Economic Policy Uncertainty and Corporate Investment Dynamics: Evidence from Listed Chinese Firms

Yuan, Mingqing (2023): Economic Policy Uncertainty and Corporate Investment Dynamics: Evidence from Listed Chinese Firms.

Abstract

This study examines the relationship between economic policy uncertainty (EPU) and corporate investment by employing the two-step system generalized method of moments approach and panel data from 4619 listed firms in China spanning 2003–2022. We comprehensively analyze EPU’s impact on various timelines of investment and show non-linear dynamics within the EPU–investment nexus. Our findings suggest that EPU negatively affects total and short-term investments, but positively influences long-term investment. Total and short-term investments demonstrate a U-shaped association with EPU, while long-term investment follows an inverted U-shaped pattern. Additionally, we explore the effects of ownership and capital structures. Ownership concentration and institutional ownership amplify the negative impact of EPU on total and short-term investment but alleviate it for long-term investment. State ownership exacerbates the adverse effects on total and short-term investments, with no significant impact on long-term investment. We find that increased debt financing and equity financing intensify the adverse impact of EPU on total and short-term investments, while not significantly affecting long-term investment. This study offers policy implications based on investment horizon, ownership structure, and financial leverage, guiding policymakers and corporate decision-makers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic policy uncertainty, Corporate investment, Ownership structure, Capital structure
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P34 - Financial Economics

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