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

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.