Abstract
This paper investigates the motivations behind corporate social responsibility (CSR) by considering the consequences of environmental, social and governance (ESG) failures that CSR is intended to avoid. Using data from 2581 public U.S. firms over 2007–2018, this paper finds that such failures are associated with increased CEO turnover. This relationship is driven primarily by CEOs with longer tenures and by environmental issues. These negative events are also found to be associated with declines in the firm’s sales growth, employment growth and equity returns. CSR activities that reduce the incidence of such events therefore benefit both the CEO and the shareholder. Interestingly, replacing the CEO does not mitigate the negative impacts of such events on the firm, nor does it reduce the incidence of such events in subsequent years. The decision to remove the CEO following such failures appears costly to both the CEO and the firm’s shareholders.
Highlights
There is a broad literature evaluating whether investment in corporate social responsibility (CSR) benefits shareholders or destroys firm value by favoring other stakeholders’ interests at the expense of those of the shareholder
To better understand the motivations behind CSR activity, this paper studies how the incidence of negative ESG events affects both Chief Executive Officer (CEO) turnover and firm performance
Using data from RepRisk, this paper finds that an increase in negative ESG events is associated with a higher probability of CEO turnover
Summary
There is a broad literature evaluating whether investment in corporate social responsibility (CSR) benefits shareholders or destroys firm value by favoring other stakeholders’ interests at the expense of those of the shareholder. Proponents of stakeholder theory argue that investments in corporate social responsibility can increase firm value, described as “doing well by doing good” (Vogel 2005; Bénabou and Tirole 2010). Another line of research considers whether costly investments in CSR are primarily made to benefit the firm’s managers. Cespa and Cestone (2007) argue that the Chief Executive Officer (CEO) may use discretionary CSR investment as a means to enhance managerial entrenchment rather than maximize shareholder returns. Empirical studies suggest this is likely not the case. Hubbard et al (2017) find that CSR investment increases the probability of CEO turnover at firms with poor financial performance but decreases the probability of CEO turnover at firms with superior financial performance
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