Good for managers, bad for society? Causal evidence on the association between risk‐taking incentives and corporate social responsibility

Using FAS 123R as an exogenous shock to stock options, I provide evidence that equity‐based risk‐taking incentives discourage corporate social responsibility (CSR). This finding suggests that compensation incentives can motivate managers not to pursue CSR strategies because CSR reduces firms’ risk and provides insurance‐like benefits. Firms with a greater demand for CSR's risk reduction are more sensitive to changes in risk‐taking incentives. I triangulate my results by confirming that CSR weaknesses are positively related to subsequent stock return volatility. Overall, using a robust empirical design, I find that risk‐taking incentives are a determinant of firms’ CSR.