Abstract
We posit that active options trading provides managerial incentives to invest in corporate social responsibility (CSR) because managers can better hedge the downside risks of long-term and uncertain CSR investment. Our results show that firms with more options trading have better CSR performance. We also find stronger results for firms with more product market competition, larger takeover risks, shorter CEO career horizon, and higher reputation and goodwill. We use a quasi-natural experiment that reduces options trading costs for treated firms to address endogeneity concerns. A subsample analysis of insider hedging transactions corroborates our main findings. Overall, we provide the first evidence that active derivative markets have real effects on firms’ CSR performance.
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