How does economic policy uncertainty influence managers' learning from peers' stock prices? Evidence from China

This paper investigates the impact of economic policy uncertainty (EPU) on firms' investment sensitivity to their peers' stock prices. We find that investment increasingly responds to the variation of peers' prices during the high policy uncertainty period in China. To deal with the increasing uncertainty, managers need more information for investment decisions and thus are motivated to learn from the prices of their peer firms. Empirical evidence shows that the positive effect is more pronounced for firms with higher operating uncertainty, lower price informativeness, and limited access to economic policy, which supports our managerial learning hypothesis. Further discussions suggest that when EPU is heightened, the relationship between firms' investment and peers' prices is more significant for better-governed, less financially constrained, and more policy uncertainty exposed firms. And the investment of followers is sensitive to leaders' prices, but not vice versa. We also document investment influenced by peer learning is conductive to firm value in high EPU periods. Our study highlights the importance of policy uncertainty in explaining managers' incentives to learn from peer firms.