The Influences of Economic Policy Uncertainty on the Preference of Enterprise Investment Structure: Evidence from China EPU Index

Abstract

Abstract:

"Black Swan" events continuously emerge and intensify market panic, bringing the uncertainty of global economic policy to a new high. What effects will the uncertainty have on enterprise investment? With an insight into the quarterly data from 2007 to 2016 of listed companies, this paper conducts a positive analysis on EPU's impact on enterprise investment. Based on the monthly Chinese EPU Index developed by Baker et al., our analysis reaches the following conclusions. (1) There is a significant negative correlation between EPU and enterprise physical investment. The rise in uncertainty of economic policy leads to a decline in physical investment. While, vir-tual investment is the opposite. (2) The rise of EPU adds to the investment cost of physical assets. Investment cost is an intermediary path. In contrast, the rise of EPU leads to the increase of virtual investment income, stimulating the enterprise virtual investment. Invest-ment income is an intermediary path. (3) Government intervention weakens the relationship between EPU and enterprise investment. Market competition and corporate governance strengthen it. All the three factors have a significant regulatory role. This paper devotes to o-pening the black box of the internal structure of the enterprise capital allocation, expanding the research content of enterprise investment, and revealing the inherent mechanism and path of how EPU affects enterprise investment. This paper provides enlightenment on the eco-nomic impact of uncertain events and ways in which financial institutions can offer stronger backing for real economy.

Key words: uncertainty, physical investment, virtual investment, real option

Xu Guangwei, Sun Zheng, Liu Xing. The Influences of Economic Policy Uncertainty on the Preference of Enterprise Investment Structure: Evidence from China EPU Index[J]. , 2020, 32(1): 246-261.

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