Navigating Social and Political Volatility: Corporate DEI Investment under Political Polarization
We examine how firms respond to changing social and political pressures by studying their DEI activities following the murder of George Floyd in May 2020 and the subsequent rise of anti-DEI legislation and political backlash during 2023–2025. Using BERT-based textual analysis of proxy statements, we construct firm-level measures that capture different aspects of publicly communicated substantive DEI-related commitments. Disclosed DEI investment follows a rollercoaster pattern, increasing sharply from 2020-2022 and decreasing equally sharply from 2023-2025. The rise and subsequent decline are concentrated among the same firms: those with high pre-existing DEI engagement, greater public exposure, and stronger exposure to pro-DEI investors, customers, and employees. As a result, cross-sectional dispersion in DEI investment expands sharply during the build-up period and compresses sharply during the retrenchment period. These findings are difficult to reconcile with a simple stakeholder-demand view in which firms with pro-DEI stakeholders persistently maintain relatively high DEI investment. Instead, the evidence suggests that stakeholder influence on corporate social policies is conditional on the political risk regime. The same firm characteristics that increase the benefits of DEI investment in favorable environments also increase the cost of backlash when political conditions reverse. More broadly, our findings suggest that stakeholder-oriented corporate policies are less stable under political polarization than under a more stable political environment.
Tracy Wang
Tracy Wang is the John Spooner Professor of Finance. Her expertise lies in the fields of corporate governance, law and economics, and behavioral finance. Her current research explores the impact of prominent societal trends such as increasing attention to ESG and DEI, increasing polarization in ideology, and increasing income inequality on corporate finance and corporate governance. She has also established expertise in research related to corporate securities fraud, securities market regulation, and the value impact of management. She has published in top economics, finance, and accounting journals such as Journal of Finance, Review of Financial Studies, Review of Economic Studies, Journal of Law, Economics, and Organization, Journal of Accounting and Economics. She currently serves as an editor for Journal of Corporate Finance.