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

Purpose This study aims to investigate the influence of institutional investors on corporate social responsibility (CSR) spending among Indian firms, focusing particularly on distinctions between domestic and foreign institutional ownership. It examines how institutional ownership shapes CSR spending in different contexts of firm profitability and size and during external shocks such as the COVID-19 pandemic, thus contributing to understanding investor activism’s role in emerging markets under mandatory CSR regulatory frameworks. Design/methodology/approach The study analyzes data from 2,171 Indian firms over 2014–2023, comprising 11,134 firm-year observations. It applies a two-stage least squares (2SLS) regression model to address potential endogeneity between institutional ownership and CSR spending effectively. Additional robustness analyses evaluate the consistency of findings across contexts, including profitability, firm size and the impact of the COVID-19 pandemic, ensuring a holistic understanding of the institutional ownership–CSR relationship. Findings Results indicate a significant positive impact of institutional ownership on CSR spending, with domestic institutional investors exhibiting stronger influence than foreign investors. Institutional influence is more pronounced in smaller, loss-making firms and intensified during the COVID-19 pandemic. These findings suggest institutional investors use CSR strategically to enhance firm legitimacy and stability, especially under economic distress or uncertainty, highlighting their critical role in driving sustainable governance practices in the Indian context. Research limitations/implications This study focuses solely on listed Indian firms subjected to CSR mandates, limiting generalizability beyond regulated CSR environments. Further, the analysis mainly captures financial and institutional dimensions. Future research could incorporate qualitative analyses or comparative cross-country studies to deepen understanding of institutional investors’ motivations and strategies behind CSR engagement. Practical implications The findings underscore the importance of fostering institutional investor engagement, especially domestic institutions, to promote sustainable and accountable CSR practices. Policymakers are recommended to create targeted regulatory frameworks incentivizing institutional investments in CSR, particularly in financially vulnerable or smaller firms. Firms can strategically leverage CSR initiatives to strengthen legitimacy and governance during crises. Educational initiatives highlighting CSR’s long-term benefits could also encourage responsible institutional investment behavior. Originality/value The study uniquely addresses the gap concerning endogeneity in the relationship between institutional ownership and CSR through advanced econometric techniques (2SLS). It differentiates between domestic and foreign institutional investor impacts, particularly under crises like COVID-19. Examining moderating roles of profitability and firm size provides insights into investor-driven CSR. This enriches theoretical and empirical perspectives on institutional activism and corporate governance within mandatory CSR frameworks in emerging economies.