Firm value in commonly uncertain times: the divergent effects of corporate governance and CSR

ABSTRACT

Economic uncertainty disrupts firms’ ability to create value. Most related literature examines how various organizational characteristics affect value under extreme conditions – the global financial crisis. However, recent work in quantifying economic uncertainty now makes it possible to take a more nuanced approach in investigating the conditions under which this value reduction can be mitigated during more ‘commonly uncertain’ periods. In this paper we analyze the effects of corporate governance mechanisms and social responsibility investments on Tobin’s q across 13 years and 40 countries. Evidence suggests that shareholder-centric corporate governance policies restrict board and executive flexibility during uncertain times, and therefore stifle their ability to react effectively to adverse macroeconomic changes. We also find that CSR initiatives serve as insurance in that they preserve value under uncertainty by acting as a reservoir of social capital.

KEYWORDS:

• Economic policy uncertainty
• corporate governance
• corporate social responsibility
• firm value

JEL CLASSIFICATION:

• G28
• G32
• G34
• G38

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ http://www.law.harvard.edu/faculty/bebchuk/studies.shtml.

² http://www.policyuncertainty.com/global_monthly.html.

³ See El Ghoul, Guedhami, and Kim (2016) for an extended description.

⁴ For our empirical analyses, GEPU, CSR, and CG are each divided by 100.

⁵ From Table 3 model (6): (0.4296*0.3071/1.1603) = 0.1137; (0.4411*(−0.2360)/1.1603) = −0.0897.

⁶ We thank an anonymous referee for offering this suggestion.