The Social Costs of Political Divide: Evidence from the Impact of Polarization Risk on CSR

Abstract

Using a novel approach to gauge firm-level political polarization (PP) risk, we show that PP risk is associated with decreased corporate social responsibility (CSR). We further show that this effect is more pronounced for firms with weak governance, firms facing financial distress, firms that have less cash, and politically connected firms, while the negative effect of PP risk on CSR is attenuated for firms with less opacity. Interestingly, in the presence of heightened PP risk, CSR reduces shareholder value. Taken together, our results suggest that firm-level PP risk reduces CSR and undermines its effectiveness in creating value.

Keywords: CSR, political risk, political partisanship, stakeholders, financial performance.

JEL Classification: G32, G38, H77, M14