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We show that a firm's CSR policy is significantly influenced by the CSR policies of firms in the same three‐digit zip code, an effect possibly due to investor clienteles, local competition, and/or social interactions. We then exploit the variation in CSR across the zip codes to estimate the effect of CSR on credit ratings under the assumption that zip code assignments are exogenous. We find that more socially responsible firms enjoy more favorable credit ratings. In particular, an increase in CSR by one standard deviation improves the firm's credit rating by as much as 4.5%.

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Purpose This study aims to investigate the role of the market for corporate control as an external governance mechanism and its effect on executive risk-taking incentives. Managers tend to be risk-averse as they are more exposed to idiosyncratic risk, resulting in sub-optimal risk-taking that does not maximize shareholders’ wealth. The takeover market alleviates this problem, inducing managers to take more risk. Therefore, risk-taking incentives inside the firm are less powerful when the outside takeover market is more active. Design/methodology/approach Exploiting a novel measure of takeover vulnerability recently constructed by Cain et al. (2017), the authors explore how takeover vulnerability influences executive risk-taking incentives. Using a large sample of US firms, the authors use fixed-effects regressions, propensity score matching and instrumental variable analysis. Findings Consistent with this study’s hypothesis, a more active takeover market results in less powerful risk-taking incentives. Specifically, a rise in takeover vulnerability by one standard deviation diminishes executive risk-taking incentives by 22.39%, which is an economically meaningful magnitude. Originality/value To the best of the authors’ knowledge, this study is the first to explore the effect of the takeover market on managerial risk-taking incentives, using a novel measure of takeover susceptibility. The authors’ measure of takeover vulnerability is considerably less susceptible to endogeneity, enabling the authors to draw causal inferences with more confidence.

We argue that firms located close to one another tend to have similar corporate social responsibility (CSR) policies, due to investor clienteles, local competition, as well as social interactions. Our results are consistent with this notion. In particular, firms located in the same 3-digit zip code exhibit a similar degree of CSR. Exploiting the variation in CSR across zip codes, we estimate the effect of CSR on firm value. Part of the firm's CSR is induced by the surrounding firms in the same zip code and can be considered exogenous as it is determined outside the firm. Because zip code allocation is based on efficiency in mail delivery, and not on corporate policies or outcomes, it is likely exogenous. Our instrumental variable analysis reveals that more socially responsible firms enjoy significantly higher firm value. We confirm the results using phone number area codes, instead of zip codes, and reach the same conclusion.