Caught in the crossfire: Geopolitical risk and firm performance, and the lifeline of risk management and sustainability strategies

Purpose This paper aims to test the adverse impact of geopolitical risk (GP_RISK) on firm performance and to examine whether risk management and sustainability strategies mitigate this relationship in the Gulf Cooperation Council (GCC) countries. Design/methodology/approach The study sample comprises 6140 firm-year observations from non-financial listed firms from 2013 to 2024. Consistent with prior studies, the study uses a system GMM estimator to address endogeneity and heterogeneity issues in panel data, ensuring consistent and efficient estimates. Findings The study shows that heightened GP_RISK significantly reduces firm performance in the GCC, negatively affecting both return on assets (ROA) and Tobin’s Q. The adverse effect is stronger for ROA, indicating that geopolitical shocks transmit more immediately through operational channels, including higher adjustment costs, supply-chain disruptions and operational inefficiencies. The negative impact on Tobin’s Q reflects investors’ concerns regarding future performance and risk exposure. The findings further show that geographical diversification (GEO_DIV) intensifies the adverse effect of GP_RISK, while hedging does not significantly mitigate it. In contrast, environmental, social and governance performance reduces the negative impact of GP_RISK, driven primarily by the governance dimension. Originality/value This study contributes to research on GP_RISK and firm-level dynamics in the emerging GCC context. It integrates political risk, risk management and stakeholder theories to explore the relationship between GP_RISK and firm performance and to evaluate the shielding effect of risk management and sustainability strategies. The research offers several important theoretical and practical implications for emerging economies.