Being nice to stakeholders: The effect of economic policy uncertainty on corporate social responsibility

Economic policy uncertainty (EPU) is an important source of risk and affects various firm decisions and the macro economy. However, existing studies provide no consensus on the effect of EPU on corporate social responsibility (CSR) engagement. In this paper, we investigate the impact of EPU on firms' CSR engagement based on a sample of Chinese listed firms between 2008 and 2015. We find a significant positive relationship between EPU and a firm's CSR engagement. A plausible mechanism is offered in support of the 'sending signal hypothesis' that firms tend to adopt more CSR engagement during periods of higher uncertainty, as it is a positive signal to their stakeholders. In addition, our results are more significant for firms loosing political connection unexpectedly, firms in regions with low social trust, firms with high profitability ability, and firms in political sensitive industries, which further validate the sending signal mechanism. •Effect of economic policy uncertainty (EPU) on corporate social responsibility (CSR) is investigated.•EPU has a positive effect on a firm's CSR engagement.•Firms use CSR engagement as a positive signal in high uncertainty periods.•Political connection, profitability, and social trust play significantly moderating effects.•Investors also positively react to CSR engagement in high uncertainty periods.