The impact of CSR contracting on reputational risk: An expectancy violation theory perspective

We focus on a fast-growing phenomenon in which firms link top executive compensation to corporate social responsibility (CSR) criteria, commonly referred to as CSR contracting. Drawing on expectancy violation theory (EVT), we examine whether and how CSR contracting influences firms’ reputational risk. Using panel data on S&P 1500 firms from 2010 to 2021, we find that CSR contracting is negatively associated with reputational risk. CSR contracting signals a firm’s social commitment and raises stakeholder expectations that the firm will act responsibly. Firms tend to avoid violating stakeholder expectations by reducing their irresponsible behavior, thus lowering reputational risk. We further demonstrate that this relationship is partially mediated by reduced stakeholder pressure. Additionally, while a firm’s experience in using CSR contracting strengthens the negative relationship between CSR contracting and reputational risk, CEO duality weakens it. The contributions of these findings are discussed.