Can Social Capital and Reputation Mitigate Political and Industry-Wide Economic Risk?

50 Pages Posted: 28 Jan 2019

See all articles by Dimitris Andriosopoulos

Dimitris Andriosopoulos

Strathclyde Business School

Sheikh Tanzila Deepty

affiliation not provided to SSRN

Date Written: January 15, 2019

Abstract

Firms’ social capital, captured by corporate social responsibility (CSR), can serve as an operational hedging instrument for firm-specific negative shocks. This paper assess CSR’s hedging effectiveness against risks arising from political uncertainty and industry-wide economic shocks. We find that CSR has a significant mitigating effect on stock return volatility making it an effective reputational hedge against political risk such as gubernatorial elections, especially for closely contested elections. However, CSR’s hedging is effective only for market risk (stock volatility) and not for cash flow volatility. Meanwhile, a difference-in-difference estimation suggests that CSR is not an effective hedge against risk during industry-wide economic shocks. Finally, CSR’s mitigating effect on stock volatility is transient.

Keywords: CSR, Social Capital, Risk, Gubernatorial Elections, Tariff Shocks, Operational Hedge

JEL Classification: G18, G32, G38

Suggested Citation

Andriosopoulos, Dimitris and Deepty, Sheikh Tanzila, Can Social Capital and Reputation Mitigate Political and Industry-Wide Economic Risk? (January 15, 2019). Available at SSRN: https://ssrn.com/abstract=3316174 or http://dx.doi.org/10.2139/ssrn.3316174

Dimitris Andriosopoulos (Contact Author)

Strathclyde Business School ( email )

199 Cathedral Street
Department of Accounting and Finance
Glasgow, G4 0QU
United Kingdom
+44(0)1415483892 (Phone)

HOME PAGE: http://www.strath.ac.uk/staff/andriosopoulosdimitrisdr/

Sheikh Tanzila Deepty

affiliation not provided to SSRN

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