Does shareholder litigation risk promote or hinder corporate social responsibility? A quasi‐natural experiment

Abstract

AbstractExploiting an exogenous shock that diminishes the shareholder litigation risk for certain firms, we examine the effect of litigation risk on corporate social responsibility. In particular, we take advantage of an unexpected ruling by the Ninth Circuit Court that raised the difficulty of shareholder litigation. Our results show that an exogenous reduction in litigation risk results in significantly stronger CSR. Lower litigation risk improves managers' job security, thereby motivating them to adopt a long‐term perspective and invest more in CSR. Further analysis validates the findings, such as propensity score matching and entropy balancing. Because our identification strategy is based on a quasi‐natural experiment, our results are more likely to show a causal effect.