Good for Managers, Bad for Society? Causal Evidence on the Association between Risk-Taking Incentives and Corporate Social Responsibility
64 Pages Posted: 27 Mar 2020
Date Written: March 3, 2020
Using FAS 123R as an exogenous shock to stock options, I provide evidence that equity-based risk-taking incentives discourage corporate social responsibility (CSR). This finding suggests that compensation incentives can motivate managers not to pursue CSR strategies because CSR reduces firms’ risk and provides insurance-like benefits. Firms with a greater demand for CSR’s risk reduction are more sensitive to changes in risk-taking incentives. I triangulate my results by confirming that CSR weaknesses are positively related to subsequent stock return volatility. Overall, using a robust empirical design, I find that risk-taking incentives are a determinant of firms’ CSR.
Keywords: corporate social responsibility, sustainability, risk-taking, stock options, executive compensation
JEL Classification: M41, M14, J33
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