Managerial pessimism and investment in corporate social responsibility

This study examines the relationship between managerial pessimism and firms’ investment in corporate social responsibility (CSR). We find that managerial pessimism is positively associated with CSR investment. This result is consistent with the argument that pessimistic managers are more likely to increase their CSR investment to benefit from the insurance-like protection provided by a positive CSR reputation. Additionally, pessimistic managers are less likely to decrease CSR investment because such activities serve as a control mechanism to curb excessive risk-taking. Cross-sectional analyses reveal that this positive association is stronger for firms with higher operating uncertainty, litigation risk, and analyst following and “sinful” firms. Under these circumstances, pessimistic managers are more likely to invest in CSR, using it as a risk management tool and shareholder monitoring mechanism. Overall, this study suggests that managerial pessimism is an important factor that affects CSR investments.