Economic policy uncertainty and corporate donation: evidence from private firms in Korea

Abstract

This study examines the association between economic policy uncertainty (EPU) and private firms’ corporate donations. Based on resource constraints and the conservation of resources (COR) theory, we argue that private firms are constantly facing resource constraints and their resource conservation motive becomes apparent when EPU is heightened. Therefore, we expect that corporate donations are negatively related to EPU. Using audited corporate donations from 48,903 private firms in Korea during 2002–2019, we find that private firms’ donations are negatively related to EPU. We find that private firms operating in more competitive conditions increase their donations, but this positive association between market competition and donations is moderated by EPU. We find that private firms’ donations increased when the progressive party is in power, but this positive relationship is also moderated by EPU. Our results suggest that firms reduce their level of corporate giving to conserve resources as a precautionary saving motive when they face higher EPU. Our paper contributes to the strand of literature on corporate donations and EPU by providing evidence that EPU significantly affects private firms’ donations. We also find that firms’ strategic motives and political pressure to engage in corporate donations are moderated by EPU.

Effects of presidential elections on accounting conservatism: Evidence from South Korea

“…Meanwhile, extant literature has shown that Korean government and ruling party' policy significantly affect firms' operations (e.g., Chiu et al, 2005;Ducret & Isakov, 2020;Kim, 2021;Song et al, 2014). For example, Chun et al (2023) document that Korean private firms are likely to increase the corporate donation when the incumbent government is progressive party rather than conservative party. This heightened pressure for corporate donation leads to an unwanted resource allocation, which would generate the incentive for accounting manipulation and delay the recognition of bad news.…”

“…For example, Chun et al. (2023) document that Korean private firms are likely to increase the corporate donation when the incumbent government is progressive party rather than conservative party. This heightened pressure for corporate donation leads to an unwanted resource allocation, which would generate the incentive for accounting manipulation and delay the recognition of bad news.…”

“…They also point out that firms’ financial health is one of key requirements to win the government contract. This strict qualification acts as a significant constraint, especially for small and medium‐sized enterprises (SMEs) that have to compete with large corporations (e.g., Chun et al., 2023). While facing heightened uncertainty around PEs, firms that rely heavily on government contracts may have an incentive to curb the flow of negative information about their financial vulnerabilities.…”

The Nonlinear Effect of Economic Policy Uncertainty on Corporate Social Responsibility

“…Zhao et al also found that the effect of EPU on various dimensions of CSR is still significantly negative [16]. Firms tend to reduce their charitable giving to conserve resources as a precautionary move in an environment with high EPU [17,48]. Su et al observed the negative effect between EPU and CSR in food enterprises, which are a part of a sensitive industry [49].…”