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Economic policy uncertainty and firms' investment and financing decisions in China

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  • Liu, Guanchun
  • Zhang, Chengsi

Abstract

This paper designs a quasi-natural experiment for the identification of causal relationships between economic policy uncertainty and firms' investment-financing decisions using China's supply-side structural reform in 2015. We construct measures of asset reversibility across industries using China's national input–output flow table and match them with nonfinancial firms listed in China's A-share stock market from 2013 to 2017. We then use the difference-in-difference estimation strategy to investigate two-dimensional variations in periods (i.e., before and after 2015) and asset reversibility (i.e., high- and low-reversibility industries). The empirical results show that economic policy uncertainty significantly impedes real investment and reduces net debt issuance for private firms, whereas no such effects exist in state-owned firms. Interestingly, however, economic policy uncertainty has no significant impact on firms' cash-holding decisions.

Suggested Citation

  • Liu, Guanchun & Zhang, Chengsi, 2020. "Economic policy uncertainty and firms' investment and financing decisions in China," China Economic Review, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:chieco:v:63:y:2020:i:c:s1043951x19300240
    DOI: 10.1016/j.chieco.2019.02.007
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    More about this item

    Keywords

    Economic policy uncertainty; Financial decisions; Asset reversibility;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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