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Local Tournament Incentives and Corporate Social Responsibility

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Abstract

The objective of this research is to examine whether and how enterprises adjust their corporate social responsibility (CSR) activities in response to top executives’ local tournament incentives. The findings provide evidence to support the claim that local compensation gaps encourage top executives to reduce their CSR performance; furthermore, they indicate that this reduction is accomplished mainly through the CSR categories of diversity, community, the environment and product. The enforceability of noncompete agreements (NCAs) is examined, and the negative relationship between local compensation gaps and CSR is documented to be weaker in states that feature stronger enforcement of NCAs, which constrains labour mobility and imposes turnover costs. The findings of this research are robust to concerns regarding endogeneity and reverse causality.

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Data Availability

The author does not have permission to share data.

Notes

  1. The sample period ends in 2013 because the enforceability of the NCA index covers the period from 1980 to 2013; therefore, the sample period was selected to ensure the data availability.

  2. As suggested by Cronqvist and Yu (2017), KLD includes corporate governance as a core category, but this notion is different from social behaviour.

  3. According to McWilliams and Siegel (2000), R&D plays crucial role in affecting corporate social performance, and omitting control of R&D may cause endogeneity problem. Since not all firms report R&D expenses, I replace missing value of R&D with zero. Some studies replace missing value of R&D with 0.5% of revenues (e.g., Havlinova and Kukacka 2023), I re-estimate regression with R&D missing value replaced by 0.5% of revenues and have similar findings.

  4. Variable definitions are provided in the “Appendix”.

  5. The data regarding GDP by state is obtained from https://www.bea.gov/.

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  1. Business School, Hunan University, Changsha, China

    Yiqing Tan

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Appendix: Variable Definitions

Appendix: Variable Definitions

Variable

Definition

CSR1

Net CSR rating score based on seven data categories rooted in KLD ratings, i.e., community, diversity, governance, employee relations, environment, human rights, and product

CSR2

Net CSR rating score based on six data categories rooted in KLD ratings, i.e., community, diversity, employee relations, environment, human rights, and product

LT

Natural log of the pay gap between the CEO under consideration and the second-highest-paid CEO at a similarly sized firm in the same state

Internal

Natural log of the pay gap between the CEO under consideration and VPs

Industry

Natural log of the pay gap between the CEO under consideration and the second-highest-paid CEO in the same 2-digit industry

Vega

Natural log of CEO’s total portfolio Vega, which is calculated as the change in the value of the CEO’s equity holdings resulting from a 1% change in the standard deviation of stock returns

Delta

Natural log of CEO's total portfolio delta, which is calculated as the change in the value of the CEO’s equity holdings resulting from a 1% change in stock price

Size

Natural log of total revenue

ROA

Ratio of return to total assets

RD

Ratio of research and development expenses to total assets

Capx

Ratio of capital expenditures to total assets

Invrec

Ratio of the sum of inventory and accounts receivable to total assets

Leverage

Total debt divided by total equity

Cash

Ratio of cash flows from operating activities to total assets

HHI

Herfindahl–Hirschman Index, which is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers

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Tan, Y. Local Tournament Incentives and Corporate Social Responsibility. J Bus Ethics (2024). https://doi.org/10.1007/s10551-024-05623-0

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