Does Options Trading Affect Managerial Incentives in Corporate Social Responsibility Investment?

58 Pages Posted: 1 Mar 2021 Last revised: 2 Mar 2021

See all articles by Fengfei Li

Fengfei Li

Deakin University - Deakin Business School

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Sichen Shen

The University of Hong Kong

Date Written: March 2, 2021

Abstract

We posit that active options trading provides managerial incentives to invest in corporate social responsibility (CSR) because managers can better hedge the downside risks of long-term and uncertain CSR investment. Our results show that firms with more options trading have better CSR performance. We also find stronger results for firms with more product market competition, larger takeover risks, shorter CEO career horizon, and higher reputation and goodwill. We use a quasi-natural experiment that reduces options trading costs for treated firms to address endogeneity concerns. A subsample analysis of insider hedging transactions corroborates our main findings. Overall, we provide the first evidence that active derivative markets have real effects on firms’ CSR performance.

Keywords: CSR; Managerial Hedging; Career Concerns; Options Volume, Penny Pilot Program

JEL Classification: G30; G10; M14

Suggested Citation

Li, Fengfei and Lin, Tse-Chun and Shen, Sichen, Does Options Trading Affect Managerial Incentives in Corporate Social Responsibility Investment? (March 2, 2021). Available at SSRN: https://ssrn.com/abstract=3716260 or http://dx.doi.org/10.2139/ssrn.3716260

Fengfei Li (Contact Author)

Deakin University - Deakin Business School ( email )

Australia

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Sichen Shen

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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