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Subjective perception of economic policy uncertainty and corporate social responsibility: Evidence from China
Abstract
While existing literature explores factors affecting corporate social responsibility (CSR) from various perspectives, the role of economic policy uncertainty perception has never been studied to our knowledge. In this paper, we study the effect of Chinese firms’ subjective perception of economic policy uncertainty (SEPU) on their CSR engagement. Our model proves that SEPU reduces the benefits of maintaining relationships between shareholders and stakeholders, thus decreases corporate CSR engagement. This negative relationship is more pronounced for firms that are highly influenced by the government. We empirically examine these two predictions using the sample of Chinese A-share listed companies. We address endogenous concerns by using the US-China trade war as an exogenous uncertainty shock, and including a Bartik instrumental variable.
... These interconnected objectives form the overarching framework and trajectory of China's economic policy landscape (Yu et al. 2021). However, China's governance structure, characterized by a powerful government, is susceptible to heightened risks of information asymmetry and policy uncertainty (Li et al. 2024b). This phenomenon can be attributed to several key factors. ...
... However, the indicators of EPU in specific aspects constructed by the above-mentioned scholars cannot reflect enterprises' perceptions of overall macroeconomic policy. Therefore, some studies have used the textual analysis to construct the SPEPU index (Li et al. 2023;Li et al. 2024b;He et al. 2022;Wang et al. 2023b). For example, Wang et al. (2023b) sort out the EPU-related vocabulary and perform textual analysis on the management discussion and analysis (MD&A) part of annual reports to construct an indicator of enterprises' perceptions of macroeconomic policies from a micro-perspective, which can reflect the subjective perceptions of different enterprises more accurately. ...
... Columns (3) and (4) denote the impact of SPEPU on ESG performance and short-term bank loans, respectively. Column (3) shows that the coefficient of SPEPU is −0.510 and significant at the 1% level, indicating that SPEPU will reduce ESG performance, which is consistent with the findings of Li et al. (2024b). In addition, column (4) shows that the coefficient of ESG performance is -0.001 and significantly negative at the 10% level, which means that ESG performance has a significant mitigating effect on short-term bank loans. ...
Using Chinese listed companies from 2011 to 2021, we employ textual analysis to examine the influence of the subjective perception of economic policy uncertainty (SPEPU) on the loan term structure of enterprises. The results show that SPEPU shortens the loan term structure of enterprises. After robustness tests, our results are still valid. Mechanism analysis shows that SPEPU works through increasing corporate financing costs and reducing corporate ESG performance. Moreover, reducing financing constraints and improving financial environment will alleviate this phenomenon. Additionally, in state-owned enterprises, enterprises with large performance fluctuations and good internal control, this phenomenon is more pronounced. Further analysis reveals a trend of short-term borrowing for long-term use, where short-term bank loans are used to offset the shortage of long-term bond financing and fixed asset investments. The conclusions have important significance for enterprises to mitigate liquidity risk and operate smoothly during economic fluctuations.
... However, by no means is this study claiming that the general use of log approximations is suicidal and problematic. Logarithms, in itself, is a powerful tool that has simplified working with numbers, especially large numbers and reduces data variances (Hao, Peng, & He, 2023;He, Guo, & Yue, 2024;Li, Nie, Ruan, & Shen, 2024;Zhang, Su, Sun, Zhang, & Shen, 2015). The use of logarithmic returns in derivative ...
... Secondly, even when the actual magnitude or payoff of an asset matters, the actual return and log return consistently move in the same direction, thereby giving the same sign despite the possible discrepancies in magnitude or payoff. Beyond these, the logarithmic function is used for model linearization, capturing several nonlinear functional form model relations, estimating elasticities, reducing variances, etc. (Li, Nie, et al., 2024;Tian, Li, & Cheng, 2022). However, the issues discussed in this study become a salient concern when the actual magnitudes or payoffs are relatively important or relevant. ...
It is rather a norm for researchers to directly use the log difference of an asset price to compute returns. Just like using ln(X+1) to avoid taking the natural logarithm of zero(s). However, this log returns are but a conditional approximation of the actual returns. Nonetheless, can log difference approximations and the ln(X+1) common practices produce BLUE estimates? Using the log return as an example, this study discusses the approximation nature and conditions for using the log difference approximation both for the interest regressor and control variables. These conditions are; that both the sample average and variance of the original series tend to zero. When these conditions are not met, the log difference approximation is, in fact, not a good approximation and biases OLS causal estimators. When the conditions are met, it produces unbiased, consistent but less efficient estimators. Thereby making the estimates less precise and less accurate. Nonetheless, this is true for a log differenced interest regressor(s) and control variables, when it correlates with the interest variable(s) and explains, in part, the dependent variable, even in large samples. Similarly, the common use of ln(X+1) biases the estimation of the true causal effect, even the intercept term, except when
X tends to infinity. A robust solution of using non-zero subsamples, against ln(X+1), produces unbiased and consistent estimators for the true causal effects under the causal assumptions. These biasedness, inconsistencies, and inefficiencies do not disappear in large samples. Finally, both ex-ante and ex-post test statistics are discussed, however, the ex-post estimation test statistic is recommended to confirm both the choice of using log difference approximation and that of using ln(X+1), in an empirical data causal regression analysis. Ideally, researchers should ensure the conditions for using the log difference approximation are met. Otherwise, these approximations and practices produce biased, inconsistent, and inefficient results, even in large samples, leading to misinformed policy implications.
... The dependent variable, denoted as PEPU, is the perceived level of economic policy uncertainty within firms. Following prior research (Baker et al., 2016;Nie et al., 2020;Li et al., 2024), a company's perception of economic policy uncertainty is determined as follows: initially, a set of words is constructed to capture the essence of economic policy uncertainty; 2 then, the EPU-related terms from this set are extracted from the Management Discussion and Analysis (MD&A) segment of annual reports of the company; subsequently, the company's perception of economic policy uncertainty is computed through dividing the number of EPU-related terms by the total word count in the MD&A section. ...
... Da mesma forma, os outros 3 pilares servem como critérios para o progresso do desenvolvimento (Hermawati & Suci, 2015), dado que um ambiente de trabalho saudável pode ter um impacto significativo na preservação e promoção da cultura, na conservação ambiental e no desenvolvimento socioeconômico sustentável e equitativo. Ou seja, quando as organizações adotam práticas éticas (Li et al., 2024) que respeitam os direitos humanos, cria-se um espaço onde os funcionários podem partilhar os seus antecedentes e experiências culturais, promovendo a compreensão mútua e a preservação da riqueza cultural. ...
This study examines the relationship between subjective well-being in the workplace and organizational productivity through a systematic review of relevant scientific articles. A systematic review was conducted on 310 articles, employing inclusion and exclusion criteria to narrow it down to 36 pertinent articles. The review identified several factors affecting both subjective well-being and productivity, such as the company’s willingness to implement programs to improve well-being prioritizing friendly working conditions, fair compensation, flexible schedules, a respectful work environment, promotion of professional development, and emotional and economic incentives.
Keywords:
subjective well-being; labor productivity; organizations; quality of life; job satisfaction.
... Organizations can leverage their understanding and interpretation of economic policy uncertainty as an organizational affordance to shape their strategies and actions . A shift in firms' perception of economic policy uncertainty will result in alterations in decisions regarding DT and CGI (Li et al., 2024;Shao & Xu, 2024). ...
The rise of cutting‐edge technologies motivates corporations to undertake and carry forward green innovation, aiding economic development by maintaining environmental sustainability. Using A‐share listed firms from 2013 to 2022 as the research sample, the paper empirically examines the impact of digital transformation on corporate green innovation from an affordance perspective. The findings suggest that the higher the level of digital transformation, backed by accumulative and variational affordances, in a firm, the more conducive it is to corporate green innovation as it enables the homogenization, recombination, and transformation of existing information related to green environmental protection and low‐carbon energy efficiency, facilitating firms to achieve targeted and breakthrough green innovations. The analysis of the moderating effects of public environmental concern, economic policy uncertainty, and regional innovation readiness suggested that public environmental concern and regional innovation readiness positively moderate the relationship between digital transformation and corporate green innovation, while economic policy uncertainty perception negatively moderates this relationship. Heterogeneity analyses suggest that digital transformation positively affects corporate green innovation within labor‐intensive firms and state‐owned enterprises. The study contributes to the literature by enhancing our understanding of the affordance theory in the domain of digital transformation. By investigating the key organizational and institutional affordances – economic policy uncertainty perception, public environmental concern, and regional innovation readiness – the research provides valuable insight to policymakers in fostering green innovation.
... A healthy work environment can have a significant impact on the preservation and promotion of culture, environmental conservation, and sustainable and equitable socioeconomic development. Thus, when organizations adopt ethical practices (Li et al., 2024) that respect human rights, they create a space where employees can share their cultural backgrounds and experiences, promoting mutual understanding and the preservation of cultural richness. ...
This study examines the relationship between subjective well-being in the workplace and organizational productivity through a systematic review of relevant scientific articles. A systematic review was conducted on 310 articles, employing inclusion and exclusion criteria to narrow it down to 36 pertinent articles. The review identified several factors affecting both subjective well-being and productivity, such as the company's willingness to implement programs to improve well-being prioritizing friendly working conditions, fair compensation, flexible schedules, a respectful work environment, promotion of professional development, and emotional and economic incentives. Keywords: subjective well-being, labor productivity, organizations, quality of life, job satisfaction. RESUMO Este estudo examina a relação entre o bem-estar subjetivo no local de trabalho e a produtividade organizacional por meio de uma revisão sistemática de artigos científicos relevantes. Foi realizada uma revisão sistemática de 310 artigos, empregando critérios de inclusão e exclusão para reduzir a 36 artigos pertinentes. Por fim, nossa análise identificou vários fatores que afetam o bem-estar subjetivo e a produtividade, tais como a disposição que eles percebem por parte da empresa para implementar programas que melhorem seu bem-estar, de modo que priorizem condições de trabalho amigáveis, remuneração justa, horários de trabalho flexíveis, ambiente de trabalho respeitoso, promoção do desenvolvimento profissional e incentivos emocionais e econômicos. Palavras-chave: bem-estar subjetivo, produtividade do trabalho, organizações, qualidade de vida, satisfação no trabalho. RESUMEN Este estudio examina la relación entre el bienestar subjetivo en el lugar de trabajo y la productividad organizacional a través de una revisión sistemática de artículos científicos relevantes. Se realizó una revisión sistemática de 310 artículos, empleando criterios de inclusión y exclusión para reducirlo a 36 artículos pertinentes. Finalmente, nuestra revisión identificó varios factores que afectan el bienestar subjetivo y la productividad, como lo es la disposición que perciban por parte de la empresa a implementarles programas que mejoren su bienestar, de tal manera que se prioricen condiciones de trabajo amigables, una compensación justa, horarios flexibles, ambiente laboral de respeto, impulso al desarrollo profesional e incentivos emocionales y económicos. Palabras clave: bienestar subjetivo, productividad laboral, organizaciones, calidad de vida, satisfacción laboral. ARTICLES | Subjective well-being and labor productivity: a global and organizational perspective
Purpose
In the context of macroeconomic fluctuations and uncertainty in policy changes, it is essential to understand how companies adapt their environmental strategies and marketing tactics to ensure survival and growth. This study, therefore, examines the impact of perceived economic policy uncertainty on corporate greenwashing.
Design/methodology/approach
Based on panel data from listed companies on the Chinese A-share market between 2013 and 2022, this paper employs a high-dimensional fixed effects model to explore the impact of perceived economic policy uncertainty (PEPU) on corporate greenwashing behavior.
Findings
The results show that higher PEPU increases greenwashing, with agency costs and investor sentiment mediating the relationship. Corporate credit availability and managerial short-sightedness positively moderate this effect. Heterogeneity analysis reveals that non-state-owned enterprises in central and western regions, particularly those with weak environmental regulation and high pollution, are most impacted by PEPU.
Practical implications
This paper provides practical guidance for how to avoid the phenomenon of green reshuffle in economic and environmental policies and encourages enterprises to take more real and effective environmental protection measures.
Originality/value
These findings highlight the importance of considering corporate responses to policy uncertainty when formulating economic and environmental policies. They provide valuable insights for emerging economies in fostering genuine corporate environmental behavior and promoting sustainable development.
In the context of the U.S.‐China trade war, this study constructed a corporate trade policy uncertainty index through text analysis and found that rising trade policy uncertainty significantly improves corporate ESG performance. Mechanism analyses show that trade policy uncertainty promotes corporate ESG performance through a risk‐reducing channel, which has increased operational risks and dampened managers' optimistic expectations. Heterogeneity analyses find that the positive effect is more pronounced in target industries subject to tariff escalations of trade wars, non‐state‐owned enterprises and firms with lower foreign shareholdings. Tests of economic consequences show that better ESG performance positively affects market value during periods of high trade policy uncertainty while having little impact on financial performance. We further find that the promoting effect of trade policy uncertainty on ESG performance only persisted for 2 years, indicating that social responsibility activities compelled by export pressures manifest more as a short‐term strategy with insurance value. Our findings support the view that ESG acts as a nonmarket strategy to mitigate negative external shocks.
The study empirically examines the impact of firm digital transformation (DT) on the performance of Chinese-listed enterprises in the areas of environmental, social, and governance (ESG) from 2013 to 2022. We utilized OLS, IV 2SLS causal mediating effect, and moderating effect models to analyze the linkages and deep mechanisms between corporate DT and ESG performance. The empirical findings demonstrate that (i) DT has an effectively positive effect on the performance of firms’ ESG; (ii) DT enhances firms’ ESG performance by enhancing information transparency (TRANS), fostering green innovation (Green), and strengthening internal control (Inter) mechanisms; moreover, (iii) According to the study, common institutional ownership (CIO) effectively facilitates the positive effects of the DT impact on the ESG performance of listed enterprises, and firms’ subjective perception of economic policy uncertainty (SEPU) negatively influences the effect of digital change on firms’ ESG performance; (iv) the impact of DT on ESG performance is more significant in the listed companies of western region and state-owned enterprises. Our findings provide valuable insights into whether and how DT affects the firms’ ESG performance, providing practical recommendations for corporate managers and government decision-making agencies.
Based on the double machine learning model, this study examines the impact of perception of policy uncertainty (PPU) on labor income share (LIS). We find that PPU negatively influences LIS. Mechanism test indicates that PPU not only results in a reduction in fixed asset investment, distorting human capital structure, but leads to a financing dilemma for firms, ultimately exerting a detrimental effect on LIS. Additionally, PPU primarily diminishes LIS of ordinary employees rather than executives. Furthermore, the inhibitory effect of PPU on LIS is significantly more pronounced in firms characterized by smaller union scales and those operating within monopolistic industries.
This study investigates the role of cash flow uncertainty and firm life cycle on sustainability disclosures using environmental, social and governance (ESG) disclosure score data. We conduct our analysis on a sample of 190 Indian firms for a period of 12 years from 2010 to 2021. Drawing upon the real‐option theory and organisational‐inertia theory, we document a negative impact of cash flow uncertainty and firm life cycle on a firm's commitment to disclose sustainability information. We also find a significant impact of managerial risk inclination and risk tolerance at the firm level in moderating the above relationships. Our findings can help managers equip themselves to meet the challenges of sustainability commitments during cash flow constraints and firm life‐cycle transitions. Moreover, our results can also help policymakers in assessing the need to enforce sustainability disclosures depending on the hurdles confronted by a firm.
This study examines the relationship between subjective well-being in the workplace and organizational productivity through a systematic review of relevant scientific articles. A systematic review was conducted on 310 articles, employing inclusion and exclusion criteria to narrow it down to 36 pertinent articles. The review identified several factors affecting both subjective well-being and productivity, such as the company’s willingness to implement programs to improve well-being prioritizing friendly working conditions, fair compensation, flexible schedules, a respectful work environment, promotion of professional development, and emotional and economic incentives.
Keywords:
subjective well-being; labor productivity; organizations; quality of life; job satisfaction.
The unexpected outbreak of the U.S.-China trade war led to dramatic increases in the import and export tariffs confronting Chinese firms, and ushered in an era of unprecedented trade policy uncertainty (TPU). To assess the effects of this development on the operations of Chinese firms we adopt a new textual analysis approach to listed firms’ annual reports that allows us to create measures of TPU that vary over firms and time. Linking our new TPU measures to firm-level trade war exposure shows that increases in U.S. tariffs and Chinese retaliatory tariffs elevated firm-level TPU. The effects of Chinese firm-level tariff changes on firm TPU are heterogeneous: smaller firms experienced the most pronounced increases while firms that were more diversified in terms of partner countries were more insulated. Importantly, connecting firm-level increases in TPU during the trade war with subsequent firm performance reveals notable impairment of firm operations. Our estimates indicate that Chinese firms hit by a one standard deviation increase in TPU during the trade war reduced firm-level investment, R&D expenditures, and profits by 2.3, 2.3, and 11.5 percent, respectively.
Exploring the locality stereotype with respect to CEO’s trustworthiness, we find that firms whose CEOs are from more reputable hometowns have a higher likelihood of stock price crashes, indicating the presence of a CEO “Trust Exploitation” effect, i.e. a high-trust identity does not guarantee managerial ethics; to the contrary, it could tempt CEOs to abuse outsiders’ trust, camouflage their misconducts and conceal adverse information more severely. The effect of CEO’s perceived trustworthiness on tail risk of stock price remains robust when controlling for the region-level trust of firm’s headquarters, and in 2SLS regression with an instrumental variable. Further, CEO’s “Trust Exploitation” effect is more prominent among firms with lower disclosure quality, higher capital market pressure and higher CEO incentives. Our findings highlight an unexplored imperfection of individual-level trustworthiness as a reliable substitute for formal monitoring devices in terms of improving stock market stability.
We examine whether and how board connections affect the firm's corporate social responsibilities (CSR). Grounded in the agency, resource dependence, and social network theory, our research predicts and finds that board connectedness is positively associated with CSR performance. This result is robust to a quasi-natural experiment, alternative measurement specifications, and an instrumental variable approach. Our findings suggest firms that operate in a complex business environment or require more advising (i.e. where demand for information is greater) benefit more from a well-networked board. Also, firms that are poorly governed, have high stock return volatility, low market capitalization, or low institutional ownership tend to benefit more from the well-connected board when the cost of acquiring information is higher. In addition, we show that independent directors' abilities to gather information and resources from their networks can facilitate the transmission of information. Collectively, our study documents the informational advantage of a network as the predominant channel that allows a well-connected board to improve a firm's CSR performance.
Corporate executives managing some of the largest public companies in the U.S. are shaped by their daughters. When a firm's chief executive officer (CEO) has a daughter, the corporate social responsibility rating (CSR) is about 9.1% higher, compared to a median firm. The results are robust to confronting several sources of endogeneity, e.g., examining first-born CEO daughters and CEO changes. The relation is strongest for diversity, but significant also for broader pro-social practices related to the environment and employee relations. Our study contributes to research on female socialization, heterogeneity in CSR policies, and plausibly exogenous determinants of CEOs' styles.
Based on the concept of shareholder primacy, many scholars have argued that it is more important for businesses to earn profits for their shareholders than to provide benefits to society at large. Corporate social responsibility (CSR) is often regarded as an investment that comes at the expense of shareholders. In contrast, research analyzing the connections between the equity ownership structure of a company and its level of CSR engagement suggests that CSR offers benefits to shareholders that go beyond direct financial returns from investments. This study provides a comprehensive review and systematic assessment of theoretical considerations and approaches regarding different forms of equity ownership and their relationships to CSR, and it discusses the relevant benefits and motivations of shareholders. The perceived value of these CSR benefits varies among different types of shareholders, as they assign unequal values to short-term financial or to rather long-term CSR benefits. Based on a literature sample of 146 publications, this review demonstrates central problems inherent in previous analyses. Given the ambiguous and partially contradictory findings of prior research, this study identifies potential moderating influences that help clarify empirical evidence. A contingency approach is suggested in future research, as this can help resolve the problem of contradictory empirical findings and theoretical arguments.
Public enterprises are policy instruments that are “rediscovered”. In parallel, a separate scientific literature exists on entrepreneurship in the public sector but has not focused on public enterprises. This article suggests that a new perspective linking both streams of research could lead to an improvement in the understanding of the role as instruments of economic policy that public enterprises could play, in particular in the new context emerging after 2008. The paper advocates that the focus of research should not be on the governance of these institutions or the particularities of ownership but on public entrepreneurship.
The authors analyze the creation and capture of private and social value by firms that adopt corporate social responsibility (CSR) strategies. Strategic CSR is defined as any “responsible” activity that allows a firm to achieve a sustainable competitive advantage, regardless of motive. To provide a roadmap for managers to accomplish this objective, the authors integrate the resource-based theory (RBT) framework with concepts and tools from economics, such as hedonic pricing, contingent valuation, and the new literature on the economics of industrial organization, where CSR is referred to as “the private provision of public goods.” By linking CSR, RBT, economic models of private provision of public goods, and pricing models, the authors demonstrate how RBT can provide a structure for determining the strategic value of CSR. They then discuss the conditions under which CSR can contribute to sustainable competitive advantage.
We provide theoretical and empirical evidence that policy uncertainty can significantly affect firm level investment and entry decisions in the context of international trade. When market entry costs are sunk, policy uncertainty can create a real option value of waiting to enter foreign markets until conditions improve or uncertainty is resolved. Using a dynamic, heterogeneous firms model we show that: (i) investment and entry into export markets is reduced when trade policy is uncertain, and (ii) preferential trade agreements (PTAs) are valuable to exporters even if applied trade barriers are currently low or zero. We derive a structural equation that predicts how firm entry responds to changes in applied tariffs and a theory-based measure of policy uncertainty. Our novel approach using observable trade policies allows us to estimate the impact of policy uncertainty and quantify its aggregate implications. We apply this method to Portugal's accession to the European Community in 1986 using new firm-level trade data. We find that (i) the trade policy reform accounted for a large fraction of the observed Portuguese exporting firms' entry and sales upon accession (ii) the accession removed uncertainty about future preferences and (iii) this uncertainty channel accounted for a large fraction of the predicted growth. These results have broader implications for other PTAs and our approach can be applied to analyze other sources of policy uncertainty.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
This article examines the conceptualisation of corporate social responsibility (CSR) in the context of mining multinationals (MNCs) in Argentina. It explores the suitability of CSR for addressing social, environmental and economic issues associated with mining in the country. The study is based on interviews with four stakeholder groups in the country: government, civil society, international financial organisations, and mining industry. These are analysed using content and interpretative techniques and supplemented by the content analysis of secondary data from headquarters of mining MNCs. Using the concept of corporate social responsibility orientation (CSRO), the study contrasts the perceptions of major stakeholders and examines adaptation of mining companies’ CSRO to local context. It reveals that the CSRO of mining managers in Argentina differs from CSRO developed by global headquarters; and in Argentina companies “negotiate” economic, environmental and legal dimensions of CSR with the government. Although companies “negotiate” philanthropic responsibilities with the communities, ethical responsibilities are defined by the headquarters and not negotiated locally. The analysis suggests that environmental duties are the critical element of CSR in the mining sector in Argentina. This study treats environment as a separate dimension of corporate responsibility defined as to do “what is safe for the environment”.
ESG is both extremely important and nothing special. It's extremely important because it's critical to long-term value, and so any academic or practitioner should take it seriously, not just those with “ESG” in their research interests or job title. Thus, ESG doesn't need a specialized term, as that implies it's niche – considering long-term factors isn't ESG investing; it's investing. It's nothing special since it's no better or worse than other intangible assets that create long-term financial and social returns, such as management quality, corporate culture, and innovative capability. Companies shouldn't be praised more for improving their ESG performance than these other intangibles; investor engagement on ESG factors shouldn't be put on a pedestal compared to engagement on other value drivers. We want great companies, not just companies that are great at ESG.
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We examine the impact of venture capital (VC) on corporate social responsibility (CSR) performance in China. Exploiting the timing of VC exit, we find that the CSR performance of VC-backed companies improves after the exit of VC. Using the age of VC funds as an instrument for VC exit, we find that the effect is likely to be causal. Further analyses suggest that the effect is largely driven by inexperienced, badly performing, and less reputable VCs.
This paper explores how forced resignations of politically connected independent directors (political IDs for short) affect the performance of corporate social responsibility (CSR). Using a Communist Party of China regulation that forbids political officials from sitting on boards as an exogenous shock, this paper finds that the forced resignations of political IDs are associated with a decrease in firms' CSR performance. We further find that such reductions are not attributable to decreases in capital and knowledge resources. However, the negative association between political IDs' forced resignations and CSR performance is more prominent for firms under more political pressure, such as when political IDs are high-ranking incumbents, when firms located in the province with a high level of government intervention, or in polluting industries, and when firms have no government shareholdings. Therefore, we conclude that the reduction in CSR performance is due to the release of political pressure after the resignations of political IDs. Our results are robust to alternative CSR measures, varied sample periods, and sample selection bias correcting. The results of placebo tests also confirm our findings. Our study shows that political pressure imposed by politicians on firms is an important determinant of CSR.
Economic policy uncertainty (EPU) is an important source of risk and affects various firm decisions and the macro economy. However, existing studies provide no consensus on the effect of EPU on corporate social responsibility (CSR) engagement. In this paper, we investigate the impact of EPU on firms' CSR engagement based on a sample of Chinese listed firms between 2008 and 2015. We find a significant positive relationship between EPU and a firm's CSR engagement. A plausible mechanism might be the sending signal hypothesis, firms tend to adopt more CSR engagement during periods of higher uncertainty, as it is a positive signal to their stakeholders. In addition, our results are more significant for firms loosing political connection unexpectedly, firms in regions with low social trust, firms with high profitability ability, and firms in political sensitive industries, which further validate the sending signal mechanism.
This paper contributes to the literature by examining the impact of different forms of state ownership on corporate innovation and the moderating effects of environmental, social, and governance (ESG) practices, economic policy uncertainty (EPU), and corruption in this ownership–innovation nexus. Building on both agency theory and institutional theory, we identify and divide the ultimate controlling shareholders into three types: central government, local government, and private shareholders. This study draws on data from 2629 listed firms in China between 2007 and 2015. Our results suggest that state-owned enterprises (SOEs) controlled by the central government show the strongest innovation performance in all scenarios. In addition, private firms outperform local SOEs in terms of patent quantity in both manufacturing and nonmanufacturing sectors and in high-economic-development regions, whereas local SOEs outperform their private peers with respect to patent quality, mainly in the manufacturing sector and high-economic-development regions. Such an ownership–innovation nexus is then found to be more pronounced for firms engaging in more ESG practices, during periods of higher EPU, and when less corruption is present. These findings demonstrate the value of diversity in state capitalism in guiding SOEs' heterogeneous innovation activities in emerging economies.
We review the financial economics-based research on Environmental, Social, and Governance (ESG) and Corporate Social Responsibility (CSR) with an emphasis on corporate finance. In doing so we focus on the most debated and researched issues. Although a firm's ESG/CSR profile and activities are shown to be strongly related to the firm's market, leadership and owner characteristics as well its risk, performance and value, there still exist conflicting hypotheses and results that we show are not resolved, leading to continued questions and a need for more research.
Using corporate social responsibility (CSR) scores, we examine the effect of unionization on non-shareholding stakeholders and the value of CSR for unionized firms. Our findings suggest that unionization leads to lower CSR. This negative relation between unionization and CSR is stronger for financially constrained firms. We address endogeneity issues by controlling for firm characteristics including firm fixed effects, examining a quasi-natural experiment, and using regression discontinuity design examining union certification elections. Unionized firms with lower CSR have better alignment of CEO and shareholder interests and higher market values than other unionized firms.
We provide the first international evidence on the impact of economic policy uncertainty (EPU) on dividend policy. Using data from 19 countries, we find that a high level of EPU is positively associated with dividend payout. This evidence is robust to using alternative dividend payout measures, to controlling for other sources of uncertainty, and to addressing endogeneity. We further find that the effect of EPU on dividend policy is moderated by firms' free cash flows and governance quality, and by the quality of country-level indicators of shareholder protection, disclosure, enforcement, and creditor protection. Collectively, our novel evidence suggests that dividends help mitigate agency problems during high-EPU periods.
Using a Vector Autoregressive framework of analysis, we show that banks contract their supply of business credit in response to an exogenous increase in economic policy uncertainty. This contraction takes two main, distinct forms. On the one hand, banks restrict their supply of spot funds, which we document using flows of loans and term loan originations. On the other hand, banks also curtail their provision of liquidity insurance, reducing the amount of new credit lines and embedding in them a pricing structure that reduces the probability of borrowers drawing down on the lines. At the peak of the responses, we find that a one-standard-deviation increase in EPU causes a contraction in the supply of business loans between 3 and 5% on the extensive margin.
Motivated by the prevalence of corporate sustainability and the rise of uncertainty at the national level, we investigate the impact of three sources of uncertainty; namely, economic policy, climate change, and political instability, on firms' sustainability performance. Using a sample of 6804 firms from 72 countries spanning 15 years, our study revealed that uncertainty due to climate change, economic policy, and political instability negatively affects firms' sustainability performance. This finding is in line with the real options theory that uncertainty in an external environment discourages firms' long-term investment (e.g. investment in corporate sustainability). In addition, the results show that the option for delay in sustainability investment moderated the relation between uncertainty at the national level and firms' sustainability performance. Firms with better sustainability performance had higher firm value when facing uncertainty. Interestingly, firms with higher profitability performed better in sustainability when facing uncertainty at the national level.
We adapt simple tools from computational linguistics to construct a new measure of political risk faced by individual U.S. firms: the share of their quarterly earnings conference calls that they devote to political risks. We validate our measure by showing that it correctly identifies calls containing extensive conversations on risks that are political in nature, that it varies intuitively over time and across sectors, and that it correlates with the firm’s actions and stock market volatility in a manner that is highly indicative of political risk. Firms exposed to political risk retrench hiring and investment and actively lobby and donate to politicians. These results continue to hold after controlling for news about the mean (as opposed to the variance) of political shocks. Interestingly, the vast majority of the variation in our measure is at the firm level rather than at the aggregate or sector level, in the sense that it is captured neither by the interaction of sector and time fixed effects nor by heterogeneous exposure of individual firms to aggregate political risk. The dispersion of this firm-level political risk increases significantly at times with high aggregate political risk. Decomposing our measure of political risk by topic, we find that firms that devote more time to discussing risks associated with a given political topic tend to increase lobbying on that topic, but not on other topics, in the following quarter.
The Bartik instrument is formed by interacting local industry shares and national industry growth rates. We show that the typical use of a Bartik instrument assumes a pooled exposure research design, where the shares measure differential exposure to common shocks, and identification is based on exogeneity of the shares. Next, we show how the Bartik instrument weights each of the exposure designs. Finally, we discuss how to assess the plausibility of the research design. We illustrate our results through two applications: estimating the elasticity of labor supply, and estimating the elasticity of substitution between immigrants and natives. (JEL C51, F14, J15, J22, L60, R23, R32)
We find a significant positive relation between changes in policy uncertainty and changes in credit spreads. Macroeconomic conditions, including general uncertainty, do not explain this result, which also holds when we use instrumental variables to address endogeneity issues. The impact of policy uncertainty is greater for firms that operate in regulation-intensive industries, face high tax rates, or are dependent on government spending. It is also stronger for firms that engage in political activities or rely on external financing. We conclude that policy uncertainty has a significant effect on firms’ borrowing costs, with exposure to government policies representing an important channel.
This paper studies the effects of unexpected changes in trade policy uncertainty (TPU) on the U.S. economy. Three measures of TPU are constructed using newspaper coverage, firms’ earnings calls, and tariff rates. Firm-level and aggregate macroeconomic data reveal that increases in TPU reduce business investment. The empirical results are interpreted through the lens of a two-country general equilibrium model with nominal rigidities and firms’ export participation decisions. News and increased uncertainty about higher future tariffs reduce investment and activity.
Policy uncertainty (PU) influences the financial and investment decisions of the firm. We use global data to extend the nascent empirical finance literature on policy uncertainty by examining corporate earnings management. We find overwhelming evidence that policy uncertainty is associated with earnings management. Firms increase (decrease) earnings management (EM) when policy uncertainty is high (low). Our results show that uncertainty induced earnings management is not influenced by national culture or other country-level institutional characteristics. Further, we find that policy uncertainty induced earnings management harms firm value. The observation implies that low-quality financial reporting impairs firm value. Our results withstand a battery of robustness tests, such as removing the effect of general economic uncertainty from the measure of PU and using other measures of earnings management.
This study uses two distinct quasi-natural experiments to examine the effect of institutional shareholders on corporate social responsibility (CSR). We first find that an exogenous increase in institutional holding caused by Russell Index reconstitutions improves portfolio firms’ CSR performance. We then find that firms have lower CSR ratings when shareholders are distracted due to exogenous shocks. Moreover, the effect of institutional ownership is stronger in CSR categories that are financially material. Furthermore, we show that institutional shareholders influence CSR through CSR-related proposals. Overall, our results suggest that institutional shareholders can generate real social impact.
In this essay, the author addresses four questions about uncertainty. First, what are some facts and patterns about economic uncertainty? Both macro and micro uncertainty appear to rise sharply in recessions and fall in booms. Uncertainty also varies heavily across countries - developing countries appear to have about one-third more macro uncertainty than developed countries. Second, why does uncertainty vary during business cycles? Third, do fluctuations in uncertainty affect behavior? Fourth, has higher uncertainty worsened the Great Recession and slowed the recovery? Much of this discussion is based on research on uncertainty from the last five years, reflecting the recent growth of the literature.
Recent literature suggests that some socially responsible corporate actions benefit shareholders while others do not. We study differences in policy toward corporate social responsibility (CSR) between family and non-family firms, using environmental performance as the proxy for CSR. We show that family firms are more responsible to shareholders than non-family firms in making environmental investments. When shareholder interests and societal interests coincide, i.e., when it comes to alleviating environmental concerns that have potential to harm society and elevate the firm’s risk exposure, family firms do at least as well as non-family firms in protecting shareholder interests. However, when shareholder and societal interests diverge, i.e., when it comes to making environmental investments that might benefit society but do not benefit shareholders, family firms protect shareholder interests by undertaking a significantly lower level of such investments than non-family firms. Our findings suggest that lack of diversification by controlling families creates strong incentives for them to act in the financial interest of all shareholders, which more than overcomes any noneconomic benefits families may derive from engaging in social causes that do not benefit non-controlling shareholders.
We investigate the role of uncertainty in business cycles. First, we demonstrate that microeconomic uncertainty rises sharply during recessions, including during the Great Recession of 2007–2009. Second, we show that uncertainty shocks can generate drops in gross domestic product of around 2.5% in a dynamic stochastic general equilibrium model with heterogeneous firms. However, we also find that uncertainty shocks need to be supplemented by first‐moment shocks to fit consumption over the cycle. So our data and simulations suggest recessions are best modelled as being driven by shocks with a negative first moment and a positive second moment. Finally, we show that increased uncertainty can make first‐moment policies, like wage subsidies, temporarily less effective because firms become more cautious in responding to price changes.
Political and regulatory uncertainty is strongly negatively associated with merger and acquisition activity at the macro and firm levels. The strongest effects are for uncertainty regarding taxes, government spending, monetary and fiscal policies, and regulation. Consistent with a real options channel, the effect is exacerbated for less reversible deals and for firms whose product demand or stock returns exhibit greater sensitivity to policy uncertainty, but attenuated for deals that cannot be delayed due to competition and for deals that hedge firm-level risk. Contractual mechanisms (deal premiums, termination fees, MAC clauses) unanimously point to policy uncertainty increasing the target's negotiating power.
Using CSR ratings for 23,000 companies from 114 countries, we find that a firm's corporate social responsibility (CSR) rating and its country's legal origin are strongly correlated. Legal origin is a stronger explanation than “doing good by doing well” factors or firm and country characteristics (ownership concentration, political institutions, and globalization): firms from common law countries have lower CSR than companies from civil law countries, with Scandinavian civil law firms having the highest CSR ratings. Evidence from quasi-natural experiments such as scandals and natural disasters suggests that civil law firms are more responsive to CSR shocks than common law firms. This article is protected by copyright. All rights reserved
This study examines the relationship between firm corporate social responsibility (CSR) and CEO confidence. Research shows that CSR has a hedging feature. Research also shows that more confident CEOs underestimate firm risks, which, in turn, leads them to undertake relatively less hedging. Consistent with this, we find that CEO confidence is negatively related to the level of CSR. Closer analysis shows that this effect is stronger in the institutional aspects of CSR, such as community and workforce diversity, rather than in the technical aspects of CSR, such as corporate governance and product quality. Our results are robust to different competing explanations, including narcissism, which refers in this context to CEOs who engage in CSR to attract attention and alternative proxies for CSR and CEO confidence.
China's recent promotion of Corporate Social Responsibility (CSR) has coincided with a marked increase in the number of Chinese listed firms attracting female board members and foreign equity investors. Using Rankins' (RKS) ratings over the 2009 to 2013 period, we show that greater gender balance in top-management supports stronger CSR performance. This finding broadens gender-based accounts emphasizing social networks (Westphal and Milton, 2000), Critical Mass Theory (Kramer et al., 2006; Bear et al., 2010; and Soares et al., 2011) and team dynamics (Woolley et al., 2010; and Hoogendoorn et al., 2013). Findings also reveal stronger CSR performance in firms where a female officer is present at the CEO and/or vice-CEO level. Female leadership thus appears to be just as important as gender mix in driving CSR change. Our findings shed new light and add further dimension to the nascent literature on gender and CSR-engagement in China (Lau et al., 2016; and Liao et al., 2016).
We examine whether a political-networking motivation underlies foreign investment (Du and Girma, 2010; Liu et al., 2014a; Lin et al., 2015; and Jiang and Kim, 2015). We argue that qualified foreign institutional investors (QFIIs) deploy social-engagement in non-SOEs to build competitive advantage. But in SOEs, where strong political networks already exist, QFIIs have less incentive to boost CSR ratings. Results indicate little difference in the social ratings of QFII-invested SOEs and non-SOEs. However, CSR scores are increasing in foreign ownership levels in SOEs. By considering offshore ownership, we broaden understanding of how foreign channels influence CSR in China (Tsoi, 2010; Cheung et al., 2014a; and Lau et al., 2016).
Additionally, we confirm the Barnea and Rubin (2010) contention of an inversion in social ratings at entrenched managerial ownership levels. Non-linear rating effects also emerge in relation to state ownership (Li et al., 2013). Finally, CSR performance exhibits positive (negative) relation with a listed entity's size and age (leverage and lagged return-on-equity) but virtually no connection with independent board representation.
A common approach to evaluating robustness to omitted variable bias is to observe coefficient movements after inclusion of controls. This is informative only if selection on observables is informative about selection on unobservables. Although this link is known in theory (i.e. Altonji, Elder and Taber (2005 —, —, and —, “Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools,” Journal of Political Economy, 2005, 113 (1), 151–184.)), very few empirical papers approach this formally. I develop an extension of the theory which connects bias explicitly to coefficient stability. I show that it is necessary to take into account coefficient and R-squared movements. I develop a formal bounding argument. I show two validation exercises and discuss application to the economics literature.
In the corporate finance tradition, starting with Berle and Means (1932), corporations should generally be run to maximize shareholder value. The agency view of corporate social responsibility (CSR) considers CSR an agency problem and a waste of corporate resources. Given our identification strategy by means of an instrumental variable approach, we find that well-governed firms that suffer less from agency concerns (less cash abundance, positive pay-for-performance, small control wedge, strong minority protection) engage more in CSR. We also find that a positive relation exists between CSR and value and that CSR attenuates the negative relation between managerial entrenchment and value.
We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence – including human readings of 12,000 newspaper articles – indicate that our index proxies for movements in policy-related economic uncertainty. Our US index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, healthcare, finance and infrastructure construction. At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies. Extending our US index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upwards since the 1960s.
Using a news-based index of policy uncertainty, we document a strong negative relationship between firm-level capital investment and the aggregate level of uncertainty associated with future policy and regulatory outcomes. More importantly, we find evidence that the relation between policy uncertainty and capital investment is not uniform in the cross-section, being significantly stronger for firms with a higher degree of investment irreversibility and for firms that are more dependent on government spending. Our results lend empirical support to the notion that policy uncertainty can depress corporate investment by inducing precautionary delays due to investment irreversibility. © The Author 2015. Published by Oxford University Press on behalf of The Society for Financial Studies.
In this paper we draw on recent progress in the theory of (1) property rights, (2) agency, and (3) finance to develop a theory of ownership structure for the firm.1 In addition to tying together elements of the theory of each of these three areas, our analysis casts new light on and has implications for a variety of issues in the professional and popular literature, such as the definition of the firm, the “separation of ownership and control,” the “social responsibility” of business, the definition of a “corporate objective function,” the determination of an optimal capital structure, the specification of the content of credit agreements, the theory of organizations, and the supply side of the completeness-of-markets problem.
A manager and a worker are in an infinitely repeated relationship in which the manager privately observes her opportunity costs of paying the worker. We show that the optimal relational contract generates periodic conflicts during which effort and expected profits decline gradually but recover instantaneously. To manage a conflict, the manager uses a combination of informal promises and formal commitments that evolves with the duration of the conflict. Finally, we show that liquidity constraints limit the manager's ability to manage conflicts but may also induce the worker to respond to a conflict by providing more effort rather than less.
Uncertainty is an amorphous concept. It reflects uncertainty in the minds of consumers, managers, and policymakers about possible futures. It is also a broad concept, including uncertainty over the path of macro phenomena like GDP growth, micro phenomena like the growth rate of firms, and noneconomic events like war and climate change. In this essay, I address four questions about uncertainty. First, what are some facts and patterns about economic uncertainty? Both macro and micro uncertainty appear to rise sharply in recessions and fall in booms. Uncertainty also varies heavily across countries—developing countries appear to have about one-third more macro uncertainty than developed countries. Second, why does uncertainty vary during business cycles? Third, do fluctuations in uncertainty affect behavior? Fourth, has higher uncertainty worsened the Great Recession and slowed the recovery? Much of this discussion is based on research on uncertainty from the last five years, reflecting the recent growth of the literature.
Using a news-based index of policy uncertainty, we document a strong negative relationship between firm-level capital investment
and the aggregate level of uncertainty associated with future policy and regulatory outcomes. More importantly, we find evidence
that the relation between policy uncertainty and capital investment is not uniform in the cross-section, being significantly
stronger for firms with a higher degree of investment irreversibility and for firms that are more dependent on government
spending. Our results lend empirical support to the notion that policy uncertainty can depress corporate investment by inducing
precautionary delays due to investment irreversibility.
Received January 2, 2014; accepted July 27, 2015 by Editor David Denis.
We examine whether the political leanings of a firm’s stakeholders affect its behavior in terms of corporate social responsibility (CSR). Using firm-level CSR ratings from Kinder, Lydenberg, Domini (KLD), we find that firms score higher on CSR when they have Democratic rather than Republican founders, CEOs, and directors, and when they are headquartered in Democratic rather than Republican-leaning states. We estimate that CSR costs Democratic-leaning firms approximately 20 million more in annual SG&A expenses than Republican-leaning firms (80 million more within the sample of S&P500 firms), representing about 10% of net income. We also show that changes in firm CSR policies (KLD “strengths”) are negatively associated with future stock returns, changes in institutional ownership, and changes in ROA, suggesting some loss of firm financial value in exchange for any direct value benefits to stakeholders from social responsibility.
In this study, we propose an alternative technique for estimating the cost of equity capital. Specifically, we use a discounted residual income model to generate a market implied cost-of-capital. We then examine firm characteristics that are systematically related to this estimate of cost-of-capital. We show that a firm's implied cost-of-capital is a function of its industry membership, B/M ratio, forecasted long-term growth rate, and the dispersion in analyst earnings forecasts. Together, these variables explain around 60% of the cross-sectional variation in future (two-year-ahead) implied costs-of-capital. The stability of these long-term relations suggests they can be exploited to estimate future costs-of-capital. We discuss the implications of these findings for capital budgeting, investment decisions, and valuation research.