What shapes CSR performance? Evidence from the changing enforceability of non-compete agreements in the United States

Abstract

This paper investigates whether companies strategically engage in corporate social responsibility (CSR) practices to retain employees. Under a unique setting of exogenous variations in non-compete law enforceability in the U.S., we examine the relation between the changing enforceability of non-compete agreements and firms’ CSR performance. Using a difference-in-differences design, we find that an increase in the enforcement of non-compete agreements (which enhances a firm’s ability to retain employees) deteriorates CSR performance. In cross-sectional tests, we find that peer pressure affects CSR performance interactively with the enforceability of non-compete agreements; specifically, the strategic role of CSR performance in employee retention is more pronounced for firms facing higher peer pressure (i.e., firms that are R&D intensive and in highly competitive industries). We further find a negative relation between the absolute enforceability of non-compete agreements and CSR performance. The above findings are consistent with the notion that firms strategically engage in CSR practices to retain employees, thereby reducing the knowledge spillover associated with employee mobility.