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Economic policy uncertainty and herding behavior in venture capital market: Evidence from China

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  • Sun, Yicong
  • Fu, Hui

Abstract

This paper investigates the impact of economic policy uncertainty (EPU) on herding behavior in China's venture capital market from 2002 to 2021. The study finds a significant negative relationship between EPU and herding behavior, indicating that venture capitalists are more likely to make independent judgments when EPU rises. Mechanism analysis reveals that under high EPU, investors become more specialized and favor stable mid‑to‑late‑stage projects, which in turn dampens market‑wide herding behavior. Further heterogeneity analysis shows that foreign-backed venture capital firms exhibit a more pronounced reduction in herding behavior, while government-backed institutions respond more weakly. In addition, experienced investors and early‑stage investors exhibit stronger reductions in herding when EPU rises. This study enriches the understanding of venture capital behavior under uncertainty and offers new empirical evidence to inform policymakers assessing how shifts in macroeconomic expectations influence the allocation of innovation capital.

Suggested Citation

  • Sun, Yicong & Fu, Hui, 2025. "Economic policy uncertainty and herding behavior in venture capital market: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 92(C).
    • Handle: RePEc:eee:pacfin:v:92:y:2025:i:c:s0927538x25001404
    DOI: 10.1016/j.pacfin.2025.102803
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