Navigating Economic Policy Uncertainty: Implications for Firm Value in the Indian Context

This study explores the influence of economic policy uncertainty (EPU) on firm value within the Indian context. The study employs fixed effect regression methodology on sample of 25,108 firm-year observations covering the period 2011 to 2020. Drawing on information asymmetry theory, the findings reveal a negative relationship between EPU and firm value, indicating that changes in economic policies, tax regulations, fiscal and monetary policies, and trade dynamics significantly impact the firm value. The study also investigates the impact of leverage (supply side effect) and cash holdings (precautionary motive) as moderating factors. The study reveals that firms strategically utilize leverage to manage their financial obligations and enhance their market valuation. Business group affiliation during EPU periods is associated with higher market value, indicating advantages in capital access and reputation. Sector-specific dynamics show that manufacturing firms with higher cash holdings experience lower market valuations compared to service sector firms. The insights drawn from the study can be beneficial for the firms, policymakers, and investors in navigating economic policy uncertainties in the Indian market. The research contributes to the existing literature by focusing specifically on the Indian market to gain deeper insights into the complex relationship between financial strategies, environmental uncertainty, and firm value.