Conclusion
We analyse the relationship between CEO risk-taking incentives, measured by the sensitivity of CEO wealth held in options to a change in stock return volatility or Vega, and socially irresponsible activities for U.S. firms during the period 1992-2012. We find that, during the pre-crisis period, CEO risk-taking incentives are positively related to socially irresponsible activities, and that this relation is stronger for firms that have a higher level of prior socially responsible activities. The results during the post-crisis period differ and show no evidence of a significant relationship between CEO risk-taking incentives and socially irresponsible activities. This might be explained by the increased scrutiny on compensation packages and the increased role of reputational issues in the aftermath of the financial crisis. Our findings are consistent with those of previous studies which suggest that compensation packages which embed high risk-taking incentives encourage the CEO to engage in riskier strategies which may include (or lead to) socially irresponsible activities. This might result from financial performance pressures associated with these risk-taking incentives or because of the CEO’s underestimation of the potential negative implications of these socially irresponsible activities.
