Geopolitical risk, uncertainty, real options, and corporate social responsibility

Abstract

Motivated by intensified interest in corporate social responsibility (CSR) and with the backdrop of rising geopolitical risk (GPR), we examine the impact of news-based GPR on CSR activities among US public firms between 1995 and 2019. In line with real options theory, we confirm a negative relationship between GPR and CSR, that the effect is more pronounced for more irreversible investments, and it is channeled through lower profitability, reduced cash flow and asymmetric information. We further assess the differential impact across resource and financial constraints, political regimes, multinational operations, pre-existing levels of CSR, industry membership, and over time.