Being Nice to Stakeholders: The Effect of Economic Policy Uncertainty on Corporate Social Responsibility

71 Pages Posted: 23 Jan 2018 Last revised: 8 Sep 2020

See all articles by Jian Zhang

Jian Zhang

School of Business and Management, Shanghai International Studies University

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology; School of Finance, Zhongnan University of Economics and Law

Ni Qin

Huazhong University of Science and Technology (Formerly Tongi Medical University)

Ji (George) Wu

Massey University - School of Economics and Finance

Date Written: November 10, 2018

Abstract

This study examines the reaction of firms to economic policy uncertainty (EPU) by investing in corporate social responsibility (CSR). Using a Chinese sample, we find a positive and significant relationship between EPU and the CSR engagement of firms. Moreover, we find that firms without political connection, firms in low social trust regions, firms with high profitability, and firms in policy sensitive industries, engagement more on CSR when EPU increases. Our results also suggest that CSR engagement is an efficient strategy for a firm to hedge the firm’s value from a negative shock of EPU at least for two years. The results are robust to a variety of model specifications and endogeneity problems. We contribute to the literature as firms tend to send a signal to their stakeholders to convey that they honour implicit contracts by investing in CSR activities during high uncertainty periods. The results support the risk management perspective that firms adopt CSR as an ex-ante insurance mechanism.

Keywords: economic policy uncertainty, corporate social responsibility, investment

Suggested Citation

Zhang, Jian and Kong, Dongmin and Qin, Ni and Wu, Ji (George), Being Nice to Stakeholders: The Effect of Economic Policy Uncertainty on Corporate Social Responsibility (November 10, 2018). Available at SSRN: https://ssrn.com/abstract=3107756 or http://dx.doi.org/10.2139/ssrn.3107756

Jian Zhang

School of Business and Management, Shanghai International Studies University ( email )

550 Dalian Road (West)
Shanghai, Shanghai 200083
China

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

Ni Qin

Huazhong University of Science and Technology (Formerly Tongi Medical University) ( email )

1037 Luoyu Rd
Wuhan, Hubei 430074
China

Ji (George) Wu (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 102904
North Shore
Auckland, Auckland 0745
New Zealand
+6292127089 (Phone)

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