Do Firms React to Uncertainty by Doing Good Deeds? Uncertainty and CSR Investment

Abstract

We find that firms invest more to build up corporate social capital, as measured by corporate social responsibility (CSR) intensity, when facing high economic policy uncertainty (EPU). The results are robust to endogeneity concerns. The effects are more pronounced for firms in consumer-oriented industries, firms headquartered in high social capital regions, and for firms in industries with higher levels of irreversible investments. Overall, our results suggest that investment in social capital affects trust between a firm and its stakeholders and this provides a cushion when firms face high levels of uncertainty.

Keywords: Economic policy uncertainty, social capital investment, corporate social responsibility (CSR), trust

JEL Classification: G34, M14