Corporate Social Responsibility and CEO Risk-Taking Incentives
40 Pages Posted: 9 Jan 2019
Date Written: April 4, 2017
In this paper, we explore how firms incentivize their CEOs subsequent to undertaking risk-reducing corporate social responsibility (CSR) initiatives. Specifically, we focus on the effect of CSR standing on CEO’s future risk-taking financial incentives. We hypothesize that because firms possessing better social performance generate insurance-like moral capital that reduces firm risk, they will have more risk-taking capacity and should respond, therefore, by offering greater risk-motivating incentives to managers. Employing a large sample of US firms from 1992 to 2010, we find strong empirical evidence to support our hypothesis. Indeed, CSR standing is positively related to CEO pay-risk sensitivity, demonstrating that firms whose sustainable initiatives are viewed to be successful are more likely to offer their CEOs greater risk-motivating financial incentives. Further, this association is driven by CSR strengths rather than CSR concerns. Finally, we provide evidence that firm overall risk and idiosyncratic risk negatively moderate the association between CSR and CEO future risk-taking financial incentives.
Keywords: Corporate Social Responsibility, CEO Incentives, Vega, Risk Management
Suggested Citation: Suggested Citation