External tournament incentives and corporate social irresponsibility

Abstract

We integrate the perspectives of tournament and agency theories to examine whether, how, and when external tournament incentives influence firms' corporate social irresponsibility (CSI). Using data on Chinese listed companies from 2003 to 2020, we show that external tournament incentives positively affect firms' CSI. Essentially, CEOs can use CSI to rapidly improve the firm's short‐term performance and thus increase their chances of winning external tournaments. Therefore, CEOs have an incentive to push companies to implement more CSI in response to external tournament incentives. Meanwhile, we find that good external corporate governance mechanisms (short‐selling pressure, marketization, and social trust) inhibit CEOs' opportunistic tendency to use CSI in response to external tournament incentives, thus attenuating the positive impact of external tournament incentives on CSI. This study extends the literature on external tournament incentives and CSI and provides important insights for shareholders and policymakers to effectively curb CSI.