Effects of the litigation risk coverage on corporate social responsibility

This study investigates the relationship between the law of director liability reduction (DLR) and the level of corporate social responsibility (CSR). Using unique Korean institutional data, we show that firms that do not employ liability reduction coverage engage more heavily in CSR-related activities. This is primarily to control the litigation risk. Firms that have not adopted the DLR are vulnerable to litigation risks, and therefore, they strategically use CSR to hedge such risks. We also employ the propensity score matching approach and show that endogeneity does not drive the result.