Economic policy uncertainty, cost of capital, and corporate innovation

By Zhaoxia Xu. 2020

491 citations recorded by the source corpus.

We examine the impact of government economic policy uncertainty (GEPU) on corporate innovation and identify a cost-of-capital transmission channel. We find that GEPU increases firms’ cost of capital, which translates into lower innovation. As economic policy uncertainty rises, firms with more exposure to such uncertainty face a higher weighted average cost of capital and innovate less. Innovations of financially constrained firms and firms relying on external finance in a competitive environment are affected more. Our study provides novel evidence that higher economic policy uncertainty hinders innovation not only through the traditional investment irreversibility channel, but also through the cost-of-capital channel.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/63e2aea8526bc2ee73a0dcdab8bca80f6fb93fc0

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Thanh N. Ngo
2. Qing Zhang
3. Yongjia Lin
4. Xiaoqing Li
5. Xiaolan Fu
6. X. Fu
7. S. Jory
8. Zongyi Hu

In Finance

1. Thanh N. Ngo
2. Yongjia Lin
3. Xiaolan Fu
4. X. Fu
5. S. Jory
6. Hieu V. Phan
7. Hinh D. Khieu
8. Yong Tan

Citations in the corpus

• Varieties in state capitalism and corporate innovation: Evidence from an emerging economy (2021, background): “A growing body of literature argues that corporate innovation performance is affected by EPU (Cumming et al., 2016; Bhattacharya et al., 2017; Feng and Johansson, 2017; He et al., 2020; Jiang et al., 2020; Tajaddini and Gholipour, 2020; Xu, 2020).”
• Environmental regulation, economic policy uncertainty, and green technology innovation (2021, background): “Such decisions also affect future innovation activities (Saleem et al. 2018), especially for companies with nancial constraints and those dependent on external nancing (Xu 2020); the conclusions of these studies for the negative effects are contradictory.”
• The influence of economic policy uncertainty on corporate trade credit and firm value (2020, background): “Xu (2020) finds that firms’ cost of capital increases under EPU.”