Policy uncertainty and peer effects: Evidence from corporate investment in China

Hyun Joong Im, Jia Liu and Young Joon Park

International Review of Financial Analysis, 2021, vol. 77, issue C

Abstract: This study investigates whether economic policy uncertainty (EPU) magnifies peer effects in corporate investment in China and the economic mechanisms through which EPU may act upon this property. We examine this relationship by analysing a large sample of publicly listed companies in China for the period of 2009–2019, adopting the peer-firm-average idiosyncratic stock return to capture exogenous variations in peer firms’ investment activities. We demonstrate that peer effects are stronger when EPU is increasing in intensity. We also find that high EPU magnifies peer effects by decreasing the accuracy of firms’ signals regarding their investment opportunities, asymmetrically impacting their capacity to acquire information and exacerbating managers’ career concerns. We further show that increased EPU magnifies peer effects only for underinvesting firms, causing underinvestment to persist and retarding recovery from an economic downturn. Our investigation provides original evidence of how EPU influences corporate investment decisions through peer effects, contributing to the continuing debate on the role of EPU and corporate investment efficiency by establishing that the adoption of consistent and transparent economic policies optimize returns on a company’s investments, especially during an economic downturn.

Keywords: Corporate investment policy; Peer effects; Economic policy uncertainty; Underinvestment; Information cascade (search for similar items in EconPapers)
JEL-codes: D81 E22 G31 G32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:77:y:2021:i:c:s1057521921001678

DOI: 10.1016/j.irfa.2021.101834

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