 2025; Faysal et al., 2020). This period also underscored the importance of material CSR information in shaping investors’ decisions, as discussed by Pratoomsuwan and Chiaravutthi (2023), who demonstrated that professional investors in emerging markets weigh material CSR information heavily in investment judgments. Despite these insights, significant gaps remain in understanding the relationship between institutional ownership and CSR. Many studies fail to account for potential endogeneity in this relationship, which can lead to biased conclusions (Nofsinger et al., 2019). Furthermore, the distinct roles of domestic versus foreign institutional investors in driving CSR, particularly during crises like COVID-19, remain underexplored. This study addresses these gaps by investigating how institutional ownership influences CSR spending while examining the moderating effects of firm-specific factors such as profitability and size, thereby contributing to an understanding of institutional pressures and corporate governance.

Building on the insights from Institutional Theory and the evidence provided in the literature review, it is evident that institutional ownership is instrumental in driving CSR activities. Institutional investors pressure firms to align with societal norms, thereby institutionalizing CSR within corporate strategy and governance frameworks (Campbell, 2007; Maignan and Ralston, 2002). Given the influence of institutional investors, both domestic and foreign, and their mechanisms of action, including long-term monitoring, engagement, and conforming to societal expectations, the study posits.

Since enacting the Companies Act of 2013, which mandated Corporate Social Responsibility (CSR) for qualifying companies, India has continually refined its CSR framework to enhance corporate accountability and societal impact. The initial legislation required companies meeting specific financial thresholds to allocate at least 2% of their average net profits from the preceding three years to CSR activities, marking a significant shift from voluntary to mandatory CSR engagement. In 2019 and 2020, the Companies (Amendment) Acts introduced pivotal changes to Section 135 of the Companies Act. These amendments emphasized stricter compliance by mandating that unspent CSR funds be transferred to designated government funds or spent within a specified timeframe, reinforcing the obligation for timely and effective utilization of CSR allocations.

Further refinements were made through the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022. These rules introduced provisions for impact assessments of substantial CSR projects, capping the expenditure on such evaluations at 2% of the total CSR spend or $₹$ 50 lakh, whichever is higher. This initiative aims to enhance the effectiveness and transparency of CSR activities by ensuring that significant projects undergo thorough evaluations to assess their social impact. The Ministry of Corporate Affairs has also issued various circulars and amendments to clarify CSR expenditure eligibility and reporting obligations. For instance, contributions to certain government funds and activities exclusively for employees have been specified as non-eligible CSR expenditures, guiding companies toward more community-focused initiatives.

These regulatory developments reflect India’s commitment to fostering a robust CSR environment where corporate contributions are strategically aligned with national development priorities. By instituting clear guidelines and compliance mechanisms, the Indian government seeks to ensure that CSR activities are mandatory but also meaningful, transparent, and impactful.

The sample of this study consists of all listed companies in India that are in the ambit of CSR regulations and report CSR spending-related information in their annual reports. Such data are available only from 2014. The study period was from 2014 to 2023. The study sample consists of 2,171 firms reporting CSR spending from 2014 to 2023, representing 11,134 firm-year observations in the sample. All variables with outliers were winsorized at the top and bottom 1% levels to mitigate the impact of outliers. This results in a decrease in the kurtosis value to approximately three for all variables except leverage.

In Equations (1) and (2), CSR_it is log the value of CSR spending; TII_it is the percentage of institutional ownership in total shareholdings of a company; DII_it is the percentage of domestic institutional ownership; FII _it is the percentage of foreign institutional ownership; PROM_it is promoter holdings; ROA_it denotes profitability measured as “Return on Assets”; LOGCASH_it measured as log value of cash holding; LEV_it stands for debt to equity ratio; AGE_it denotes firm age; SIZE_it denotes the size of the company measured as log value of total assets and LOGINDCSR measured as log value of average CSR spending in the given industry; $COVID19_Dummy$ refers to a dummy variable representing the COVID-19 pandemic, which takes value one for the period after and zero before.

Instrumental variables used in the model: We address the influence of institutional ownership on CSR spending as evidenced by Panicker (2017), Nuvaid et al. (2017), Tokas and Yadav (2023), Mishra et al. (2021), Pradhan and Nibedita (2021). The evolving dynamics between institutional shareholders and regulatory bodies, enhancing corporate governance in emerging markets, are well-documented by Armour et al. (2003), Campbell (2007), and Davis et al. (2007). Additionally, the positive correlation between institutional ownership and CSR, supported by Chen et al. (2020), forms the basis of our empirical investigation.

Institutional investment is regressed on the nine most probable market determinants: size, volume, yield, index investing, growth, BHAR (buy-hold return), ROA, beta, and debt ratio. (Bushee, 2001; Zang, 2012; Callen and Fang, 2013; Kałdoński et al., 2020). The prior literature argues that size is one of the instrumental variables because some institutional investors prefer investment in large-size companies. The volume of traded shares indicates liquidity, a crucial variable in institutional investors’ investment decision-making. Dividend yield proxies the dividend preferences, which also influence institutional investment decisions; the Nifty-50 dummy represents the institutional investor’s preference for blue-chip companies; Growth represents institutional investors’ preference for investment in fast-growing firms; BHAR (buy-hold return) refers to stock performance in the market; beta and debt ratio indicates risk profile of the firms. See Table 1.

As shown in descriptive statistics (Table 2), CSR spending (log) has a mean of 15.940 with a standard deviation of 1.965, indicating less variation in the values. The mean value for domestic institutional investors (DII) is 5.427 with a standard deviation of 7.265; for foreign institutional investors (FII), the mean is 8.123 with a standard deviation of 9.322. Institutional holdings show a mean of 11.353 and a higher standard deviation of 13.836, reflecting more significant variability. Promoter holdings have a mean of 58.732 and a standard deviation of 14.479. ROA is 6.563 on average, and leverage, measured by the debt ratio, is 0.841, with a standard deviation of 8.966, indicating greater variability. The average firm age is 38.050 years, with a standard deviation of 21.519, while the average firm size (log of assets) is 9.243. Industry CSR (INDCSR) has a mean of 17.550, with a standard deviation of 1.093, indicating more consistent CSR spending across industries.

The correlation analysis (Table 3) reveals several significant relationships. CSR spending (CSRS) is positively correlated with institutional ownership (TII) at 0.641, domestic institutional investors (DII) at 0.547, foreign institutional investors (FII) at 0.450, and firm size (SIZE) at 0.808, indicating that larger firms with higher institutional ownership tend to spend more on CSR. DII and FII are also significantly correlated (0.313), reflecting the interconnectedness of institutional ownership types. Additionally, CSR spending by a firm is positively correlated with industry CSR (INDCSR) at 0.284, suggesting that industry norms influence individual firms’ CSR spending. Promoter holdings (PROM) show a negative correlation with both TII (−0.432) and FII (−0.424).

As shown in Table 4, the regression analysis reveals a significant positive impact of institutional ownership (TII) on CSR spending, with a coefficient of 0.361. This finding aligns with the Institutional Theory of Corporate Responsibility, which posits that corporate behavior, including CSR activities, is shaped by external pressures such as institutional norms and governance frameworks (Campbell, 2007). The positive relationship between institutional ownership and CSR spending supports previous research by Kim et al. (2019), who emphasized that long-term institutional investors promote CSR as part of sustainable governance. This result highlights the role of institutional investors in driving corporate social responsibility, likely through enhanced monitoring and alignment of CSR initiatives with broader governance and sustainability objectives. The COVID-19_dummy variable, with a coefficient of 0.123, indicates a significant increase in CSR spending during the pandemic. This finding aligns with studies such as Alda (2025), which highlighted heightened CSR efforts during crises as a means for firms to maintain legitimacy and meet societal expectations. The surge in CSR spending underscores the responsiveness of firms to external shocks and the importance of CSR in preserving corporate reputation and stakeholder trust during challenging times. Pratoomsuwan and Chiaravutthi (2023) also noted that material CSR information becomes a critical factor for investors during periods of uncertainty, further supporting the observed increase in CSR spending.

Among the controlling variables, firm size (SIZE) shows the most substantial positive impact, with a coefficient of 1.413, reinforcing the idea that larger firms with greater resources and public visibility are more likely to allocate resources to CSR activities. This finding corroborates Bidari and Djajadikerta (2020), who identified size as a significant predictor of CSR disclosures, particularly in resource-abundant firms. Profitability (ROA) and cash holdings also positively influence CSR spending, with coefficients of 0.309 and 0.033, respectively, suggesting that financially stable firms have more capacity to engage in CSR initiatives. These results align with the stakeholder theory, which indicates that financially robust firms prioritize stakeholder engagement, including CSR. Conversely, leverage negatively impacts CSR spending, with a coefficient of −0.047. This supports the findings by Moradi et al. (2018), which identified financial constraints as a deterrent to CSR investments. Firm age, with a coefficient of 0.007, shows no significant impact, indicating that the firm’s tenure does not substantially influence CSR spending decisions, consistent with Pradhan and Nibedita (2021).

As shown in Table 5, domestic institutional investors (DII) and foreign institutional investors (FII) significantly positively impact CSR spending, with coefficients of 0.213 and 0.138, respectively. The stronger influence of DII aligns with findings by Mahrani and Soewarno (2018), who emphasized the role of local investors in promoting CSR, often due to their proximity to regulatory frameworks and socio-economic environments. This distinction is further explained by Dissanayake et al. (2023), who observed that governance mechanisms implemented by domestic investors help curb managerial opportunism and strengthen CSR alignment with ethical practices. The COVID-19_dummy variable, with a coefficient of 0.118, further underscores the pandemic’s role in CSR spending, consistent with studies highlighting the role of institutional pressures during crises.

This study addresses potential endogeneity concerns in analyzing the relationship between institutional ownership and CSR spending, recognizing that factors beyond CSR activities alone could influence institutional investments. A two-stage least squares (2SLS) regression model effectively managed this issue, providing robust control for instrumental variables influencing institutional ownership. This methodological approach distinguishes the study, as previous research rarely addresses endogeneity using the 2SLS model in this context. The 2SLS regression results (Table 6) confirm the robustness of the baseline findings, revealing a stronger positive effect of institutional ownership on CSR spending (TII_PREDICTED coefficient = 0.740) compared to the baseline regression (0.361). This underscores the precision gained when endogeneity is properly controlled, aligning with insights from Chen et al. (2020). Furthermore, domestic institutional investors (DII_PREDICTED coefficient = 0.608) exhibited a notably stronger influence on CSR spending than foreign institutional investors (FII_PREDICTED coefficient = 0.362), consistent with earlier findings (Pradhan and Nibedita, 2021; Mishra et al., 2021). The consistently significant positive coefficient for the COVID-19_dummy variable across models reinforces the pandemic’s role in intensifying CSR efforts, highlighting firms’ proactive responses to societal expectations during crises (Alda, 2025).

We further analyzed the robustness of our results by categorizing the sample firms based on profitability into profit-making and loss-making groups. This additional analysis validates the consistency and reliability of the institutional ownership-CSR relationship across different financial conditions. The results (Tables 7 and 8) confirm that institutional ownership positively influences CSR spending in both groups. Interestingly, the impact is slightly stronger among loss-making firms (coefficient = 0.332) compared to profit-making firms (0.299), suggesting institutional investors might prioritize CSR initiatives to enhance legitimacy and stability in financially distressed companies (Chen et al., 2020; Dyck et al., 2019). Furthermore, the COVID-19 pandemic notably increased CSR spending in loss-making firms (0.402) compared to profit-making firms (0.125), indicating heightened CSR responsiveness during crises. Domestic institutional investors (DII) significantly drive CSR spending across both profitability contexts, with marginally greater influence in loss-making firms (0.196) versus profit-making firms (0.194). Foreign institutional investors (FII) also exhibit a significant positive impact, particularly stronger in loss-making firms (0.202) relative to profit-making firms (0.089). The more pronounced effect of the COVID-19 pandemic on CSR in loss-making firms (0.427 versus 0.112 in profit-making firms) underscores the strong investor-driven CSR efforts during economic downturns, aligning with prior findings (Shafeeq Nimr Al-Maliki et al., 2023; Kim et al., 2019; Tokas and Yadav, 2023).

Firm size can significantly influence CSR engagement due to differing resource availability and visibility. We divided sample firms into large and small categories based on median asset size to test the consistency of our findings across these groups. The results (Tables 9 and 10) reveal a positive impact of institutional ownership on CSR spending for both large (coefficient = 0.325) and small firms (coefficient = 0.331), indicating consistent influence irrespective of firm size (Panicker, 2017, Nuvaid et al., 2017). However, a notably higher R-squared value for larger firms (0.617 compared to 0.310 for smaller firms) suggests that the model better predicts CSR activities in larger firms. This difference might reflect smaller firms’ greater susceptibility to resource constraints and inconsistent CSR strategies (Faysal et al., 2020; Shafeeq Nimr Al-Maliki et al., 2023). The COVID-19 pandemic significantly increased CSR spending in large (0.166) and small firms (0.156), underscoring heightened corporate responsiveness across sizes. Domestic institutional investors (DII) significantly influenced CSR spending across firm sizes, with a slightly stronger effect in small firms (0.213 versus 0.204 in large firms) (Kim et al., 2019; Tokas and Yadav, 2023). Conversely, foreign institutional investors (FII) positively impacted large firms only (0.130), reflecting differing investor influences based on firm size (Moradi et al., 2018).

The study employs a Two-Stage Least Squares (2SLS) regression approach to analyze the relationship between institutional ownership and CSR spending among Indian firms, addressing endogeneity through predicted values (TII_PREDICTED, DII_PREDICTED, and FII_PREDICTED). The results strongly indicate that institutional investors, especially domestic ones, significantly influence CSR spending, with a stronger impact after controlling for endogeneity. This confirms prior findings highlighting the pivotal role of domestic institutional investors in driving CSR, particularly in emerging markets characterized by complex ownership structures and regulatory environments (Panicker, 2017; Kim et al., 2019; Tokas and Yadav, 2023). Additionally, CSR spending significantly increased during the COVID-19 pandemic, reflecting firms’ responsiveness to societal expectations and regulatory pressures (Graff Zivin and Small, 2005; Kim et al., 2019).

Further robust analyses across profitability and firm size confirm that institutional ownership consistently promotes CSR activities, with a slightly stronger effect among loss-making and smaller firms. This suggests institutional investors prioritize CSR in financially distressed firms to enhance reputation and stability, corroborating previous research (Chen et al., 2020; Pradhan and Nibedita, 2021). Although the impact is marginally greater in smaller firms, CSR spending predictability is higher in larger firms due to their greater resources and visibility (Faysal et al., 2020; Shafeeq Nimr Al-Maliki et al., 2023). These findings align with the Institutional Theory of Corporate Responsibility, emphasizing institutional pressures from regulatory frameworks and investor activism as critical drivers of CSR (Campbell, 2007; Armour et al., 2003; Davis et al., 2007; Davis and McAdam, 2000; Maignan and Ralston, 2002). The results underline a shift towards integrating financial returns with broader social and environmental responsibilities, reflecting evolving investor preferences in India’s regulated CSR landscape.

This study examined the relationship between institutional ownership and Corporate Social Responsibility (CSR) spending among Indian firms from 2014–2023, grounded in the Institutional Theory of Corporate Responsibility. The findings strongly support the hypothesized positive relationship, highlighting the influential role of institutional investors, especially domestic institutions, in driving CSR activities. Employing a robust two-stage least squares (2SLS) regression to address potential endogeneity, the study confirmed that institutional ownership consistently promotes CSR spending across firms of varying profitability and size. Notably, the influence of domestic institutional investors was more pronounced in smaller and loss-making firms, emphasizing their strategic role during economic uncertainties, such as the COVID-19 pandemic.

These findings carry significant theoretical and practical implications, particularly within emerging markets with high promoter ownership and agency conflicts. Theoretically, the study reinforces the institutional theory by demonstrating how institutional investors can mitigate informational asymmetry and enhance corporate governance through proactive CSR engagement. Practically, the research underscores the critical importance of institutional investors, particularly domestic entities, in ensuring sustained CSR commitments across different financial contexts. This calls for policymakers and market participants to foster institutional investor involvement actively, creating regulations encouraging institutional investments and enhancing corporate governance practices.

Finally, companies and regulatory bodies should prioritize institutional ownership and foster transparency through improved corporate governance standards to strengthen CSR initiatives in India. Policymakers should consider targeted regulatory frameworks that incentivize institutional investment in CSR alongside educational campaigns to highlight CSR’s long-term value to investors. Future research can be undertaken to explore the specific mechanisms by which institutional investors influence CSR, enriching academic insights and informing practical policy directions in the evolving Indian market.