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CSR contracting and stock price crash risk: International evidence

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  • Liu, Simeng
  • Wang, Kun Tracy
  • Walpola, Sonali
  • Zhu, Nathan Zhenghang

Abstract

In this study, we examine whether and how the worldwide integration of corporate social responsibility (CSR) criteria into executive compensation contracts (hereafter, CSR contracting or CSR-based executive compensation) affects a firm’s stock price crash risk. Using a comprehensive sample of 42,049 firm-year observations from 53 countries from 2003 to 2019, we find that CSR contracting firms have greater stock price crash risk. This positive association can be attributed to exacerbated managerial bad news hoarding behavior and overinvestment. We further demonstrate that the positive relationship between CSR contracting and crash risk is more pronounced for firms with powerful CEOs, as well as in countries with inferior investor protection and disclosure transparency. Overall, our findings are consistent with the agency cost and managerial power perspective, suggesting that CSR contracting may be exploited by powerful and opportunistic managers as a means of diverting shareholders’ attention and concealing bad financial news. Our findings have implications for both researchers and business practitioners.

Suggested Citation

  • Liu, Simeng & Wang, Kun Tracy & Walpola, Sonali & Zhu, Nathan Zhenghang, 2024. "CSR contracting and stock price crash risk: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:intfin:v:93:y:2024:i:c:s1042443124000659
    DOI: 10.1016/j.intfin.2024.101999
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