ECONOMIC POLICY UNCERTAINTY AND FIRM VALUE: THE MODERATING ROLE OF ESG PERFORMANCE

Abstract

This study examines whether environmental, social, and governance (ESG) activities can alleviate the negative impact of economic policy uncertainty on firm value. Using an unbalanced panel of 6,451 firm-year observations of U.S. non-financial firms from 2018 to 2024, we find that strong ESG performance mitigates the negative effect of EPU on firm value. Our results remain robust when controlling for firm-year fixed effects. To address potential endogeneity and correct for heteroskedasticity and autocorrelation, we employ instrumental-variable estimation and feasible generalized least squares. Further analysis reveals that ESG’s moderating effect is especially significant during periods of heightened regulatory uncertainty, supporting the stakeholder reputation theory. Overall, ESG acts as a credibility-enhancing mechanism, offering insurance-like benefits that stabilize firm value and boost investor confidence in uncertain policy environments. These findings offer important insights for managers, investors, and regulators focused on corporate resilience and market stability.