Managerial Litigation Risk and Corporate Social Responsibility : Evidence from a Change in Nevada’s Corporate Law

We examine the impact of managerial litigation risk on corporate social responsibility (CSR). To mitigate the endogeneity issues with respect to CSR, we use a difference-in-differences design to implement an exogenous change in Nevada’s corporate law in 2005 that significantly lowers managers’ legal liability. We find that firms incorporated in Nevada notably increased CSR after lowering the liability risk, suggesting that external pressure from potential litigation discourages managers from engaging in CSR. This disciplining effect of litigation risk is more pronounced when managerial mobility in the labor market is high, or firms receive extensive media coverage. Our study contributes to the literature by adding an important determinant of CSR and by examining how managers view CSR engagements.