Does Corporate Social Responsibility Increase Investment Efficiency During Economic Policy Uncertainty? Exploring the Moderating Role of Family and Non-Family Firms

Abstract

This study addresses an unexplored area in research by examining the potential moderating influence of Corporate Social Responsibility (CSR) on the relationship between economic policy uncertainty (EPU) and investment efficiency (IE), considering both family and non-family firms as moderators. Using agency and organizational theories, we analyzed data from 293 non-financial firms from 2010 to 2021. Our findings show that the positive effects of CSR extend beyond stable environments, proving effective in uncertain circumstances. The results emphasize the strategic orientation of CSR involvement, demonstrating that CSR disclosure by family firms may not effectively bridge information gaps in the market due to their strategic choices, such as internal financing and potential impression management strategies. The research adds to the literature by considering the motivation to misrepresent CSR information within family firms. It reveals that CSR moderation is effective when the motivation to misrepresent is low. This emphasizes the credibility and strategic alignment of CSR initiatives in reducing information asymmetry during times of economic uncertainty. These results suggest that regulatory bodies should devise policies to scrutinize CSR information to prevent deceptive practices in family businesses. Our research findings enhance the current understanding of sustainability practices by family businesses. Past studies, particularly those utilizing various theoretical perspectives like Socio Emotional Wealth (SEW), frequently depicted family firms as exceptionally socially responsible. However, our results indicate that their actions could be shaped by institutional and legal considerations, particularly in environments characterized by weak institutions.

Introduction

Recently, there has been a notable surge in academic attention toward the impact of policy uncertainty on the economy and the financial system. While researchers have employed different measures to gauge this uncertainty, a consensus has emerged that heightened policy uncertainty exerts a constraining influence on economic and market activities (Dai & Ngo, 2021). Economic policy uncertainty (EPU) is a pervasive issue globally, and it significantly affects developing economies. Pakistan, being a developing economy, is more vulnerable to the challenges of EPU.

EPU in Pakistan arises from several factors, including frequent changes in political leadership and inconsistent policy decisions. For example, the abrupt introduction and subsequent cancellation of a digital tax by the PTI government in 2020 highlighted issues with policy consistency. Additionally, political disagreements, reliance on external aid, corruption, and global economic influences further contribute to uncertainty, affecting different sectors and investment decisions. These interconnected factors depict the complex nature of EPU in Pakistan.

In any economy, the corporate sector plays a vital role in overall economic development and can be significantly influenced by changes in economic policies. Companies often adjust their financial and investment choices based on shifts in government policies. Thus, EPU poses a significant challenge for corporate management and experts in policy analysis, as it can impede the progress of almost all economic segments within a nation’s economy (Hoang et al., 2023). This impact is particularly stronger in developing economies, which already struggle with other economic complexities like energy shortages, a less skilled workforce, and inadequate subsidies, among other factors. Hence, it becomes essential to formulate strategic remedies to counter the adverse effects of EPU, particularly within such economies.

Economic policy shocks can undermine the operational efficiency of companies, leading to reduced profits, sales volumes, and diminished returns on investments (Gulen & Ion, 2016). It is not surprising that several research studies have clearly shown how EPU negatively affect choices made by corporations regarding investment (X. Chen et al., 2020; Kong et al., 2022; Soni et al., 2023). However, this area warrants further research to identify effective strategies for companies to mitigate the negative impacts of EPU.

This study aims to contribute novel insights by examining how the effectiveness of sharing information with stakeholders can help alleviate the detrimental effects of EPU on investment efficiency (IE) of firms. Specifically, the study investigates the role of Corporate Social Responsibility (CSR) disclosure in moderating the relation between EPU and investment decisions of corporations. Given the adverse impacts of EPU on various aspects of business choices as highlighted in existing research (U. Iqbal et al., 2020), it becomes crucial to promote policies that ensure business stability and mitigate the adverse effects of EPU on business decisions.

Among the other factors, our findings demonstrate that when companies share information related to their sustainability efforts with various stakeholders, it can help mitigate the negative effects of EPU. However, in underdeveloped markets, there is a tendency for firms’ management to entrench the rights of minority shareholders, and this entrenchment behavior increases with the rise in uncertainty in the overall environment. In these scenarios, companies may employ CSR as a tool to mask negative aspects (Muriithi et al., 2022; Xue & Hu, 2023).

While committing to disclose CSR activities can help shape a positive public image and enhance legitimacy (Aqueveque et al., 2018), it can also be used to divert attention away from unethical practices through showcasing social performance. This perspective is supported by Chih et al. (2008), where they highlight instances of well-known international corporations—such as Shell Inc., British American Tobacco, and Coca-Cola—that heavily emphasize sustainability reporting while simultaneously engaging in actions that lack social responsibility. Existing literature suggests that, since some firms use CSR reporting to conceal unethical behavior, companies with significant agency conflicts might resort to CSR reporting to camouflage entrenched practices with excessive sustainability information (Salewski & Zülch, 2013). In this regard, family-owned businesses are especially motivated to divert attention from potentially questionable earnings practices and increase their sustainability reporting to project an ethical image (Gavana et al., 2017).

Consequently, it becomes evident that both EPU and CSR collectively impact various financial choices that firms make, including their investment decisions. Due to these interconnected influences, this study mainly aims to empirically examine how EPU and CSR disclosure jointly affect investment decisions, and how this relation varies between family and non-family-owned businesses. Hence, recognizing the significant strategic connections that exist between CSR, EPU, and investment, it becomes evident that considering CSR as a moderating factor in the association between EPU and firm’s IE is a logical step forward in our analysis. Our empirical analysis involves gathering financial and non-financial data from non-financial companies listed on the PSX over a span of 12 years (2010–2021). Results from panel GLS analyses reveal that uncertainty in economic policies negatively impacts IE. However, the decline in IE during turbulent policy environments takes a different turn when we consider CSR disclosure as a moderating factor within the relationship. Furthermore, the empirical analysis highlights the evolving impact of disclosure practices in family-owned versus non-family-owned firms.

The second section of this paper presents the theoretical framework and reviews relevant literature, which serves as the foundation for developing the hypotheses. The subsequent section details the sample under study and the econometric models employed. Following this, the fourth section discusses the empirical results and summarizes the findings, while the fifth section provides a comprehensive discussion and conclusion.

Theoretical Framework and Hypothesis Development

Investment efficiency, representing the optimal allocation of resources to maximize firm value, serves as a fundamental concept in this study. According to Ohlson’s Residual Income Valuation Model, IE directly influences a firm’s value, but market conditions and managerial behaviors, such as overinvestment or underinvestment, can lead to inefficiencies (Richardson, 2006). EPU introduces environmental volatility that affects firm behavior and decision-making, particularly regarding investments. Existing literature suggests a negative relationship between EPU and IE, primarily due to agency issues like adverse selection, where higher information asymmetry complicates project evaluations, leading to cautious or reduced investments (Bloom et al., 2007); moral hazard, where managers may exploit uncertainty to prioritize personal gains over firm value, resulting in suboptimal investments (Jensen, 1986); and financing constraints, where uncertainty increases external financing costs, limiting firms’ access to capital and reducing investment levels (Chan et al., 2021; Kim et al., 2023).

CSR activities, including transparency initiatives and sustainability disclosures, are thought to mitigate the negative impact of EPU on IE. The theoretical foundations of this include stakeholder theory, which posits that CSR strengthens firm-stakeholder relationships, enhancing reputation and trust, thus offsetting the adverse effects of uncertainty (Wang & Chen, 2017), and agency theory, which suggests that CSR reduces information asymmetry and agency conflicts by increasing transparency and ethical practices (Cui et al., 2018; Martínez-Ferrero & García-Sánchez, 2017). This study also explores whether family ownership impacts the effectiveness of CSR in moderating the relationship between EPU and IE. Family-controlled firms, often prevalent in emerging markets, tend to exhibit higher agency costs due to ownership concentration, potentially limiting CSR activities and transparency (Morck, 2007). In weak institutional environments, such firms may prioritize immediate financial benefits over long-term CSR investments, exacerbating information asymmetry (Faccio & Lang, 2002).

The external environment is a crucial aspect that affects enterprises’ investment behavior, as it is a significant source of information and resources for businesses (Ghosh & Olsen, 2009). Considering the challenges within Pakistan’s economy and its growing engagement with the global landscape, businesses in Pakistan confront a wider array of uncertainties related to their surroundings (Altaf, 2023). An increasing amount of research is dedicated to understanding how EPU affects different choices made by companies. However, a significant portion of this research has revolved around examining the influence of factors related to individual companies and market conditions on IE. These factors include aspects like the quality of financial reporting, corporate governance, internal control, political affiliations, cash flow, and oil prices, as discussed in studies by Shi et al. (2020), Yu et al. (2023), and Cao et al. (2020). Nonetheless, the correlation between policy uncertainty and the IE of businesses in emerging markets remains unclear. These markets are particularly sensitive to shifts in policies, as highlighted in studies by Hoang et al. (2023) and Mirza and Ahsan (2020). EPU, encompassing various aspects like monetary, fiscal, trade, and regulatory policies, exerts an impact on the economic environment within which companies operate. This influence extends to shaping their decisions and behaviors, as evidenced by Shen and Hou (2021). Given this backdrop, our research delves into studying the relationship between EPU and the efficiency of investment decisions made by firms.

EPU and IE

Our first research question addresses whether EPU impacts the IE of firms, as IE is a decisive factor in determining a firm’s value (Ohlson, 1995). However, specific market conditions and managerial incentives may cause overinvestment or underinvestment, ultimately leading to a decrease in share value (Richardson, 2006). Previous research has established the connection between EPU and the decisions made by companies regarding their investments (Bloom et al., 2007; Chan et al., 2021; X. Chen et al., 2020; Dreyer & Schulz, 2023; Kong et al., 2022), which consistently suggest that firms delay their investments during periods of high EPU. However, the decrease in corporate investment during times of growth opportunities may adversely impact their IE. This prompts the question of whether EPU tends to decrease IE by reducing investment sensitivity to growth opportunities, since Tobin (1969) asserts that growth opportunities predict real investment in an ideal market. Based on this, Faccio et al. (2016) argue that IE is contingent on how well a firm’s capital allocation aligns with its growth opportunities. In a perfect market with low information imbalance, a firm can attain optimal investment by taking advantage of its growth opportunities. However, information asymmetry between firms and the market can give rise to agency issues, such as adverse selection, moral hazard, and financial constraints (Myers & Majluf, 1984).

The challenge of adverse selection complicates the accurate evaluation of information by management, making it hard to effectively predict and assess investment projects (Bloom et al., 2007). Consequently, to prevent investment failure, the management usually opts for a cautious approach and decreases investment levels.

Moreover, information asymmetry during heightened policy uncertainty can result in moral hazards, where corporate managers may pursue overinvestment in low-value projects for personal gain, knowing they will not have to bear the full consequences (Jensen, 1986). Recent studies suggest that the information gap between managers and market participants increases during periods of high EPU (Chan et al., 2021; Nagar et al., 2019).

Environmental uncertainty also indirectly influences investment levels through the financing constraint mechanism. With increased environmental uncertainty, both operational and financial risks rise, leading external investors to seek higher capital returns to counterbalance their risks. This results in elevated external financing costs and more stringent financing limitations (Chan et al., 2021; De Silva et al., 2023; Hoang et al., 2023; Pástor & Veronesi, 2013; Soni et al., 2023). Consequently, the issue of financing constraints becomes more acute for firms, causing them to delay or abandon investment plans and reduce investments (Kong et al., 2022). As environmental uncertainty increases, banks and financial institutions commonly implement stricter credit policies to mitigate risk (Kim et al., 2023), compounding financing constraints and further lowering investment levels. Listed firms in Pakistan primarily rely on debt financing due to an underdeveloped stock market (A. Iqbal et al., 2016). In times of high EPU, debt holders tend to maintain more precautionary liquidity, leading to cautious lending practices that make it even more challenging for enterprises to secure funding (Lei & Chen, 2019). For underinvested firms, growing environmental uncertainty significantly impacts their ability to secure funds, compelling them to struggle with reduced credit availability, elevated credit costs, as well as changing expectations from potential investors, exacerbating the problem of underinvestment. Based on these arguments, it is plausible to assert that EPU negatively impacts IE.

• H1: EPU negatively impacts the IE of firms.

Moderating Role of CSR

Our next research question explores whether CSR plays any moderating role between EPU and IE. Literature has identified two main causes behind investment inefficiency: financing constraints and market frictions. According to literature reviews on this topic by Stein (2003) and Hubbard et al. (1998), capital market frictions caused by information asymmetry have an impact on enterprises’ investment decisions and can result in inefficiencies like over- and underinvestment. This is because the communication gap between managers and shareholders leads to higher financing costs and difficulties in raising sufficient capital to fund even positive NPV projects. During uncertain times, the information gap widens even further, leading to inefficient financial performance.

To reduce the information asymmetry and minimize agency costs, firms must adopt CSR as a means of improving information transparency, as suggested by Cui et al. (2018). Dhaliwal et al. (2011) show that disclosing public information increases a firm’s transparency and reduces the existing informational gap. Evidence from Martínez-Ferrero and García-Sánchez (2017) shows that firms that publish stand-alone CSR reports face reduced analyst forecast errors and information asymmetry, indicating that higher transparency can reduce information asymmetry. Lee et al. (2013) found that CSR disclosure benefits firms during difficult economic times and supports the idea that sustainability disclosure can reduce the information gap and capital market efficiency, as argued by Anwar and Malik (2020). Benlemlih et al. (2018) explain that CSR reduces corporate risk by increasing transparency, leading to a better market reputation and trust among stakeholders.

According to a stream of literature, management is more likely to experience moral hazard and adverse selection problems in difficult economic times (De Silva et al., 2023); as a result, increasing asymmetry of information between various stakeholders during EPU exacerbates agency conflicts. The agency hypothesis contends that managers are self-centered and may put their own interests ahead of those of minority shareholders in this regard (Faisal et al., 2020). CSR may aid in reducing this possible conflict of interest by encouraging moral conduct and more transparency in the company’s business activities. Therefore, transparency with stakeholders acts as a means of control to prevent management from making suboptimal investment decisions, as shown by Francis et al. (2009). Hence, when stakeholders possess equivalent information as the management, it becomes challenging for the management to hide ineffective investment choices, even in the presence of EPU.

Furthermore, during uncertain economic times, investors tend to be more prudent and selective about their investment choices. In this scenario, companies can enhance investor trust and showcase their commitment to stable and responsible operations by disclosing information regarding their CSR efforts. A meta-analysis conducted by Wang and Chen (2017) discovered that CSR disclosure has a positive correlation with a company’s financial performance, resulting in increased customer loyalty, market share, and profitability.

A recent study by Dreyer and Schulz (2023) discovered that when uncertainties arise regarding future economic policies, companies face the problem of investment inefficiency. In light of this context, Ahsan et al. (2022) have put forth several strategic solutions by investigating how diverse business strategies can assist companies in maintaining their growth amidst EPU. In a similar vein, Rjiba et al., (2020) have explicitly documented that companies can effectively counter the threats posed by uncertain institutional environments by employing non-market strategic actions, such as CSR and bribery. Their research highlights that engaging in CSR activities over time can help mitigate the adverse effects of uncertainty in economic policies on a company’s financial performance by fostering social capital. This is achieved by gaining access to policy information and enhancing collaboration with stakeholders.

In conclusion, CSR disclosure can play a crucial role in mitigating the negative impact of EPU on IE. It achieves this by mitigating the resource crowding out phenomenon through communication of information, thus nullifying its impact (Makosa et al., 2020). By increasing transparency, reducing uncertainty, and improving a company’s financial performance, CSR can help companies attract investment and allocate resources more efficiently, even during times of EPU. The existing research on the impact of CSR on investment inefficiency primarily focuses on how it can mitigate the effects arising from a firm’s or ownership-specific characteristics. However, it does not examine if non-market strategies like CSR can have an impact on moderating the external systematic macroeconomic elements such as EPU. Our subsequent hypothesis aims to bridge this gap by investigating the relationship between individual company-specific factors and larger macroeconomic forces in shaping firms’ IE. Drawing from stakeholder theory, which asserts that CSR activities such as environmental sustainability efforts, ethical labor practices, community engagement, and philanthropy can enhance firms’ reputations and relationships with stakeholders, our study seeks to elucidate how these factors influence firms’ resilience to external shocks.

• H2: CSR disclosure mitigates the negative impact of EPU on IE of firms.

Moderating Impact in Family Versus Non-family Firms

The idea that ownership concentration is more common than dispersed ownership is widely accepted (La Porta et al., 1999). This is especially true in the case of Asia’s emerging economies, where more than two-thirds of businesses have a controlling shareholder (Claessens et al., 2000; Moshirian et al., 2022). These controlling owners have the privilege of enjoying exclusive control benefits, including financial and non-financial gains that are not distributed to other shareholders (Dyck & Zingales, 2004). Family owners in emerging markets enjoy higher information differences, allowing them to act opportunistically, which creates agency conflicts, specifically Principal-Principal (P-P) conflicts. P-P disputes occur when there is a controlling shareholder present and the formal institutional structure is weak at protecting the interests of minority shareholders (Young et al., 2008). Both of these conditions are present in most developing markets, including Pakistan. Therefore, it’s important to use our understanding of how investors with varying information affect different scenarios, and apply this to situations where CSR is anticipated to reduce the harmful impact of EPU on information efficiency.

Conflicts between controlling and minority shareholders are more likely when the advantages outweigh the drawbacks of such actions (Renders & Gaeremynck, 2012). In Pakistan, the cost is low due to weak institutional mechanisms, while the benefits are attractive, further supported by ownership mechanisms like pyramiding and tunneling etc. (Shah et al., 2023). Due to these financial instruments, agency costs may rise since controlling shareholders may be less motivated to prioritize the welfare of minority shareholders (Faccio & Lang, 2002). Consequently, minority investors rely on family shareholders for information as they lack direct access to it (Akhtaruddin & Haron, 2010). Therefore, a firm’s transparency depends on the family’s willingness and minority shareholders’ influence.

Based on the theory of the firm, when external ownership increases, there is a rise in the supervision of the firm, leading to enhanced transparency and reduced agency costs (Eng & Mak, 2003). However, in a weak institutional setting, concentrated ownership by family members reduces monitoring and increases agency costs (Mak & Li, 2001). Therefore, concentrated ownership can lead to a situation where the primary owner prioritizes profit over the interests of minority shareholders. As explained by Fan and Wong (2002), when management is entrenched within concentrated ownership, it reduces the transparency of the company. This occurs because there is a tendency to avoid sharing information with external parties, creating a situation of information asymmetry. Therefore, this research explores how family ownership affects the relationship between CSR reporting and IE during high EPU.

Research shows that family ownership gives rise to an agency issue, leading to higher agency costs and a less effective governance structure (Morck, 2007). In this scenario, dominant shareholders aim to conceal their intentions through diverse CSR initiatives and prefer not to disclose information. Ghoul et al. (2017) have demonstrated that the institutional environment significantly impacts the engagement of family firms in CSR activities. Since Pakistan is characterized as a weak investor protection country, family firms are expected to be less socially responsible here. Previous research has also found evidence of tunneling by private controlling shareholders under weak institutions. Peng and Yang (2014) explain that while CSR activities bring long-term advantages to a company, they pose short-term challenges. In a controlled ownership setup, the sole owner aims to maximize their immediate gains, leading them to avoid investing in CSR activities. They hold the belief that environmental matters are complex to gauge, causing an increase in information asymmetry. Shahab et al. (2023) provide evidence that affiliation with business groups leads to an increase in environmental violations. Similarly, Dick et al. (2020) indicate that family firms prioritize maintaining control (family control dimension of SEW) over enhancing their image and reputation in shaping their CSR policy. Consequently, family-controlled firms tend to have lower levels of CSR involvement. Other studies have shed light on various less ethical practices among family firms, such as fraud (Krishnan & Peytcheva, 2019) and ethically questionable behavior, particularly during times of crisis (Miller & Le Breton-Miller, 2021). Despite this, few studies have examined how family firms engage in CSR activities amidst the global crisis period. For example, Rudyanto (2023) found that family involvement in businesses decreased their CSR efforts amidst the uncertainty of the COVID-19 pandemic. Similarly, Le Breton-Miller & Miller (2022) noted that family executives often possess considerable autonomy, which allows them to act decisively. However, this autonomy can be a double-edged sword, as it may lead to potentially detrimental decisions during crises like the COVID-19 pandemic, where a single individual’s actions can have significant repercussions for the firm.

In developing economies, the ownership structure plays a significant role in influencing the disclosure of CSR, as indicated by the literature. Various studies highlight that ownership concentration shows an adverse link with CSR disclosure (Anwar & Ahmed, 2020; Khan et al., 2013), particularly when it comes to family concentrated ownership (Farooq et al., 2023; Mohd Ghazali, 2007; Muttakin & Khan, 2014). Hence, as family ownership rises, the willingness to voluntarily share information about CSR activities decreases, leading to an increase in information asymmetry.

Furthermore, the quality of reporting provided by a company is shaped by the requirements and concerns of different stakeholders, with investors valuing quality information to reduce uncertainty and risk (Rudyanto & Veronica Siregar, 2018). Differing from the situation in developed markets, research indicates that in developing markets, the agenda for sustainability disclosure is predominantly shaped by external factors and influential stakeholders. Notable among these are international buyers (Ali et al., 2017), foreign investors (Khan et al., 2013), concerns raised by international media (Azizul Islam & Deegan, 2008), and global regulatory bodies like the World Bank (Sorour et al., 2021). Furthermore, unlike in advanced nations, businesses in developing nations face less demand from the public regarding CSR disclosure (Momin & Parker, 2013). Therefore, the extent of information sharing is determined by the company based on the interplay of various forces, such as proprietary costs in a competitive environment, litigation risk, and the need for capital. When robust corporate governance systems are lacking, high ownership concentration in developing Asian economies can lead to expropriation by controlling shareholders, which is incentivized in opaque information environments (Claessens et al., 2000). In this vein, Safdar et al. (2019) showed that in the Chinese market, high levels of agency conflict between principals can lead to poor information quality. Bothello et al. (2023) backed these findings by showing that Business Group firms are more likely to engage in CSR decoupling compared with non-business group firms.

Certain viewpoints suggest that concentrated ownership, especially within a family or business group context, might have advantages for the company, such as accessing cost-effective financing through an internal capital market (Saeed & Sameer, 2015), reducing the need for transparent information (Park, 2019). The other perspective proposes that in firms with substantial ownership concentration, the drawbacks of disclosing information, such as costs or political motivations, can outweigh the short-term focus of minority shareholders. This could make an environment with less transparency an optimal choice (Fan & Wong, 2002). Since the connection between firm ownership and CSR in environments with weak institutional settings is not widely explored (Ararat et al., 2018), it is vital to investigate whether CSR disclosures by family firms have a similar moderating effect on the adverse outcomes of EPU on IE compared to non-family firms.

Considering the factors mentioned above, it can be argued that CSR disclosure, which tends to reduce information asymmetry, may alleviate the adverse effects of EPU on firms’ IE. Based on agency theory, which highlights the divergence of interests between principals (owners) and agents (management), family firms may lack the motivation to engage in CSR activities. Therefore, it is hypothesized that CSR disclosure by non-family firms could mitigate the negative impacts of EPU on IE compared to their family-owned counterparts.

Non-family firms may benefit from effective monitoring mechanisms, such as independent directors overseeing management, as suggested by Eng and Mak (2003). Additionally, family firms’ reliance on financial markets for funding, as indicated by Ntoung et al. (2020), may also contribute to their ability to manage EPU more effectively.

In contrast, family firms may struggle to mitigate the negative impact of EPU for several reasons. Firstly, their reduced dependence on external financial markets, as highlighted by Saeed and Sameer (2015), may lead to lower levels of information disclosure. Secondly, even if family firms do disclose information, the quality of disclosure may be poor due to agency issues and a preference for opacity, as noted by Bothello et al. (2023). Consequently, such poor-quality disclosures may fail to reduce information asymmetry effectively. This leads us to our third hypothesis, which states that;

• H3: CSR disclosure is more effective in mitigating the negative impact of EPU on IE in non-family firms than in family firms.

Research Design

Sample

The sample consists of non-financial corporations listed on the PSX (Pakistan Stock Exchange), which have disclosed their sustainability involvement through either their annual reports or dedicated standalone reports. The exclusion of financial firms, attributed to their distinct accounting methodologies (Omair Alotaibi & Hussainey, 2016), narrows the focus to 293 companies that reported their CSR undertakings in the year 2021. The research timeline is initiated from the year 2010 for two reasons. The first being the issuance of the General Order by the SECP (Securities and Exchange Commission of Pakistan) in 2009, urging enterprises to publicly share their CSR initiatives in both qualitative and quantitative terms. The legitimacy and accuracy of this research will increase by commencing the study subsequent to the implementation of these regulatory reforms (Ma et al., 2017). The second reason stems from the availability of EPU data for Pakistan, spanning from 2010 onward.

Models

EPU and IE

To analyze the association between EPU & IE (Hypothesis 1) we used the following model.

$$\begin{array}{c}\multicolumn{1}{c}{\mathrm{IE}={\mathrm{\beta }}_0+{\mathrm{\beta }}_1\mathrm{EP}{\mathrm{U}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_3\mathrm{SL}{\mathrm{K}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_4\mathrm{F}{\mathrm{S}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+{\mathrm{\beta }}_5\mathrm{INDEB}{\mathrm{T}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_6\mathrm{S}{\mathrm{V}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_7\mathrm{F}{\mathrm{D}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+{\mathrm{\beta }}_8\mathrm{F}{\mathrm{P}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_9\mathrm{FR}{\mathrm{Q}}_{\mathrm{i},\mathrm{t}-1}+\mathrm{Ind}+\mathrm{Year}+{\mathrm{\epsilon }}_{\mathrm{i},\mathrm{t}}}\end{array}$$

(1)

The F-test and Breusch-Pagan test indicate individual effects in panel data therefore OLS is biased (p = .3). The Hausman test (P > x² = .186) recommends using GLS (random effect) regression. GLS is effective in handling panel data challenges (Baltagi & Wu, 1999) and is robust against autoregressive, cross-sectional correlation, and heteroskedasticity issues (Pathan, 2009). It also overcomes concerns of FE estimation, especially with limited variation and large N, small T (Baltagi, 2005). Therefore, GLS with random effects is suggested over fixed effect estimation in this scenario.

The firm-specific control variables include Slack (SLK). Current ratio serves as a measure of Slack (SLK), where current assets are divided by current liabilities. Firm size (FS), is computed as the logarithm of total sales to normalize the absolute values and address distribution non-normality. Indebtedness (INDEBT) is evaluated through the ratio of total liabilities to total assets. Sales volatility (SV) measures the standard deviation of sales over the previous 5 years. Z-score is used to measure the financial distress (FD) of firms. Firm’s Financial Performance (FP) is adjusted for by incorporating Return on Asset as a proxy, derived from the ratio of operating profit to total assets. Following Kasznik (1999) model is used to compute FRQ:

$$\mathrm{T}{\mathrm{A}}_{\mathrm{i},\mathrm{t}}={\mathrm{\beta }}_0+{\mathrm{\beta }}_1\mathrm{\Delta }\mathrm{Sale}{\mathrm{s}}_{\mathrm{i},\mathrm{t}}+{\mathrm{\beta }}_2\mathrm{PP}{\mathrm{E}}_{\mathrm{i},\mathrm{t}}+{\mathrm{\beta }}_3\mathrm{\Delta }\mathrm{CF}{\mathrm{O}}_{\mathrm{i},\mathrm{t}}+{\mathrm{\epsilon }}_{\mathrm{i},\mathrm{t}}$$

(2)

Where, $\mathrm{T}{\mathrm{A}}_{\mathrm{i},\mathrm{t}}$ represents total accruals; $\mathrm{\Delta }\mathrm{sale}{\mathrm{s}}_{\mathrm{i},\mathrm{t}}$ is the change in sales from year t to t − 1. $\mathrm{PP}{\mathrm{E}}_{\mathrm{i},\mathrm{t}}$ is the property plant and equipment. $\mathrm{\Delta }\mathrm{CF}{\mathrm{O}}_{\mathrm{i},\mathrm{t}}$ is the change in cash flows from operations from year t to t − 1 and ${\mathrm{\epsilon }}_{\mathrm{i},\mathrm{t}}$ represents the error term. We obtained the absolute values of residuals and multiplied them by −1 to compute FRQ. Higher value of residuals indicates higher FRQ.

The study follows (Magnanelli & Izzo, 2017), incorporating a 1-year lag for CSR and firm-specific variables to allow for proper assessment by market actors and address endogeneity concerns. Additionally, industry and year dummy variables are included in Equation 1 to mitigate potential endogeneity from omitted variables correlated with both CSR and IE (Ben Lahouel et al., 2019).

Measurement of IE

The investment efficiency of firms relates to how effectively companies utilize their resources when making investments. Essentially, it assesses how well a company manages its money when deciding to invest in various projects or assets. A firm is considered to be investment-efficient when it makes prudent decisions that lead to favorable returns on its investment endeavors. Following the existing literature we employ two distinct measures to assess IE, as outlined by Biddle et al. (2009) and C. Chen et al. (2013).

Biddle et al. (2009) Model: We utilized Equation 3 to estimate the optimal level of investment by conducting a regression with lagged sales growth and total investment.

$$\mathrm{In}{\mathrm{v}}_{\mathrm{i},\mathrm{t}}={\mathrm{\beta }}_0+{\mathrm{\beta }}_1\mathrm{Sales}\mathrm{growt}{\mathrm{h}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\epsilon }}_{\mathrm{i},\mathrm{t}}$$

(3)

C. Chen et al. (2013) Model: We also adopt the framework by C. Chen et al. (2013) to calculate our second measure of IE. This approach utilizes sales growth and Tobin’s Q to estimate the optimal investment level as shown below:

$$\mathrm{In}{\mathrm{v}}_{\mathrm{i},\mathrm{t}}={\mathrm{\alpha }}_0+{\mathrm{\alpha }}_1\mathrm{T}{\mathrm{Q}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\alpha }}_2\mathrm{\Delta }\mathrm{Sale}{\mathrm{s}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\mu }}_{\mathrm{i},\mathrm{t}}$$

(4)

IE is measured by calculating the variance from the optimal investment level using Equations 3 and 4 which signifies the difference from the anticipated investment level. Here the positive value of residual term shows overinvestment and negative value shows underinvestment. Additionally, the absolute value of residuals is taken and multiplied by −1, where higher values indicate increased IE, and lower values indicate low IE.

Measurement of EPU

A significant contribution to measuring EPU was made by Baker et al. in their seminal paper of 2016, wherein they introduced an innovative approach to understanding policy uncertainty. In a similar vein, Choudhary et al. (2020) extended this concept of Baker and his colleagues to the context of Pakistan in 2020.

This study uses the annual EPU index for Pakistan by converting monthly measurements into a yearly average. The EPU proxy by Baker et al. (2016) effectively captures the changing uncertainties in the economic environment arising from various sources of EPU. As a result, it proves to be a more suitable measure compared to those based solely on election cycles or equity market volatility. In all our regression analyses, we employ the natural logarithm of the EPU index.

Measurement of CSR

Following Anwar and Malik (2020), we evaluated a firm’s CSR disclosure using nine criteria. The assessment involves assigning scores based on the presence of the criteria. A report scoring high on all criteria receives a total score of 9 (100%). To convert this score into continuous data, the obtained total score is divided by the maximum achievable score of 9.

Moderating Impact of CSR

We employed the following model to investigate our second hypothesis of whether CSR moderates the connection between EPU and IE.

$$\begin{array}{c}\multicolumn{1}{c}{\mathrm{IE}={\mathrm{\beta }}_0+{\mathrm{\beta }}_1\mathrm{CS}{\mathrm{R}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_2\mathrm{EP}{\mathrm{U}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+{\mathrm{\beta }}_3\mathrm{EP}{\mathrm{U}}_{\mathrm{i},\mathrm{t}-1}*\mathrm{CS}{\mathrm{R}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_4\mathrm{SL}{\mathrm{K}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+{\mathrm{\beta }}_5\mathrm{F}{\mathrm{S}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_6\mathrm{INDEB}{\mathrm{T}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_7\mathrm{S}{\mathrm{V}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+{\mathrm{\beta }}_8\mathrm{F}{\mathrm{D}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_9\mathrm{F}{\mathrm{P}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_{10}\mathrm{FR}{\mathrm{Q}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+\mathrm{Ind}+\mathrm{Year}+{\mathrm{\epsilon }}_{\mathrm{i},\mathrm{t}}}\end{array}$$

(5)

Moderating Impact of CSR in Family Versus Non-family Firms

In our third hypothesis, we aim to study how the joint influence of CSR and EPU affects IE, taking into account the distinctions between family and non-family firms.

$$\begin{array}{c}\multicolumn{1}{c}{\mathrm{IE}={\mathrm{\beta }}_0+{\mathrm{\beta }}_1\mathrm{CS}{\mathrm{R}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_2\mathrm{EP}{\mathrm{U}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+{\mathrm{\beta }}_3\mathrm{EP}{\mathrm{U}}_{\mathrm{i},\mathrm{t}-1}*\mathrm{CS}{\mathrm{R}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_4\mathrm{EP}{\mathrm{U}}_{\mathrm{i},\mathrm{t}-1}*\mathrm{CS}{\mathrm{R}}_{\mathrm{i},\mathrm{t}-1}*\mathrm{F}{\mathrm{F}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+{\mathrm{\beta }}_5\mathrm{EP}{\mathrm{U}}_{\mathrm{i},\mathrm{t}-1}*\mathrm{CS}{\mathrm{R}}_{\mathrm{i},\mathrm{t}-1}*\mathrm{NF}{\mathrm{F}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_6\mathrm{SL}{\mathrm{K}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+{\mathrm{\beta }}_7\mathrm{F}{\mathrm{S}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_8\mathrm{INDEB}{\mathrm{T}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_9\mathrm{S}{\mathrm{V}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+{\mathrm{\beta }}_{10}\mathrm{F}{\mathrm{D}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_{11}\mathrm{F}{\mathrm{P}}_{\mathrm{i},\mathrm{t}-1}+{\mathrm{\beta }}_{12}\mathrm{FR}{\mathrm{Q}}_{\mathrm{i},\mathrm{t}-1}}\\ \multicolumn{1}{c}{+\mathrm{Ind}+\mathrm{Year}+{\mathrm{\epsilon }}_{\mathrm{i},\mathrm{t}}}\end{array}$$

(6)

In family business research, a proxy commonly employed to represent family hold is family ownership, as it signifies the extent of control an owner possesses in influencing managerial decisions. Family ownership is denoted by the percentage of direct or indirect ownership held by family members. This involves identifying family members through their last names (Deephouse & Jaskiewicz, 2013).

Empirical Results

Descriptive Statistics

Table 1 presents descriptive statistics of our dependent, explanatory, moderating and control variables for the dataset comprising 3,516 firm-year observations. The mean value of −0.19 for IE explains that most of the sample firms are inefficient when it comes to investment decisions, and the standard deviation of 0.60 shows that IE remained quite volatile during the period from 2010 to 2021. The mean value of EPU is 87.63, which indicates that the EPU faced by the firm during the study period was quite high, and the standard deviation of 20.48 suggests that EPU fluctuated each year considerably.

Table 1.

Descriptive Statistics of Regression Variables.

Variables	Mean	Std. Dev	Min	Max	Obs.
IE	−0.19	0.60	−9.72	0	3,516
EPU	87.63	20.48	53.54	109.80	3,516
CSR	0.18	0.38	0	1	3,516
FF	10.03	30.77	0	100	3,516
NFF	5.86	28.04	0	100	3,516
SLK	1.76	1.54	0.09	8.72	3,516
FS	1.52	0.62	−4.32	2.31	3,516
INDEBT	0.19	0.20	0	1.52	3,516
SV	0.43	0.41	0	2.48	3,516
FD	1.79	1.42	0.09	11.86	3,516
FP	1.13	1.74	−5.96	5.71	3,516
FRQ	−0.04	0.07	−0.75	0	3,516

The mean CSR score for the firms in our sample is 0.18, which is relatively low, indicating that CSR practices in Pakistan still have room for improvement. CSR score ranges between 0 and 1, with a standard deviation of 0.38, we observe a large variation in the CSR score of the sampled firms. It is evident from the standard deviation of CSR score that there exists a high degree of heterogeneity amongst the sample firms with regard to their sustainability performance. This low figure supports the findings of previous studies that firms in developing countries don’t report on their sustainability activities because of implementation issues, poor regulatory enforcement, government support and sustainability infrastructure, weak media and civil society (Tauringana, 2021). The significant fluctuation in CSR scores can be explained by the absence of guidelines from the SECP initially on how to disclose sustainability information. However, in 2009, the SECP issued a General Order urging companies to disclose their CSR performance. Since disclosure was not mandatory, some firms chose to disclose, while others did not.

The mean value of FF shows that there is a reasonable degree of family presence in sample firms. Thus, we conclude that, on average, the non-financial firms in Pakistan are headed by family members. The mean value for firm size (FS) is 1.52, and the standard deviation of 0.62, which explains that the sample firms differ considerably with regard to size. Moreover, the sample firms are relatively highly indebted (mean leverage of 0.19), face moderate financial distress, have a reasonable financial performance on average, provide comparatively low-quality financial disclosure on average, and some firms face considerable sales volatility.

Univariate Analysis

The correlation matrix (Table 2) shows the correlation between different variables. As expected, IE is negatively correlated with EPU but positively correlated with CSR. Moreover, it is noted that CSR is negatively correlated with FF whereas it is positively related to NFF. All these findings are aligned with our hypotheses. In addition, SLK, SV, FD, FP, and FRQ are positively correlated with IE, whereas FS and INDEBT correlate negatively, which is consistent with the results of previous studies (Cao et al., 2020; Khediri, 2021; Makosa et al., 2020)

Table 2.

Correlation of Regression Variables.

Variables	1.	2.	3.	4.	5.	6.	7.	8.	9.	10.	11.	12.
1. IE	1
2. EPU	−.02	1
3. CSR	.04	.00	1
4. FF	.01	.00	−.08	1
5. NFF	.01	.00	.03	−.47	1
6. SLK	.02	−.01	.14	−.18	−.04	1
7. FS	−.10	.05	.15	−0.13	.11	.06	1
8. INDEBT	−.14	−.07	−.21	.04	.00	−.07	−.09	1
9. SV	.09	.02	.02	.00	.00	.04	−.14	−.10	1
1. FD	.00	.03	.17	.01	.05	.11	.07	−.31	.47	1
11. FP	.00	−.05	.13	−.00	−.01	.48	.24	−.25	.09	.31	1
12. FRQ	.05	.02	.21	.05	.03	.00	.31	.00	.01	.12	.23	1

GLS Results

Table 3 reports the GLS results of our research models on the total sample of 3,516 firm-year observations. Specification (A) reports the results using Biddle’s model of IE, whereas Chen’s model is used in specification (B). Results indicate that IE of firms is decreased when facing high uncertainty due to economic policy, as the estimated coefficient of our independent variable is significantly negative in both specifications (i.e., −0.154 and −0.210). The baseline results validate our first research hypothesis.

Table 3.

Moderating Impact of CSR on the Relation Between EPU and IE.

Dependent variable: IE	Biddle (A)		Chen (B)		Sensitivity test (C)
	(1)	(2)	(3)	(4)	(5)
Intercept	1.064*** (0.000)	1.056*** (0.000)	1.011*** (0.000)	0.951*** (0.000)	0.909*** (0.000)
EPU	−0.154*** (0.000)	−0.071** (0.021)	−0.210*** (0.008)	−0.199*** (0.002)	−0.080** (0.033)
CSR	0.108** (0.030)	0.100** (0.039)	0.112** (0.045)	0.101** (0.044)	0.982** (0.034)
CSR × EPU	0.112*** (0.008)		0.212** (0.013)
CSR × EPU × FF		0.142 (0.213)		0.148 (0.201)	0.217 (0.329)
CSR × EPU × NFF		0.016** (0.027)		0.019** (0.018)	0.024** (0.036)
FF	0.063** (0.034)	0.058** (0.031)	0.153* (0.064)	0.079*** (0.002)	0.055** (0.039)
SLK	0.012** (0.049)	0.009** (0.048)	0.104*** (0.000)	0.011** (0.017)	0.020 (0.120)
FS	−0.004** (0.047)	−0.004** (0.044)	−0.071*** (0.002)	−0.072** (0.021)	−0.012** (0.042)
INDEBT	−0.107** (0.027)	−0.112** (0.028)	−0.206* (0.056)	−0.271 (0.190)	−0.108* (0.056)
SV	0.263* (0.058)	0.254* (0.052)	0.189** (0.023)	0.174 (0.121)	0.254** (0.048)
FD	0.184*** (0.000)	0.172*** (0.001)	0.144*** (0.001)	0.103*** (0.009)	0.214** (0.038)
FP	0.175** (0.014)	0.169** (0.014)	0.211*** (0.000)	0.249* (0.053)	0.327 (0.192)
FRQ	0.083*** (0.000)	0.089*** (0.000)	0.110** (0.040)	0.0421* (0.061)	0.073** (0.049)
TQ					0.0637** (0.031)
CSEN					0.512*** (0.000)
Ind. FE	Included
Time FE	Included
${\mathrm{R}}^2$	.54	.49	.61	.60	.53
Prob > Chi2	0.000	0.000	0.000	0.000	0.000
Obs.	3,516

Note.***, **, * represent significance at the 1%, 5%, and 10% level respectively.

Estimation results for the mitigating role of CSR in the negative association between EPU and IE are also presented in Table 3. In line with our expectations, the estimated coefficient of the interaction term (CSR*EPU) is positive. This relationship is significant at the 5% level.

Specifications A (2) and B (4) examine how the above relationship is impacted by taking into account the presence of family ownership. In line with our expectations, the interaction term (EPU × CSR × NFF) is positive and statistically significant, whereas considering the family presence, the relation turns insignificant.

Findings

Our results of hypothesis 1 are aligned with previous literature supporting the role of uncertainty in increasing corporate investment inefficiency as asymmetric information and agency problems are emphasized (Kong et al., 2022; Nagar et al., 2019). This negative association shows that high uncertainty about economic policies increases information asymmetry in the market, which leads to multiple problems and one of which is suboptimal investment decisions.

The findings from hypothesis 2 support the notion that CSR disclosure enables companies to reduce friction in the market, attract investments and allocate resources effectively, even during economic uncertainty. Our results suggest that in times of high EPU, CSR disclosure has the ability to increase information symmetry in the market and reduce the negative effects that are brought by economic uncertainty on the IE of the firms, and hence lead to better firm performance. Overall, our findings support the view that CSR disclosure has the potential to tame down the agency conflicts, information asymmetry and financial constraints raised due to uncertainty about the economic policy. This finding supports the argument of Healy and Palepu (2001), which states that asymmetry can be reduced through the availability of information to the different participants, which is one of the motives for managers’ CSR disclosure decisions.

The results from hypothesis 3 lead us to infer that CSR disclosure attenuates the negative impact of EPU on IE in the subset of non-family firms only. So, the theoretic expectation of CSR disclosure mitigating the negative impact of EPU on IE may not hold when the firm has concentrated family ownership, as the entrenchment hypothesis proves in the existing literature.

Another reason behind this relation could be that family firms, specifically in Pakistan, are well-connected and they don’t rely on external financing sources, instead, they fulfill this financing requirement through family savings and bank loans. This gives them greater implicit guarantees and increases their attraction, particularly during uncertain times (Saeed & Sameer, 2015). Therefore, unlike other firms, family firms are not obliged to share their sustainability involvement with stakeholders in times of EPU to obtain external funding from the capital market. Consequently, they have incentives to limit disclosure or provide symbolic CSR information just to fulfill the formality in order to continue to easily expropriate private benefits. This is the plausible reason why their disclosure fails to alleviate the information asymmetry created by EPU, and therefore, their efficiency in investment is adversely impacted by the economic uncertainty. Conversely, the non-family businesses rely on the market for finances, which is not easily accessible. Particularly during periods of high EPU, obtaining external funding becomes even more challenging. In response, non-family firms tend to report more on their CSR involvement. This strategic transparency serves to address information imbalances between internal stakeholders and potential investors.

Our findings support the literature on the resource effect. The results show that the coefficient of CSR × EPU is significantly positive in non-family firms because high EPU lead the firms with no implicit guarantees to indulge more in CSR activities to attract potential investors and make a repute in the market.

Robustness Check

To address the risk of omitted variable bias, this study examines how coefficients change when additional control variables are included. Specification (C) in Table 3 tests the robustness of the main model by adding control variables known to impact a firm’s investment efficiency, as identified in existing literature. The additional control variables used are Tobin Q (TQ) and Cash Sensitivity (CSEN). Despite including these additional variables, our results remain consistent, indicating that our findings are not influenced by omitted variable bias.

To determine the significance of our results, in Tables 4 and 5, we further divided the family sub-sample into two subgroups based on whether they have any incentive to hide information or share CSR information just to fulfill the formality. These subgroups are principal-principal conflict severity and financial performance shortfall.

Table 4.

Moderating Impact of CSR on the Relation Between EPU and IE (P-P Conflict Severity in Family Sub-Sample).

	Low P-P conflict severity		High P-P conflict severity
Dependent variable: IE	Biddle	Chen	Biddle	Chen
Intercept	0.638** (0.047)	0.247*** (0.006)	0.552** (0.038)	0.481*** (0.008)
EPU	−0.043*** (0.008)	−0.104** (0.038)	−0.142*** (0.000)	−0.011** (0.047)
CSR	0.219** (0.017)	0.312*** (0.008)	0.004*** (0.003)	0.012* (0.082)
CSR × EPU	0.271** (0.012)	0.331*** (0.010)	0.104 (0.518)	0.171 (0.250)
SLK	0.014** (0.014)	0.098** (0.025)	0.008** (0.033)	0.153** (0.025)
FS	−0.027** (0.038)	−0.107* (0.079))	−0.013*** (0.000)	−0.004** (0.050)
INDEBT	−0.114* (0.095)	−0.238** (0.041)	−0.018** (0.067)	−0.117** (0.041)
SV	0.318 (0.359)	0.249* (0.088)	0.010** (0.023)	0.091* (0.100)
FD	0.117* (0.061)	0.172** (0.019)	0.110*** (0.007)	0.201*** (0.007)
FP	0.238** (0.012)	0.210** (0.031)	0.201* (0.093)	0.133* (0.065)
FRQ	0.027** (0.013)	0.014*** (0.005)	0.031** (0.065)	0.011** (0.028)
Ind. FE	Included
Time FE	Included
${\mathrm{R}}^2$	.42	.40	.39	.39
Prob > Chi2	0.000	0.000	0.000	0.000
Obs.	3,516

Note.***, **, * represent significance at the 1%, 5%, and 10% level respectively.

Table 5.

Moderating Impact of CSR on Relation Between EPU and IE (Financial Performance Shortfall in Family Sub-Sample).

	Low financial performance shortfall		High financial performance shortfall
Dependent variable: IE	Biddle	Chen	Biddle	Chen
Intercept	1.212** (0.041)	1.055*** (0.007)	1.921*** (0.000)	2.013*** (0.000)
EPU	−0.112** (0.044)	−0.151** (0.029)	−0.227*** (0.001)	−0.228*** (0.005)
CSR	0.104** (0.028)	0.279** (0.014)	0.312** (0.047)	0.129* (0.091)
CSR × EPU	0.310*** (0.001)	0.307** (0.032)	0.216* (0.053)	0.417* (0.100)
SLK	0.081*** (0.007)	0.041*** (0.005)	0.104*** (0.004)	0.128*** (0.001)
FS	−0.007** (0.050)	−0.005** (0.038)	−0.121* (0.097)	−0.062** (0.032)
INDEBT	−0.140** (0.027)	−0.214* (0.100)	−0.318** (0.041)	−0.235** (0.027)
SV	0.142** (0.018)	0.311** (0.050)	0.719** (0.033)	−0.905*** (0.007)
FD	0.051* (0.099)	0.189* (0.099)	0.219** (0.069)	0.237** (0.031)
FP	0.228*** (0.000)	0.228*** (0.000)	0.017** (0.050)	0.034** (0.032)
FRQ	0.127** (0.038)	0.0122** (0.032)	0.255*** (0.009)	0.206** (0.022)
Ind. FE	Included
Time FE	Included
${\mathrm{R}}^2$	.45	.42	.48	.51
Prob > Chi2	0.000	0.000	0.000	0.000
Obs.	3,516

Note.***, **, * represent significance at the 1%, 5%, and 10% level respectively.

The results in Table 4 provide support to our earlier findings that CSR disclosure of firms with more principal-principal conflict severity fails to fill the information gap in the market. The possible reason could be that since the ownership is concentrated in a few hands, these family members then go for adverse selection and place family-centered interests and SEW pursuits as a priority and go for impression management strategies rather than substantial responses. To further strengthen our findings, we divide the family firms into high financial performance shortfall and low financial performance shortfall classes.

In Table 5, performance shortfall refers to the difference between aspired and real financial performance. Following Zhong et al. (2022) we divide the family sample into low and high performance shortfall on the basis of ROS (Return on Sales) index. According to problemistic search literature, firms adopt specific responses when they run into a performance shortfall (Kavusan & Frankort, 2019). In scholarly literature, it is observed that when firms fall short on their financial performance, they tend to undertake more CSR disclosure to maintain legitimacy in the market. However, considering that CSR is a capital-intensive investment, a family firm already struggling with limited resources may engage in CSR activities primarily for impression management in order to safeguard its SEW. Consequently, the CSR disclosure of family-firms experiencing financial difficulties/ high performance shortfall are unlikely to effectively alleviate information asymmetry in the market, as these disclosures may be perceived as mere rhetoric without corresponding actions, thus resembling a case of “talk the walk.”

CSR is a non-market strategy (Al-Shammari et al., 2019) that exerts an indirect influence on firm performance by improving reputation and fostering consumer loyalty. Moreover, it’s a long-term strategy and might not offer immediate financial benefits and can even strain company resources. Despite the potential long-term gains, literature demonstrates that companies often prioritize immediate gains that are often short-sighted (Kavusan & Frankort, 2019), leading to superficial efforts, or “greenwashing,” instead of genuine sustainability endeavors. Moreover, research indicates that underperforming firms grappling with financial constraints often turn to CSR to appease investors (Lindgreen et al., 2009). Research also reveals that firms with family affiliations have market connections that ease financial access (He & Yu, 2019), enabling them to sidestep financial constraints and often neglect genuine CSR engagement.

In line with above explanation the interaction term (EPU × CSR) in Tables 4 and 5 is significantly positive in the family sub-samples of low P-P conflict severity and positive performance shortfall, which further makes our claim strong that CSR disclosure by family firms that have the motive for “greenwashing” does not mitigate negative impact of EPU on investment behavior of the firm.

Discussion

While there is a consensus among scholars regarding the adverse consequences associated with EPU on corporate investment behavior, and conversely, the positive influence of CSR, there remains a margin to further expand the research in this area. To the best of our knowledge, there have been no prior investigations exploring the potential moderating influence of CSR on the connection between EPU and IE. Our objective is to address this void by presenting empirical insights that offer a better understanding of how CSR affects the relationship between EPU and IE, taking into account both family and non-family firms as moderators.

Rising EPU make firms face higher cost of capital, default risks, and information asymmetry, which leads to investment inefficiency (Pástor & Veronesi, 2013). Our results show a robust negative connection between EPU and IE. To understand how the negative impact of policy uncertainty on IE is influenced by CSR in family and non-family firms, we rely on insights from organizational and game theories. These theories suggest that strategic choices, for example, CSR disclosure, of family firms are based on their strategic interactions with different stakeholders. We find that CSR disclosure by non-family firms mitigates the negative impact of EPU on IE. Notably, this effect can only be observed in the family firms’ sample where the firms are characterized by lower levels of Principal-Principal conflict severity or a negative performance shortfall. Our study provides robust evidence to confirm this hypothesis, utilizing various indicators of IE. Our findings align with both game theory and agency theory, which state that companies resort to shortcut tactics with regards to CSR involvement. The findings are also in line with the stakeholder theory, which emphasizes the importance of firms addressing the needs of all stakeholders, not just shareholders, to avoid negative long-term consequences.

Our study also emphasizes the significance of the strategic orientation of CSR involvement by firms. In this regard, the paper shows that CSR disclosure from family firms does not effectively bridge this informational gap in the market, potentially due to the common practice of internal financing among family firms in Pakistan, such as family savings and bank loans, rather than external financing from the market. As a result, they have less incentive to report on CSR, since they are not subject to the same level of scrutiny from investors and other stakeholders, and hence get trapped in management myopia and go for impression management strategies. In this approach, firms do not link their CSR involvement to their strategic orientation. Hence, prioritizing family-oriented interests and SEW pursuit tends to diminish the involvement of family firms in CSR activities (B. Wu et al., 2022). Such a strategic choice entails a potential trade-off between pursuing SEW and seeking personal gains (Kellermanns et al., 2012). The underlying principle of the SEW viewpoint suggests that family firms are primarily driven by the potential loss of family reputation stemming from inadequate CSR engagement, rather than an intrinsic commitment to sustainable development. In scenarios where family firms must react to factors like heightened public awareness, market volatility, or regulatory demands, leveraging impression management offers greater benefits than implementing substantial responses.

As the literature suggests that family firms are not homogeneous, therefore, we divided the family group into two sub-groups based on their motivation to misrepresent the CSR information. The findings indicate that CSR practiced by family-owned companies moderates only in the case where the motivation to misrepresent is low, that is, low P-P conflict severity or low financial performance shortfall.

Firms with low principal-principal conflict severity often have a strong commitment to long-term sustainability and responsible business practices. These firms recognize the importance of considering ESG factors in their operations. The alignment of CSR initiatives with the firm’s core values and sustainability agenda leads to a more holistic and integrated approach. Moreover, low principal-principal conflict severity creates a positive perception among stakeholders, which contributes to increased support, engagement, and participation in CSR initiatives. This, in turn, leads to better outcomes and impacts, making CSR more effective in achieving its intended goals, especially during uncertain times.

Research shows that during the times of EPU, family businesses exhibit heightened financial concern, leading them to refrain from engaging in CSR activities. Our results show that CSR involvement of family firms with balanced or negative performance shortfalls are more effective in ameliorating the negative impact of EPU on IE whereas it fails to mitigate this effect in the case of positive performance shortfalls. A potential explanation could be that investors tend to perceive these initiatives as authentic manifestations of the company’s commitment to CSR, rather than mere attempts to divert attention from financial challenges. Whereas firms with negative performance shortfall have the capacity to strategically integrate CSR initiatives into their overall business strategy, ensuring a coherent and integrated approach. This strategic alignment facilitates enhanced synergy between the firm’s operations and its CSR initiatives, leading to a more significant and meaningful impact. Consequently, this alignment not only boosts the firm’s reputation but also provides a protective cushion against the detrimental effects of market uncertainty. The cheap talk literature suggests that family firms may use substandard CSR disclosure as an impression management strategy during times when they cannot afford to indulge in actual CSR, which is not effective in reducing information asymmetry because stakeholders can see through greenwashing. This shows that CSR disclosure can only be effective in reducing information asymmetry if it is credible and believable. So, our results show that CSR disclosure by family firms with positive performance shortfall fails to attenuate information asymmetry in the market because they tend to opt for impression management strategies more frequently, as supported by existing research.

Practical Implications

Our research outcomes hold practical significance for various stakeholders. Initially, we identify that CSR disclosure has the capability to mitigate the negative effects of EPU. This evidence provides valuable guidance not only for regulatory bodies but also for corporations. In practice, many companies view CSR as an optional and luxury activity. However, our findings carry multiple implications for executives and managers, especially when devising strategies, particularly in times of EPU. Specifically, our results suggest that while firms can adopt precautionary measures to counteract the adverse impacts of a volatile environment, they should also proactively develop backup plans to navigate potential economic challenges in the future, thereby safeguarding their financial standing. Such firm-level strategies can serve as protective measures when EPU increases. Furthermore, encouraging the disclosure of impactful CSR initiatives can convey positive signals to external investors when EPU is high. In conclusion, incorporating CSR into corporate policies and strategies is advisable to project optimistic signals about firm prospects and counteract the detrimental effects of EPU.

Second, we find that CSR disclosure from family firms doesn’t moderate the negative impact of EPU. This research outcome has significant implications for regulatory bodies like the SECP and for investors. These findings contribute to the understanding of shareholders who are interested in addressing concerns about unequal information levels in family-owned businesses. This helps potential shareholders make informed decisions about risk when investing in such firms based on the CSR disclosure from family versus non-family ownership structures. SECP can evaluate the quality of CSR information to assess if family-owned businesses are engaging in deceptive practices like Green-Washing. Consequently, regulatory bodies like SECP may need to review the policies concerning the rights of minority shareholders and the manipulation of reporting practices by dominant shareholders.

Our findings can aid these authorities in developing regulatory programs that cater to different governance and ownership systems. Our results underscore the importance of closely held ownership firms, suggesting that tailored attention is needed. Additionally, to enhance sustainability performance, diversified shareholding could be encouraged, or regulations could be formulated to elevate the social performance of companies with concentrated ownership.

Our study provides evidence supporting the supervisory role of compulsory CSR disclosure in a developing country context. In Pakistan, where the institutional landscape is still developing and CSR is not fully embraced, mandated CSR disclosure could serve as a substitute for corporate governance, ultimately enhancing IE.

Theoretical Implications

Our study contributes to the theoretical understanding of the relationship between EPU, IE, and CSR by confirming agency theory and extending stakeholder theory in the context of a developing economy. Agency theory suggests that EPU negatively impacts IE by increasing uncertainty and risk in decision-making, leading to suboptimal investment choices. Our findings support this argument, demonstrating that EPU reduces IE as firms adopt a more cautious and risk-averse approach to investment decisions during uncertain economic conditions.

Stakeholder theory posits that CSR positively influences IE, particularly during economic uncertainty, by building trust with external stakeholders and reducing information asymmetry. Our results partially support this claim, as CSR disclosures mitigate the negative impact of EPU on IE in non-family firms, which benefit from stronger external monitoring and stakeholder engagement. However, in family firms operating in developing economies, the situation differs. In these firms, a unique agency conflict arises, where majority shareholders exploit weak institutional frameworks and regulatory enforcement to disclose low-quality CSR reports. This reflects an opportunistic approach to CSR, with these firms facing minimal accountability and low risks for inadequate disclosures. As a result, low-quality CSR reports fail to reduce the negative effects of EPU on IE in family firms.

Moreover, while family firms avoid direct costs like non-compliance penalties, they incur indirect costs in the form of reduced investment efficiency. Despite spending resources on CSR disclosures, the poor quality of these reports diminishes their effectiveness, preventing family firms from experiencing the moderating impact of CSR that non-family firms do. Our study also emphasizes that stakeholder theory may not fully apply in developing economies, where institutional factors differ from those in developed economies. In developed markets, strong regulatory frameworks and effective governance mechanisms ensure firms are held accountable for their CSR practices, making stakeholder engagement more impactful. However, in developing economies like Pakistan, weak institutions, ineffective enforcement, and limited stakeholder influence reduce the ability of CSR to moderate the negative effects of EPU on IE. Thus, our findings extend stakeholder theory by showing that institutional contexts play a critical role in determining CSR’s effectiveness. In low-regulation environments, CSR does not serve as a reliable tool to mitigate investment inefficiencies during periods of economic policy uncertainty, particularly in family-owned firms. This underscores the need for context-specific adaptations of stakeholder theory to account for institutional weaknesses and governance gaps in developing economies.

Limitations and Future Research Directions

While our study has provided some valuable insights, it is essential to acknowledge its limitations that invite further investigation in future research. In our research, we directed our focus toward two specific dimensions of family firms with a lower emphasis on social responsibility: P-P conflict severity and financial performance shortfall. While these dimensions offer useful perspectives, there are other aspects of family businesses that warrant exploration. Notably, considering factors such as their political affiliations or military connections, because these two are the most influential institutions in Pakistan and considering them in the analysis could provide additional insights into how families safeguard themselves from potential risks.

Additionally, the process of identifying family members presented a challenge due to the absence of an obligation for firms to disclose this information in their annual reports. Despite efforts to identify family members by matching their surnames and consulting online sources, there was no assurance that all family members were successfully identified through this method. It would be beneficial for future researchers to explore alternative approaches to address this limitation. Furthermore, this study did not examine the specific types of CSR activities prioritized by family firms, as some do provide CSR disclosure during EPU. Future research endeavors may consider investigating this aspect.

Furthermore, GLS regression is sensitive to outliers, affecting estimates. Future studies should consider Weighted Least Squares to mitigate extreme firm behaviors in social responsibility.

Conclusion

Our research builds on existing studies regarding the negative impact of EPU on IE limitations (Chan et al., 2021; De Silva et al., 2023; Hoang et al., 2023; Soni et al., 2023) by focusing on publicly listed firms in Pakistan. To examine the unique motivations and circumstances surrounding CSR reporting in family firms, we utilized the Stakeholder Theory approach, revealing that CSR’s impact may be limited in weak governance contexts, such as those with poor institutional frameworks. It underscores the importance of credible CSR practices, as greenwashing does not reduce information asymmetry and can damage a firm’s reputation. The research provides practical insights for policymakers, investors, and managers, particularly in regions with weak governance systems. Our study extends previous research on EPU and IE in two key ways: first, by demonstrating that CSR mitigates the negative effects of EPU on IE, and second, by reconciling conflicting evidence about family firms’ CSR involvement. This was achieved by comparing family firms with non-family firms and considering factors such as principal-principal conflicts and financial performance within family firms. Ultimately, our research contributes to both theory and practice, offering a deeper understanding of the implications of CSR disclosure in firms managed by family members. These findings are applicable to countries with similar institutional settings, such as Bangladesh, India, and China.