Does social capital influence executive risk-taking incentives?

Abstract

We examine the impact of social capital at the US county level on managerial risk-taking incentives. We hypothesize that corporate executives in counties with higher social capital would accept lower equity-based compensation then faithfully behave in terms of efforts and risks following the shareholder trust or restrain themselves from rent-seeking which may harm shareholders. Our main test results with firm fixed effects are consistent with our hypothesis. Additional robustness checks—propensity score matching, instrumental variable, and difference-in-differences analyses—corroborate our main findings. Thus, it is highly likely that social capital has a curbing effect on executive risk-taking incentives.