CEO risk-taking incentives and socially irresponsible activities

This study examines the relationship between CEO risk-taking incentives, measured by the sensitivity of CEO wealth held in options to a change in stock return volatility or Vega, and socially irresponsible activities using a large sample of U.S. firms during the period 1992–2012. Our results for the period before the 2007 financial crisis suggest that CEO risk-taking incentives are positively related to socially irresponsible activities. In addition, we find that a firm's socially responsible actions may act as a moderator, strengthening the aforementioned relationship. The results after the 2007 financial crisis show no evidence of a significant relationship between CEO risk-taking incentives and socially irresponsible activities. This could be due to the increased scrutiny regarding compensation packages and the increased role of reputational issues in the aftermath of the financial crisis. Our results suggest that risk-taking incentives embedded in the CEO compensation scheme have implications for corporate policies toward socially irresponsible activities.     

CEO risk-taking incentives and relative performance evaluation

This paper examines how changes in CEO risk-taking incentives are associated with changes in the use of relative performance evaluation (RPE) in CEO contracts. Using a shock to the accounting for executive stock options (FAS 123R), I confirm that risk-taking incentives and option grants declined following FAS 123R using a within-firm design, but not a within-CEO-firm design. Decreased risk-taking incentives lead executives to invest in projects with lower systematic risk and can result in reduced incentives to hedge exposure to systematic risk in CEO compensation contracts via RPE. However, CEO relative risk aversion increases with decreases in risk-taking incentives, potentially increasing incentives to protect CEO wealth from systematic performance via RPE. Testing these competing predictions, I find modest evidence consistent with reduced RPE surrounding FAS 123R, suggesting that when CEO risk-taking incentives are reduced, so are incentives to shield CEO pay from systematic performance.     

CEO tournament incentives and corporate debt contracting

This study examines the relation between CEO tournament incentives, proxied by the difference between CEO pay and the median pay of the senior executives of a given firm, and corporate debt contracting. We find negative relations between CEO pay gap and the cost of debt and default risk, and a positive relation between CEO pay gap and debt maturity. Further analysis indicates that the results are stronger for firms with near-retirement CEOs, which are more likely to run CEO tournaments. Our evidence suggests that creditors view tournament incentives favorably and are willing to provide better debt terms.     

CEO pay incentives and risk-taking: Evidence from bank acquisitions

We analyze how the structure of executive compensation affects the risk choices made by bank CEOs. For a sample of acquiring U.S. banks, we employ the Merton distance to default model to show that CEOs with higher pay-risk sensitivity engage in risk-inducing mergers. Our findings are driven by two types of acquisitions: acquisitions completed during the last decade (after bank deregulation had expanded banks' risk-taking opportunities) and acquisitions completed by the largest banks in our sample (where shareholders benefit from ‘too big to fail’ support by regulators and gain most from shifting risk to other stakeholders). Our results control for CEO pay-performance sensitivity and offer evidence consistent with a causal link between financial stability and the risk-taking incentives embedded in the executive compensation contracts at banks.     

Corporate social responsibility and CEO confidence

This study examines the relationship between firm corporate social responsibility (CSR) and CEO confidence. Research shows that CSR has a hedging feature. Research also shows that more confident CEOs underestimate firm risks, which, in turn, leads them to undertake relatively less hedging. Consistent with this, we find that CEO confidence is negatively related to the level of CSR. Closer analysis shows that this effect is stronger in the institutional aspects of CSR, such as community and workforce diversity, rather than in the technical aspects of CSR, such as corporate governance and product quality. Our results are robust to different competing explanations, including narcissism, which refers in this context to CEOs who engage in CSR to attract attention and alternative proxies for CSR and CEO confidence.     

Cross-listing and corporate social responsibility

This paper investigates the dynamics of cross-listing and corporate social responsibility (CSR). Using a sample of 10,815 firm-year observations from 54 countries over the period 2002–2011, we find that cross-listed firms have better CSR performance than non–cross-listed domestic firms. This result is robust to endogeneity and different types of cross-listing. We also find that CSR increases (decreases) significantly after cross-listing in (delisting from) U.S. markets. The positive impact of cross-listing on CSR performance is stronger for firms from countries with weaker institutions, lower country-level sustainability, and higher liability of foreignness, and for firms operating in industries with high litigation risk. Finally, we find that cross-listed firms with better CSR performance exhibit higher valuations.     

Stock repurchasing and corporate social responsibility

Stock repurchases are controversial. Researchers often view the positive association between free cash flow and the volume of the stock repurchases to be in the shareholders’ interest and the positive association between executive options and stock repurchases to be in the managers’ interest. Using firms’ corporate social responsibility (CSR) ratings as a measure of ethical culture—one that increases the cost of self-serving behavior for managers— we examine whether a firm’s CSR rating is related to its stock repurchase decisions. Although the baseline regression shows a positive association between CSR and repurchases, we find that CSR amplifies the positive association between free cash flow and stock repurchases and lessens the positive association between executive options and stock repurchases. These results indicate that ethical culture might play a role in repurchase decisions: it may encourage repurchases aligned with shareholders’ interests and discourage those primarily in managers’ interest. Furthermore, we also find that high CSR firms are associated with a greater completion rate of announced repurchase programs and receive more favorable stock market reaction to their repurchase announcements.     

Auditor selection and corporate social responsibility

This study examines the association between the selection of an industry‐specialist auditor and corporate social responsibility (CSR). We find that firms with higher CSR ratings are more likely to hire industry‐specialist auditors (national‐level industry leaders, city‐level industry leaders or joint city‐national industry leaders). Moreover, firms with better CSR performance related to product quality and the environment in controversial industries are found to select non‐specialized auditors. The results suggest that such firms may overinvest in CSR activities associated with the environment and product issues to disguise the sin nature of their manufactured goods, and simultaneously engage low quality auditors perhaps to avoid full disclosure of potential environmental and legal liabilities. Overall, we conclude that CSR is associated with the non‐controversial firms ensuring high quality financial reporting in response to societal expectations, and thus CSR firms in such industries have strong incentives to engage industry‐specialist auditors.     

Institutional shareholders and corporate social responsibility

This study uses two distinct quasi-natural experiments to examine the effect of institutional shareholders on corporate social responsibility (CSR). We first find that an exogenous increase in institutional holding caused by Russell Index reconstitutions improves portfolio firms’ CSR performance. We then find that firms have lower CSR ratings when shareholders are distracted due to exogenous shocks. Moreover, the effect of institutional ownership is stronger in CSR categories that are financially material. Furthermore, we show that institutional shareholders influence CSR through CSR-related proposals. Overall, our results suggest that institutional shareholders can generate real social impact.     

Accounting conservatism and corporate social responsibility

In this paper, we examine whether a firm's stakeholder orientation, as manifested by its social responsibility endeavors, matters for its choice of accounting conservatism. We find that the level of conservatism in financial reporting significantly increases with socially responsible activities. This result is robust to several conservatism aspects, including market-based conservatism measure, the aggregate of R&D reserves, advertising reserves, and LIFO reserves, and accrual-based conservatism construct. Moreover, our two-stage regression results validate that conservatism is more pronounced for firms that devote more resources to social responsibility programs. Consistent with stakeholder theory, these findings indicate that CSR-oriented firms are more likely to use accounting conservatism to credibly commit to acting in the interests of stakeholders. As a whole, our results provide a novel implication that the extent of accounting conservatism can be entailed by a firm's efforts to enhance stakeholder relations.     

Political sentiment and corporate social responsibility

This paper examines the association between firm-level political sentiment and corporate social responsibility (CSR). Drawing inferences from signaling and resource-based theory, we posit a positive relationship between political sentiment and CSR. Using 23,160 firm-year observations of US public firms between 2002 and 2018 as our sample, we find empirical support for our prediction. In addition, the positive relationship between political sentiment and CSR is driven by the environment, community relations, employee relations, and diversity dimensions of CSR activities. We find consistent evidence when we measure CSR using some ‘real effect’ variables. Our cross-sectional analyses reveal that the positive association between political sentiment and CSR is more evident for firms that have a high level of information asymmetry and firms that are large, mature, and active in political lobbying. Our findings remain robust to a batch of sensitivity and endogeneity tests. Overall, our findings advance the literature by highlighting the interplay between politics and firms in an ever-changing political environment.     

Accounting conservatism and corporate social responsibility

We examine the association between accounting conservatism, expressed in the form of asymmetric timeliness of recognition of economic gains and losses, and corporate social responsibility (CSR). We provide evidence that, under unfavorable macroeconomic conditions and financial constraints, as well as increased levels of outside pressure from debtholders and equity holders, catering for capital providers through conservative reporting becomes a managerial priority over engagement in CSR. Our results overall indicate that, for our whole sample period (starting in the early 2000s), higher levels of conservatism are negatively associated with a CSR orientation shown by firms; however, our analysis also indicates a significant reversing trend regarding the effect of conservatism on CSR, coinciding with the post-financial-crisis period. The findings are robust to a number of specifications and tests, including the use of an instrumental variable approach explicitly addressing endogeneity biases related to reverse causality concerns. Our study suggests that, under monitoring pressure from financial stakeholders, firms prioritize commitment to accounting conservatism over the needs of non-financial stakeholders and other interest groups.     

Sales order backlog and corporate social responsibility

We examine the impact of sales order backlog, an important leading indicator of firm performance, on corporate social responsibility (CSR) performance (measured as responsible and irresponsible CSR performance). We rely on the stakeholder and resource availability views of CSR to develop our hypotheses. Under the stakeholder view, we posit a positive relation between sales order backlog and CSR performance. Under the resource availability view, we posit this relationship to be negative. Our empirical evidence shows a significant positive relation between order backlog and irresponsible CSR performance, suggesting that firms with higher order backlog demonstrate lower overall CSR performance. This evidence is consistent with the resource availability view that engaging in CSR activities consumes valuable firm resources, and thus, firms with limited resources are less likely to invest in CSR initiatives. Firms with high levels of unfulfilled sales orders must focus on fulfilling those orders, and may not be able to devote resources to CSR.     

General managerial skills and corporate social responsibility

We show that a CEO’s general managerial skills are negatively related to the level of corporate social responsibility (CSR) undertaken by the firm. This finding is robust to alternative measures of CSR and alternative econometric specifications. The negative effect of general managerial skills on CSR persists when we attempt to address potential endogeneity concerns by employing propensity score matching and an instrumental variables approach. Further, supplementary analysis reveals that this negative effect is stronger in tight labor markets and in firms where shareholders are more short term oriented, consistent with the notion that the broader set of outside options available to generalist chief executive officers acts as a labor market mechanism that makes them less concerned about the firm’s long-term prosperity and thus more reluctant to commit to CSR.     

Managerial incentives and risk-taking

We provide empirical evidence of a strong causal relation between managerial compensation and investment policy, debt policy, and firm risk. Controlling for CEO pay-performance sensitivity (delta) and the feedback effects of firm policy and risk on the managerial compensation scheme, we find that higher sensitivity of CEO wealth to stock volatility (vega) implements riskier policy choices, including relatively more investment in R&D, less investment in PPE, more focus, and higher leverage. We also find that riskier policy choices generally lead to compensation structures with higher vega and lower delta. Stock-return volatility has a positive effect on both vega and delta.     

Valuation effects of corporate social responsibility

This paper develops a valuation model of the firm that provides for the expenditure of corporate resources in support of community, social or environmental causes. We show that under certain circumstances CSR expenditures create value for the firm. We also test our model by simulations and confirm that, at least under some conditions, CSR does pay off in the form of value creation.     

A new insight on CEO characteristics and corporate social responsibility (CSR): A meta-analytical review

Corporate social responsibility (CSR) has emerged as a strategic tool reflecting a competitive edge among firms. In addition, understanding CSR would be accomplished to a greater extent by exploring its micro-foundation. In this context, meta-analysis is carried out utilizing 54 empirical studies to explain the relationship between CEO characteristics and CSR practices. The present study uses a meta-analytical path model to observe the interaction effect among CEO characteristics and the meta-regression model to examine the moderation effect of firm characteristics. The bivariate meta-analysis and path analysis results revealed that CEO compensation, demographic, and personality constructs are consistent with the agency, upper echelon, and socio-cognitive theories, respectively. The findings also reflected the moderating effect of firm characteristics on the relationship between CEO characteristics and CSR. The findings will assist the policymakers in formulating CSR strategy, assuring the upliftment of CSR activities leading to the accomplishment of sustainable development goals (SDGs) 2030.     

Corporate social responsibility committees and the use of corporate social responsibility assurance services

This study examines whether corporate social responsibility (CSR) committees associate with the external assurance of CSR reports. Specifically, we consider the presence and effectiveness of CSR committees. Using a sample of Australian firms over the period 2004–2016, we show the mere presence of a CSR committee is not related to the external assurance of CSR. However, CSR committee effectiveness is positively related. In addition, firms with higher CSR committee effectiveness are more likely to seek external assurance provided by the Big4 accountancy firms and acquire financial audit and CSR assurance services from the same provider. Taken together, CSR committee effectiveness plays an active role in CSR assurance services. Our results are particularly relevant to those with interests in understanding the demand and choice of external CSR assurance services, as well as the impact of corporate governance mechanisms on these services.     

Oil supply expectations and corporate social responsibility

This paper examines how changes in oil supply expectations affect the social responsibility scores of Chinese listed companies and attempts to identify the source of this expectations in terms of uncertainty and orderliness of OPEC production. We document strong evidence that supply news shocks have a statistically and economically significant impact on corporate social responsibility. Supply expectations strongly impact social responsibility performance in the energy sector, with negative news leading to higher oil prices and increased economic uncertainty. Based on real options theory and precautionary storage effects, firms increase oil inventories when OPEC announcements are disclosed. This leads to increased tension in firms' cash flows, which provides evidence of the expected supply channel operation.     

Cultural diversity among directors and corporate social responsibility

We examine the relationship between board diversity and a firm's corporate social responsibility (CSR) performance in a novel way. The relation between visible forms of board diversity (gender, ethnic, age diversity) and CSR may arise endogenously due to visible diversity management. In contrast, we focus on cultural diversity (based on directors' ancestry), which is less visible. We demonstrate that cultural diversity, unlike visible diversity, is not considered in director replacements, consistent with cultural diversity not being affected by firms signaling their CSR commitment by ‘looking’ diverse. We show that board cultural diversity is positively related to CSR performance. This result holds when we control for visible board diversity, directors' foreignness and diversity in nationalities, and endogeneity. We also show that CSR performance decreases when a firm increases its visible board diversity at the cost of cultural diversity.