Economic policy uncertainty, corporate diversification and firm value: the global evidence

Zahid Jumah (), Nabeel Safdar (), Zahid Irshad Younas () and Adeel Ahmed ()
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Zahid Jumah: National University of Sciences and Technology (NUST)
Nabeel Safdar: National University of Sciences and Technology (NUST)
Zahid Irshad Younas: Berlin School of Business and Innovation
Adeel Ahmed: National University of Sciences and Technology (NUST)

Quality & Quantity: International Journal of Methodology, 2024, vol. 58, issue 3, No 30, 2677-2707

Abstract: Abstract This paper investigates the impact of economic policy uncertainty (EPU) on firm value and examines corporate diversification's role between EPU and firm value. We employ firm-level data for twenty-two countries from 2000 through 2020, which covers 364,433 firm-year observations of 29,709 unique firms and use index-based measures for EPU and corporate diversification. The results illustrate that EPU negatively impacts the firm value. However, corporate diversification positively moderates the adverse impact of EPU on the firm value by efficiently mitigating the effect of financial constraints. Further, the additional analysis shows that related and unrelated corporate diversification can be instrumental in alleviating the negative impact of high EPU on firm value in developed economies. In emerging economies, only unrelated diversification effectively deals with high EPU. The results are robust to subsampling, sensitivity, and endogeneity issues. Our study suggests a potential policy recommendation from a managerial perspective, that diversification helps to sustain the firm's value during uncertainty. Furthermore, Policymakers should recognize high policy uncertainty as a threat to business environment stability and take measures to reduce uncertainty and provide a more favorable environment for businesses.

Keywords: Corporate diversification; Economic policy uncertainty; Firm value (search for similar items in EconPapers)
JEL-codes: G32 G38 L25 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11135-023-01768-8

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