Economic Policy Uncertainty and Corporate Inefficient Investment: A Research Based on Fixed Effects Model with Evidence from China

Jianan Li; Shiyue Liao; Jingtong Liu; Yue Lyu

doi:10.54691/bcpbm.v27i.1952

Authors

Jianan Li
Shiyue Liao
Jingtong Liu
Yue Lyu

DOI:

https://doi.org/10.54691/bcpbm.v27i.1952

Keywords:

Corporate inefficient investment; economic policy uncertainty; firm size; audit quality.

Abstract

Investment decision-making is the core of corporate financial decision-making, which has a vital influence on investment income and shareholder wealth. This paper will use the fixed effects model to study the relationship between policy certainty and inefficient investment of enterprises, and the data of Chinese companies used are from the CSMAR database. This article first studies the correlation between inefficient investment and policy uncertainty. Based on the research on the relationship between economic policy uncertainty and corporate inefficient investment, this paper finds that economic policy uncertainty has a negative impact on the investment efficiency of enterprises. This conclusion is still valid after a series of robustness tests, including adding some omitted variables and fixed effects of the research year and industry. And through heterogeneous analysis, this paper finds that the investment efficiency of small-scale and low-quality auditing companies is more affected by economic policy uncertainty.

Downloads

Download data is not yet available.

References

Ullah, I., Majeed, M. A., & Fang, H. X. (2020). Female CEOs and corporate investment efficiency: Evidence from China. Borsa Istanbul Review.

Hu, J., Jiang, H., & Holmes, M. (2019). Government subsidies and corporate investment efficiency: Evidence from China. Emerging Markets Review, 41, 100658.

Laux, V., & Ray, K. (2020). Effects of accounting conservatism on investment efficiency and innovation. Journal of accounting and Economics, 70(1), 101319.

Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The quarterly journal of economics, 131(4), 1593-1636.

Cui, X., Wang, C., Liao, J., Fang, Z., & Cheng, F. (2021). Economic policy uncertainty exposure and corporate innovation investment: Evidence from China. Pacific-Basin Finance Journal, 67, 101533.

Ongsakul, V., Treepongkaruna, S., Jiraporn, P., & Uyar, A. (2021). Do firms adjust corporate governance in response to economic policy uncertainty? Evidence from board size. Finance Research Letters, 39, 101613.

Sha, Y., Kang, C., & Wang, Z. (2020). Economic policy uncertainty and mergers and acquisitions: Evidence from China. Economic Modelling, 89, 590-600.

Jeong, B. (2002). Policy uncertainty and long-run investment and output across countries. International Economic Review, 363-392.

Rodrik, D. (1991). Policy uncertainty and private investment in developing countries. Journal of Development Economics, 36(2), 229-242.

Yao, S., Wang, Z., Sun, M., Liao, J., & Cheng, F. (2020). Top executives’ early‐life experience and financial disclosure quality: impact from the Great Chinese Famine. Accounting & Finance, 60(5), 4757-4793.

Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, 11(2-3), 159-189.

Fuxe, & Kjell. (2001). The concept of investment efficiency and its application to investment management structures/risk budgeting in pension investment. abstract of the discussion held by the faculty of actuaries. British Actuarial Journal, 7(03), 348-364.

Faraglia, E., Marcet, A., & Scott, A. (2010). In search of a theory of debt management. Journal of Monetary Economics, 57(7), 821-836.

De Clercq, D., Meuleman, M., & Wright, M. (2012). A cross-country investigation of micro-angel investment activity: The roles of new business opportunities and institutions. International Business Review, 21(2), 117-129.

Al-Thaqeb, S. A., & Algharabali, B. G. (2019). Economic policy uncertainty: A literature review. The Journal of Economic Asymmetries, 20, e00133.

Liu, G., & Zhang, C. (2020). Economic policy uncertainty and firms' investment and financing decisions in China. China Economic Review, 63, 101279.

Huang, K. (2020). Management forecast errors and corporate investment efficiency. Journal of Contemporary Accounting & Economics, 16(3), 100208.

Khanchel, I. (2007). Corporate governance: measurement and determinant analysis. Managerial Auditing Journal.

Madhani, P. M. (2016). Firm size, corporate governance and disclosure practices: Inter-relations. Corporate Governance and Disclosure Practices: Inter-Relations (July 1, 2016). SCMS Journal of Indian Management, 13(2), 17-39.

Saad, M., & Zantout, Z. (2014). Over-investment in corporate R&D, risk, and stock returns. Journal of Economics and Finance, 38(3), 438-460.

Zhang, R., & Yin, H. (2018). Regional financial development, firm heterogeneity and investment efficiency. The Journal of Asian Finance, Economics, and Business, 5(4), 73-83.

Kang, W., Lee, K., & Ratti, R. A. (2014). Economic policy uncertainty and firm-level investment. Journal of Macroeconomics, 39, 42-53.

Love, I. (2003). Financial development and financing constraints: International evidence from the structural investment model. The Review of Financial Studies, 16(3), 765-791.

Biddle, G. C., & Hilary, G. (2006). Accounting quality and firm‐level capital investment. The accounting review, 81(5), 963-982.

Chang, X., Dasgupta, S., & Hilary, G. (2009). The effect of auditor quality on financing decisions. The Accounting Review, 84(4), 1085-1117.

Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency? Journal of accounting and economics, 48(2-3), 112-131.

Bushman, R. M., & Smith, A. J. (2001). Financial accounting information and corporate governance. Journal of accounting and Economics, 32(1-3), 237-333.

Wang, H., Luo, T., Tian, G. G., & Yan, H. (2020). How does bank ownership affect firm investment? Evidence from China. Journal of Banking & Finance, 113, 105741.

Wang, X., Song, L., (2021). Does the economic policy uncertainty suppress the company investment? —— Based on the perspective of the degree of industry competition and the company’s market position. Jiang Han forum (06), 30-40.

Cui, X., Yao, S., Fang, Z., & Wang, H. (2020). Economic policy uncertainty exposure and earnings management: evidence from China. Accounting & Finance.