Firms' social capital, captured by corporate social responsibility (CSR), can serve as an operational hedging instrument for firm-specific negative shocks. This paper assess CSR's hedging effectiveness against risks arising from political uncertainty and industry-wide economic shocks. We find that CSR has a significant mitigating effect on stock return volatility making it an effective reputational hedge against political risk such as gubernatorial elections, especially for closely contested elections. However, CSR's hedging is effective only for market risk (stock volatility) and not for cash flow volatility. Meanwhile, a difference-indifference estimation suggests that CSR is not an effective hedge against risk during industry-wide economic shocks. Finally, CSR's mitigating effect on stock volatility is transient.
Academic finance research is largely overshadowed by functionalist paradigm, and this limit positive contribution to knowledge. Hence, finance literature faces criticism, which highlights the justification of having a diversified philosophical stance. By investigating contemporary papers on investment benchmarks, sustainable finance and behavioural finance, we identify that modern finance researchers are rethinking about the research paradigm to bring paradigmatic diversification rather than being stagnant to positivism.
Journal of Business Studies, Vol. XLII, No. 1, April 2021 Page 59-72
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