Managerial Labor Market Mobility and Corporate Social Responsibility: Evidence from a Natural Experiment

Abstract

The staggered rejection of the inevitable disclosure doctrine (IDD) by some U.S. state courts exogenously increases managerial labor market mobility, and we exploit this setting to study whether managerial concerns about external employment potential affect firms' investment in corporate social responsibility (CSR). Using a difference-in-differences estimation, we find a significantly positive effect of the IDD rejection on CSR investment. The impact only manifests in firms with more able CEOs, does not vary with CEO age, is weaker when CEOs are locked in by unvested equity grants, is stronger when external tournament incentives are greater, and is weaker in firms with stronger governance controls, suggesting that it is managerial incentives to increase external employment potential rather than concerns about job loss or shareholder value maximization that drive increasing CSR. In examining CSR investment outcomes in response to the IDD rejection, we find that they are not firm value enhancing but benefit both active CEOs and retired CEOs through a higher likelihood of landing a new executive position and obtaining more external board appointments, respectively.