Economic policy uncertainty and firm performance: evidence from China

Xinge Feng, Weijie Luo and Yong Wang

Journal of the Asia Pacific Economy, 2023, vol. 28, issue 4, 1476-1493

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.

Date: 2023
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DOI: 10.1080/13547860.2021.1962643

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