Can Social Capital and Reputation Mitigate Political and Industry-Wide Economic Risk?
50 Pages Posted: 28 Jan 2019
Date Written: January 15, 2019
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: Suggested Citation