CEO Wealth Sensitivity and Corporate Social Responsibility

Abstract

We use CEO wealth sensitivity to stock performance (delta) and stock volatility (vega) to provide empirical evidence that supports the conclusion that CEO compensation structure influences firm Corporate Social Responsibility (CSR). We find that CEOs are uncertain about the viability of CSR investments from a profit perspective, but that they are confident that CSR initiatives increase firm risk. We quantify firms' CSR ratings using the Kinder Lydenberg Domini ratings system and compute measures of delta and vega in accordance with previous studies. Using panel data spanning 1995-2010 , we estimate a fixed effects model to determine the relationship between delta, vega and firm CSR rating. We find that delta has no significant effect on CSR rating, while vega has a strong causal relation with CSR.

Keywords: Executive compensation, Managerial incentives, Corporate Social Responsibility, Corporate Social Performance, CEO, CEO Wealth Sensitivity, Agency problem