Corporate Social Responsibility, Pension Assumptions, and Risky Asset Allocations in Defined Benefit Pension Plans

Abstract

I explore the role of corporate social responsibility (CSR) in mitigating agency issues in defined benefit (DB) pension plan management. Strong CSR firms tend to engage less in earnings management associated with executive option granting and CFOs' pay sensitivity to the stock value (Delta) through the assumed long-term rate of returns on pension assets. Furthermore, strong CSR firms are less likely to manipulate the pension discount rate in response to a change in the pension funding gap. I also investigate whether CSR influences firms' decision to make risky investments with pension assets. OLS analysis indicates that a standard deviation increase in Material CSR score is associated with a 0.063 (1.93) percentage points decreases in assumed returns (equity allocation) in pension plans. Using the BP Deepwater Horizon oil spill event as an exogenous shock, I provide supporting evidence for the causal link between firms' CSR performance and the pension policies.

Keywords: Corporate social responsibility, Defined benefit pensions, Earnings manipulation, Risk Management

JEL Classification: G23, G30, G14