The Impacts of CEO Job Security and Long-term Incentives on U.S. Firms’ Corporate Social Responsibility*
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In this study, I investigate the role of a U.S. CEO’s job security level and long-term incentive compensation on the firm’s corporate social responsibility (CSR) investment under the various financial circumstances. Nowadays, empirical research supports the view that investments in the CSR of a firm have a positive impact on the financial performance of the firm at least in the long run. However, many managers still consider investments in the CSR merely as unnecessary costs and do not invest in the CSR because they are usually evaluated and paid based on their short-term financial performance. As a solution to this kind of agency problem, stock options which cannot be exercised quickly provide managers with better incentives to pursue long-term corporate objectives, instead of short- term ones, but the pursuit of long-term objectives could also be undermined by the risk of the early termination of the term. With the sample of U.S. listed firms from 1992 to 2013, I implement multivariate regression analyses with interaction terms. I find that firms with more protection from short-term managerial turnovers and/or more long-term incentive compensation scheme exhibit better corporate social performance. Moreover, the effects vary with business cycles and a firm’s financial status.
Abstract
In this study, I investigate the role of a U.S. CEO’s job security level and long-term incentive compensation on the firm’s corporate social responsibility (CSR) investment under the various financial circumstances. Nowadays, empirical research supports the view that investments in the CSR of a firm have a positive impact on the financial performance of the firm at least in the long run. However, many managers still consider investments in the CSR merely as unnecessary costs and do not invest in the CSR because they are usually evaluated and paid based on their short-term financial performance. As a solution to this kind of agency problem, stock options which cannot be exercised quickly provide managers with better incentives to pursue long-term corporate objectives, instead of short- term ones, but the pursuit of long-term objectives could also be undermined by the risk of the early termination of the term. With the sample of U.S. listed firms from 1992 to 2013, I implement multivariate regression analyses with interaction terms. I find that firms with more protection from short-term managerial turnovers and/or more long-term incentive compensation scheme exhibit better corporate social performance. Moreover, the effects vary with business cycles and a firm’s financial status.
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