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This study employs state-level panel data to explore the relationship between inward foreign direct investment (FDI) and income inequality in the United States. Using panel cointegration techniques that allow for cross-sectional heterogeneity, cross-sectional dependence, and endogenous regressors, we find that the short-run effects of FDI on income inequality are insignificant or weakly significant and negative. In the long run, however, FDI exerts a significant and robust negative effect on income inequality in the United States. This result for the United States as a whole does not imply that FDI narrows income gaps in the long run in each individual state. There is considerable heterogeneity in the long-run effects of FDI on income inequality across states, with some states (21 out of 48 cases) exhibiting a positive relationship between FDI in income inequality.

Motivated by agency theory, we explore the effect of corporate governance quality on corporate social responsibility (CSR), using the governance standards provided by Institutional Shareholder Services (ISS). Our evidence reveals that firms with more effective governance make significantly less investment in CSR. It appears that managers tend to over‐invest in CSR and are forced to reduce CSR investments when corporate governance is more effective. In particular, an improvement in governance quality by one standard deviation translates into a decline in CSR investments by 7.16%. Our fixed‐effects analysis also shows that, within firms, when governance quality improves over time, CSR investments decline significantly. Using the passage of the Sarbanes‐Oxley Act of 2002 as an exogenous shock that improves the quality of corporate governance, we demonstrate that high‐quality governance is not merely associated with, but rather brings about, lower CSR investments.

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