Political Uncertainty and Corporate Social Responsibility: Evidence from Elections around the World

  • CHOI, Ahrum (PI)

    Project: Research project

    Project Details

    Description

    Political uncertainty has important implications for firms’ real decisions. One of the biggest events that can affect political risk is a national election. National elections that can result in changes in national leadership greatly increase uncertainty throughout the economy. While studies provide insights into the effect of political uncertainty on firms’ investment decisions, little attention has been paid to another type of corporate investment, namely, corporate social responsibility (CSR). This study uses national elections around the world as a quasi-experiment setting of elevated political uncertainty and examines firms’ CSR activities around periods of high political uncertainty and their value implication. Given that CSR has become an increasingly important element of business activities, it is important to investigate and understand this issue.

    Political uncertainty leads to conflicting incentives regarding companies’ CSR activities. On the one hand, firms invest less in CSR activities during election period if they delay all types of investments, including CSR. Theories suggest that the irreversibility of investment increases the value of the option to wait under conditions of high uncertainty. On the other hand, firms can engage in more CSR activities in the face of political uncertainty if CSR provides risk-management tool or insurance-like protection, which can ultimately improve firm value. CSR can generate positive moral and social capital among various stakeholders, which helps temper stakeholders’ negative judgments when firms suffer from negative events. Firms could also attempt to build political connections by engaging in CSR activities under political uncertainty.

    The results show that firms are more likely to engage in CSR activities during national election periods, and these results are stronger in civil law countries, where CSR is considered more important. This finding indicates managers try to build more social and moral capital, which is expected to function as insurance-like protection. The valuation results further suggest that investors consider investment in CSR activities to be more valuable during uncertain times.

    This study makes several contribution to the literature. First, it contributes to the literature on the relation between political uncertainty and investment by providing novel evidence about investment in CSR activities. Second, this study adds to the literature on the role of CSR as an insurance mechanism. Third, this paper provides insights into the cross-country determinants of CSR and thus complements prior studies on this issue. Lastly, valuation analysis can give an implication for managers about their investment decisions when facing an uncertain environment.

    StatusActive
    Effective start/end date1/09/2028/02/23

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