Do takeover threats influence corporate social responsibility? Evidence from hostile takeover vulnerability

Theory suggests that the market for corporate control, which constitutes an important external governance mechanism, may substitute for internal governance. Consistent with this notion, using a novel measure of takeover vulnerability primarily based on state legislation, we investigate the effect of the takeover market on corporate social responsibility performance. Using a sample of 9200 firms in the USA, the study finds that an exogenous increase in takeover protection decreases corporate social responsibility, consistent with the managerial myopia theory that managers tend to be myopic when more exposed to hostile takeover threats, making investments that show results in the short run at the expense of long-term projects. Furthermore, corporate social responsibility is harder to evaluate due to information asymmetry and tends to be discounted in the short run. Additional robustness checks confirm the results, including fixed-effects and random-effects regressions, propensity score matching and instrumental-variable analysis. Our results are unlikely driven by endogeneity.