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

By Guanchun Liu, Chengsi Zhang. 2020

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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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/8d7ab32084bef68155b32ee913c3da4e3aa67e61