Economic policy uncertainty and corporate investment: Does quality of governance matter?

Abstract

A stable economic condition is crucial for an organization’s success. Any fluctuation in economic policy directly influences corporate-level decisions. However, exercising better governance can mitigate the adverse effect of such unstable economic conditions. Owing to this, the current research tends to disclose the impact of economic policy uncertainty (EPU) on corporate investment decisions and how this impact varies across countries having better governance quality. To achieve the underlying objective, we use the data for the years 2010–2019 of publicly listed enterprises from 6 Asian economies. The empirical analysis was performed by employing the generalized least square (GLS) and GMM techniques. The statistical analysis reveals an inverse relationship between EPU and corporate investment while a direct relationship between governance quality and corporate investment. In addition to individual impact, better governance quality can mitigate the magnitude of the adverse impact of EPU on corporate investment. Better governance can diversify the negative impacts of EPU by protecting investor rights, eliminating information asymmetric, and enhancing policy stability. Based on empirical analysis, the policy officials are directed to exert efforts for exercising better governance. Similarly, corporate managers are advised to consider the current economic situation while formulating any strategy relating to physical investment. This study is innovative as it reinforces the significance of better governance in disentangling the adverse impacts of EPU on corporate investment.

Keywords:

• Corporate investment
• economic policy uncertainty
• governance quality
• GMM

JEL Classification:

• E60
• G31
• G38

Public Interest Statement

This study highlights the significance of governance quality in mitigating the adverse impact of economic policy uncertainty (EPU) on corporate investment decisions. EPU has an adverse impact while governance quality shows a positive relationship with corporate investment. In addition to individual analysis, the better governance quality shows a moderating role in deferring the adverse impact of EPU on investment. The findings recommend an open policy to corporate managers regarding the management of investment as they should invest more during better governance quality. In addition, they should equally consider the economic sensitivity of investment and should develop some corporate-level policies, e.g., holding more cash, etc., to enhance the immunity of firms against adverse impacts of EPU.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Data that support the findings of current study are available at WDI, The World Bank, WGI, and Thomson Reuters Data Stream. These sites are publicly accessible on monetary subscription.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Umar Farooq

Umar Farooq is a PhD (applied economics) scholar at the school of Economics and Finance, Xian Jiaotong University, China. He has a strong research interest in the areas of corporate finance and investment, green finance, sustainable development, and macroeconomic theory and practice. He has recently published papers in peer-reviewed journals including the Borsa Istanbul Review, Research in International Business and Finance, Journal of Cleaner Production, International Journal of Finance and Economics, Energy Policy, Energy, Bulletin of Economic Research, International Review of Administrative Sciences, Environmental Science and Pollution Research, Global Business Review, and Cogent Business and Management. He has also won the title of “distinguished researcher” for the year 2020–2021 as his research appeared in 10 SSCI, and Scopus indexed journals. He is also working as an active reviewer in several peer-reviewed journals including Energy Policy, Energy Economics, International Journal of Finance and Economics, and Environment, Development, and Sustainability.

E-mail: [email protected]

Google Scholar: https://scholar.google.com/citations?user=fe3IZCIAAAAJ&hl=en&oi=ao

ORCID: https://orcid.org/0000-0002-5772-5243

Scopus Author ID: 57,195,806,567