The dark and bright sides of policy uncertainty: do too many cooks spoil the broth?

Khanh Hoang, Long Phi Tran, Vu Van Thuy and Minh Duy Vu

Journal of Financial Economic Policy, 2021, vol. 14, issue 1, 56-71

Abstract: Purpose - This paper aims to investigate the nonlinear relationship between corporate social performance (CSP) and economic policy uncertainty (EPU). Design/methodology/approach - This paper uses panel regression techniques to examine a sample consisting of UK-listed non-financial companies during 2000–2018. Findings - The authors found that EPU increases corporate social responsibility which suggests that firms become more socially proactive during the period of heightened EPU. Such countermeasure enhances CSP and is likely a part of a competitive strategy and an insurance mechanism to protect firms against uncertainty in long-term. Further analysis shows a nonlinear relationship between the two factors, suggesting that in a heightened uncertain business environment, the insurance benefit generated by CSP is neutralised by the corresponding cost and, therefore, the positive relationship between EPU and CSP reverses. Originality/value - This paper is the first to find a nonlinear relationship between CSP and EPU, indicating that too much uncertainty in macroeconomic policies deteriorates the benefits of CSP to the point that the CSP – EPU relationship becomes negative. The results suggest that policy uncertainty has both the bright side and the dark side where too many cooks eventually spoil the broth.

Keywords: Financial economics; Macroeconomic policy; G30; G38 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-06-2020-0128

DOI: 10.1108/JFEP-06-2020-0128

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