Economic policy uncertainty and firm performance: evidence from China

Abstract

This paper analyzes the impact of economic policy uncertainty on firm performance. Utilizing a news-based index of economic policy uncertainty and firm-level data in China, firm investment, employment, and revenue are found to be negatively associated with policy-related economic uncertainty. This negative relationship is weakened in state-owned enterprises (a fall in investment of 5.61%, employment growth of 0.09%, and sales growth of 0.31%) compared to that of non-state-owned enterprises (a fall in investment of 7.79%, employment growth of 0.14%, and sales growth of 0.34%). We explore several potential explanations and find evidence supporting that economic policy uncertainty reduces the incentives of firms to expand their operation through the mechanism of risk-taking, cash holdings and tax burden. Given this microscopic study on mechanisms, our analysis provides a reference for policy-makers to effectively reduce economic fluctuations.

Keywords:

• economic policy uncertainty
• firm performance

JEL:

• E61
• G30

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 More recently, a number of studies (i.e. Luo and Zhang, forthcoming; Qin, Luo, and Wang, forthcoming) further work on the effect of China’s local political turnover or policy uncertainty on firm investment, whilst Zhang, Luo, and Zhu (2021) emphasize the importance of local leaders during the prevention and control period of COVID-19 in China, under the premise that evidence abounds of the political turnover of local leaders in China (Luo and Qin, forthcoming).

2 For example, see Gulen and Ion (2016), Baker, Bloom, and Davis (2016), Duong et al. (2020), Kang, Lee, and Ratti (2014), Jens (2017), An et al. (2016), Bloom, Bond, and Van Reenen (2007), Rice (2020), Dejuán and Ghirelli (2018), Phan et al. (2019), Stein and Stone (2013), Bloom (2009), and Kim and Kung (2017).

3 In addition to firm investment, employment and sales, a series of literature focuses on the relationship between economic policy uncertainty and carbon emissions in different regions, such as Brazil, Turkey, South Africa, etc. (Adams et al. 2020), Sub-Saharan Africa (Adedoyin et al., 2021), and OECD countries (Zakari, Adedoyin, and Bekun 2021), as well as the relationship between economic policy uncertainty and geopolitical risks in Malaysia (Adedoyin et al., 2020).

4 As in Gulen and Ion (2016), Investment is measured as the ratio of investment expenditures (at time t + 2) to total asset (at time t + 1).

5 Following Coibion, Gorodnichenko, and Ropele (2020), Employment growth is calculated as the growth rate of employment between the period of t – 1 and t + 2. Analogous to Employment growth, Sales growth follows a similar way to obtain.

The ralated investment and sales data for Chinese firms are taken from the China Stock Market Accounting Research (CSMAR) database. The related employment data are taken from the Wind database.

6 We simply calculate the quarterly EPU using the arithmetic average as in Gulen and Ion (2016).

7 Data on both firm-level and GDP are taken from the CSMAR database and the Wind database.

8 We use the same lagged periods as that in the baseline estimation.

Additional information

Notes on contributors

Xinge Feng

Xinge Feng is a graduate student at the University of Chinese Academy of Social Sciences. Her current research interests are in environmental uncertainty and financial risk.

Weijie Luo

Dr. Weijie Luo is an assistant professor in economics at the Central University of Finance and Economics (CUFE). Prior to joining CUFE, Dr. Luo was a visiting researcher in economics at the University of Cambridge, and worked as an associate lecturer in economics at the University of York, where he completed his PhD in economics. His research interests are in macroeconomics, public economics, and economic policy. His research work has been published in journals such as Economics Letters, Scottish Journal of Political Economy, Journal of Chinese Political Science, etc. He is currently serving as an anonymous referee in journals such as Journal of Health Psychology, Journal of Applied Economics, Bulletin of Economic Research, Public Finance Review, etc.

Yong Wang

Yong Wang is an assistant research fellow in the Institute of Finance & Banking, Chinese Academy of Social Sciences. He received his Ph.D. degree at the Graduate School of Chinese Academy of Social Sciences. His current research interests are in fintech, macro-finance, innovation, and public policy evaluation. One of his research work has been published in Journal of Applied Economics.