Shocks to CEO Political Alignment and Corporate Social Responsibility: Evidence from the 2008 and 2016 Presidential Elections

Synopsis The research problem We examined the influence of changes in CEOs' political alignment with the White House on firms' corporate social responsibility (CSR) performance, and the underlying reasons for this relationship. Theoretical reasoning Presidential elections that shift control of the White House often alter CEOs' alignment with the presidency, influencing their motivations to invest in CSR. Firms with CEOs aligned with the newly elected president (newly aligned firms) may anticipate economic benefits, such as favorable regulation, but also face increased public scrutiny. The enhanced operating environment may reduce their incentives to use CSR to mitigate product market, litigation, and capital market pressures. Conversely, heightened scrutiny may prompt their greater CSR investment. Firms with CEOs aligned with the outgoing president (newly unaligned firms) encounter directionally opposite incentives, for example, reduced economic benefits from connection with power and lower scrutiny. Both groups of politically active firms may benefit from superior access to legislative information following the transition of power. The test hypotheses We state our hypotheses in the null form, predicting that there is no difference in the postelection change of CSR performance between newly aligned (newly unaligned) firms and nonpartisan firms whose CEO political alignment with the White House did not change as a result of the 2008 or 2016 elections. Target population Our sample consists of 12,234 firm-year observations drawn from the three-year periods immediately surrounding the 2008 and 2016 elections and includes 2086 (1935) firm-year observations with newly aligned (newly unaligned) CEOs and 8213 cases with nonpartisan CEOs. Adopted methodology We employed a difference-in-differences research design to examine the difference in CSR performance between the pre-election period (the election year -3 to -1) and the postelection period (the election year +1 to +3) in newly aligned (newly unaligned) firms relative to firms with nonpartisan CEOs. Analyses and findings We found that both newly aligned and newly unaligned firms significantly improved their CSR performance following elections where control of the White House changes, relative to nonpartisan firms. This association is more pronounced for less financially constrained firms and those in politically sensitive industries. Further analysis shows that newly aligned firms enhance CSR to mitigate public scrutiny and leverage superior legislative information, while newly unaligned firms invest in CSR to reduce their cost of capital and litigation risk.