Economic policy uncertainty, ESG practices, and investment inefficiency in U.S. firms

Abstract

This study examines how economic policy uncertainty (EPU) influences the efficiency of corporate investments and whether strong environmental, social, and governance (ESG) practices impact this relationship. Using data on U.S. firms from 2010 to 2022, we find that higher EPU leads to greater investment inefficiency, including both under- and overinvestment. When faced with uncertainty, firms tend to favor R&D over capital expenditures, reflecting a preference for flexibility. We also show that information asymmetry intensifies the negative impact of uncertainty on investment decisions. Importantly, robust ESG practices help mitigate the adverse impact of EPU by easing financial constraints and reducing information asymmetry. These results highlight the value of ESG as a stabilizing force in uncertain environments. More broadly, the study underscores the importance of integrating ESG considerations into corporate strategies to foster stability and sustainable growth amid evolving economic conditions.