Do Socially Responsible Firms Walk the Talk? CSR Performance and Defined Benefit Pension Policies

Abstract

This study examines whether socially responsible firms are more likely to have well-funded employee pension programs. It also examines the relationship between corporate social responsibility (CSR) performance and management discretionary choice of pension accounting assumptions. Signaling theory suggests that managers use CSR performance as a credible signal of firms’ commitment to engage in socially responsible business practices to the stakeholder. Correspondent inference theory suggests that the stakeholder attributes CSR performance to firms’ reputation of serving the interests of stakeholder. To protect their reputation, firms must take actions that are consistent with the signal they send via firms’ CSR commitment. Maintaining responsible employee pension policies is a socially responsible action because the defined benefit plan is voluntary and employers have to bear greater investment risk and cost associated with the plan than the alternative retirement plan. Using panel data of 13,099 firms-years across 1,428 U.S. firms from 1992 to 2015, this study finds that firms with higher CSR scores are less likely to have underfunded pension and they report higher pension net assets than their counterparts. More socially responsible firms also adopt more responsible (i.e., conservative) pension accounting assumptions (discount rate and rate of compensation increase) to compute estimated pension benefit obligations.