Mandatory CSR disclosure and CEO pay performance sensitivity in China: evidence from a quasi-natural experiment

PurposeThis paper aims to empirically examine the impact of mandatory CSR disclosure on the CEO pay performance sensitivity.Design/methodology/approachUsing the mandatory requirement of CSR disclosure as an exogenous shock, the authors compare the changes in CEO pay performance sensitivity for treatment firms with control firms through a difference-in-difference (DiD) approach.FindingsThe authors find that mandatory CSR disclosure enhances CEO pay performance sensitivity. The results also show that monitoring CEO power is a conduit through which mandatory CSR disclosure affects CEO pay performance sensitivity. The positive impact is more profound in firms with a powerful CEO, i.e. one who is politically well-connected, holds dual roles as both CEO and Chairman, and/or has had a long tenure. Furthermore, the increased CEO pay performance sensitivity after the mandate is prominent among state-owned enterprises (SOEs) only.Practical implicationsThe findings of this paper have implications for other economies with similar institutional backgrounds as China. Although the mandatory CSR disclosure does not require firms to spend on CSR investment, the mandatory CSR disclosure alters firm behaviour, and mitigates agency problems.Originality/valueThis paper contributes to the studies on the impact of CSR disclosure on firms' behaviour. To the authors' knowledge, this is the first study to examine the effects of mandatory CSR disclosure on CEO pay performance sensitivity using the quasi-natural experiment settings.