CEO risk-taking incentives and corporate social responsibility

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 64; p. 101714
• Main Authors: Dunbar, Craig, Li, Zhichuan (Frank), Shi, Yaqi
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.10.2020
• Subjects: Corporate social responsibility; Executive compensation; Managerial incentives; Risk management; Social capital; Vega; Vega; M14; Corporate social responsibility; G32; G34; Executive compensation; Managerial incentives; Risk management; Social capital
• ISSN: 0929-1199; 1872-6313; 0929-1199
• DOI: 10.1016/j.jcorpfin.2020.101714

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. •As a firm’s CSR improves, increasing its risk-taking capacity, the board responds by increasing CEO risk-taking incentives;•Corporate boards use option grants to adjust CEO incentives in response to their CSR standing;•The positive CSR-Vega relation is more pronounced in firms with better corporate governance and when risk is more critical;•To maximize shareholder value firms should increase Vega to encourage CEOs to take advantage of risk capacity created by CSR.