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

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.

Citation

Hoang, K., Tran, L.P., Vu, V.T. and Vu, M.D. (2022), "The dark and bright sides of policy uncertainty: do too many cooks spoil the broth?", Journal of Financial Economic Policy, Vol. 14 No. 1, pp. 56-71. https://doi.org/10.1108/JFEP-06-2020-0128