Article2015

Unobservable CEO Characteristics and CEO Compensation as Correlated Determinants of CSP

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Corporate Social Responsibility Reporting Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Do unobservable CEO characteristics predict corporate social performance (CSP) and are they significantly correlated with CEO compensation? How meaningful is stock-based CEO compensation as a predictor of CSP? To answer these questions, the author empirically examines the relationship between stock-based CEO compensation and CSP while accounting for unobservable CEO characteristics. This study finds that CEO fixed effects (CEO dummies) account for a significant variance in CSP and that these fixed effects are correlated with CEO compensation variables in a statistically significant manner. The findings suggest that unobservable CEO characteristics should be accounted for when examining the effect of CEO compensation variables on CSP. The findings also highlight the usefulness of stock-based compensation instruments for shareholders and other stakeholders who care about CSP and intend to promote CEO attention to social and ethical issues.

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References

1979Prospect Theory: An Analysis of Decision under Risk 1988Prospect theory: An analysis of decision under risk 1973The Pricing of Options and Corporate Liabilities 1979A Three-Dimensional Conceptual Model of Corporate Performance 1984Upper Echelons: The Organization as a Reflection of Its Top Managers 1984Upper Echelons: The Organization as a Reflection of Its Top Managers 2007Strategy and society: the link between competitive advantage and corporate social responsibility 1997THE CORPORATE SOCIAL PERFORMANCE-FINANCIAL PERFORMANCE LINK

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