Corporate Social Responsibility and CEO Risk-Taking Incentives

Authors

Zhichuan LiFollow

Document Type

Article

Publication Date

10-2020

Volume

64

Issue

101714

Journal

Journal of Corporate Finance

URL with Digital Object Identifier

https://doi.org/10.1016/j.jcorpfin.2020.101714

Abstract

We examine how firms adjust CEO risk-taking incentives in response to risk environments associated with their corporate social responsibility (CSR) standing. We find strong evidence that as a firm's CSR status improves (declines), increasing (decreasing) its risk-taking capacity, the firm responds by adjusting compensation contracts to increase (decrease) CEO risk-taking incentives (Vega). One channel of the adjustment is through stock option grants. Further analyses indicate that the positive CSR-Vega association is stronger in firms with better corporate governance and in industries where riskiness is more important. Our evidence indicates that firms are not passive in response to changes in CSR status and firm risk.