RESEARCH ARTICLE
Economic policy uncertainty, corporate investment decisions and stock price crash risk: Evidence from China
Zhongbo Jing,
Shiyu Lu,
Yang Zhao,
Jun Zhou,
Zhongbo Jing
School of Management Science and Engineering, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorShiyu Lu
School of Management Science and Engineering, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorYang Zhao
Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorCorresponding Author
Jun Zhou
School of Management Science and Engineering, Central University of Finance and Economics, Beijing, China
Correspondence
Jun Zhou, School of Management Science and Engineering, Central University of Finance and Economics, Beijing 100081, China.
Email: [email protected]
Search for more papers by this authorZhongbo Jing,
Shiyu Lu,
Yang Zhao,
Jun Zhou,
Zhongbo Jing
School of Management Science and Engineering, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorShiyu Lu
School of Management Science and Engineering, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorYang Zhao
Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, China
Search for more papers by this authorCorresponding Author
Jun Zhou
School of Management Science and Engineering, Central University of Finance and Economics, Beijing, China
Correspondence
Jun Zhou, School of Management Science and Engineering, Central University of Finance and Economics, Beijing 100081, China.
Email: [email protected]
Search for more papers by this authorAbstract
We examine the relationship between economic policy uncertainty (EPU) and stock price crash risk via the corporate investment in Chinese listed firms. Results show that higher EPU is associated with lower crash risk. Firms increase financial asset holdings and reduce overinvestment when EPU rises, leading to lower future crash risk. State-owned enterprises (SOEs) and firms with lower management incentives tend to reduce overinvestment, whereas non-SOEs tend to increase financial asset holdings. Thus, firms tend to be cautious in their investments when EPU is high, which reduces crash risk. Our study provides new insights into the validity of the Lucas critique in China.
Open Research
DATA AVAILABILITY STATEMENT
Data derived from public domain resources.
REFERENCES
- Aggarwal, R.K. & Samwick, A.A. (2003) Why do managers diversify their firms? Agency reconsidered. The Journal of Finance, 58(1), 71–118.
- Aggarwal, R.K. & Samwick, A.A. (2006) Empire-builders and shirkers: investment, firm performance, and managerial incentives. Journal of Corporate Finance, 12(3), 489–515.
- Antonakakis, N., Chatziantoniou, I. & Filis, G. (2013) Dynamic co-movements of stock market returns, implied volatility and policy uncertainty. Economics Letters, 120(1), 87–92.
- Baker, S.R., Bloom, N. & Davis, S.J. (2016) Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636.
- Benmelech, E., Kandel, E. & Veronesi, P. (2010) Stock-based compensation and CEO (dis)incentives. The Quarterly Journal of Economics, 125(4), 1769–1820.
- Bernanke, B.S. (1983) Irreversibility, uncertainty, and cyclical investment. The Quarterly Journal of Economics, 98(1), 85–106.
- Białkowski, J., Dang, H.D. & Wei, X. (2022) High policy uncertainty and low implied market volatility: An academic puzzle? Journal of Financial Economics, 143(3), 1185–1208.
- Bleck, A. & Liu, X. (2007) Market transparency and the accounting regime. Journal of Accounting Research, 45(2), 229–256.
- Bloom, N., Bond, S. & Van Reenen, J. (2007) Uncertainty and investment dynamics. The Review of Economic Studies, 74(2), 391–415.
- Boubakri, N., Cosset, J.C. & Saffar, W. (2013) The role of state and foreign owners in corporate risk-taking: evidence from privatization. Journal of Financial Economics, 108(3), 641–658.
- Brogaard, J. & Detzel, A. (2015) The asset-pricing implications of government economic policy uncertainty. Management Science, 61(1), 3–18.
- Chen, R., El Ghoul, S., Guedhami, O. & Wang, H. (2017) Do state and foreign ownership affect investment efficiency? Evidence from privatizations. Journal of Corporate Finance, 42, 408–421.
- Chen, S., Sun, Z., Tang, S. & Wu, D. (2011) Government intervention and investment efficiency: evidence from China. Journal of Corporate Finance, 17(2), 259–271.
- Chen, X. & Chiang, T.C. (2020) Empirical investigation of changes in policy uncertainty on stock returns—evidence from China's market. Research in International Business and Finance, 53, 101183.
- Christiano, L.J., Motto, R. & Rostagno, M. (2014) Risk shocks. American Economic Review, 104(1), 27–65.
- Dai, J., Lu, C. & Qi, J. (2019) Corporate social responsibility disclosure and stock price crash risk: evidence from China. Sustainability, 11(2), 448.
- Demir, E. & Ersan, O. (2017) Economic policy uncertainty and cash holdings: evidence from BRIC countries. Emerging Markets Review, 33, 189–200.
- Demir, F. (2009) Financial liberalization, private investment and portfolio choice: financialization of real sectors in emerging markets. Journal of Development Economics, 88(2), 314–324.
- Du, Y., Zhang, H. & Chen, J. (2017) The impact of financialization on future development of real enterprises' core business: promotion or inhibition. China Industrial Economics, 12, 113–131.
- Duchin, R., Gilbert, T., Harford, J. & Hrdlicka, C. (2017) Precautionary savings with risky assets: when cash is not cash. The Journal of Finance, 72(2), 793–852.
- Duong, H.N., Nguyen, J.H., Nguyen, M. & Rhee, S.G. (2020) Navigating through economic policy uncertainty: the role of corporate cash holdings. Journal of Corporate Finance, 62, 101607.
-
Friberg, R. (2021) All the bottles in one basket? Evaluating the effect of intra-industry diversification on risk. Long Range Planning, 54(1), 101973.
10.1016/j.lrp.2020.101973 Google Scholar
- Greenwald, B. & Stiglitz, J.E. (1990) Macroeconomic models with equity and credit rationing. Chicago, IL: University of Chicago Press, pp. 15–42.
- Gulen, H. & Ion, M. (2016) Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523–564.
- Habib, A. & Hasan, M.M. (2017) Managerial ability, investment efficiency and stock price crash risk. Research in International Business and Finance, 42, 262–274.
- Hoskisson, R.E. & Hitt, M.A. (1990) Antecedents and performance outcomes of diversification: a review and critique of theoretical perspectives. Journal of Management, 16(2), 461–509.
- Hu, J., Li, S. & Taboada, A.G. (2020) Corporate board reforms around the world and stock price crash risk. Journal of Corporate Finance, 62, 101557.
- Huang, Y. & Luk, P. (2020) Measuring economic policy uncertainty in China. China Economic Review, 59, 101367.
- Jensen, M.C. (1986) Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.
- Jin, X., Chen, Z. & Yang, X. (2019) Economic policy uncertainty and stock price crash risk. Accounting & Finance, 58(5), 1291–1318.
- Jory, S.R., Khieu, H.D., Ngo, T.N. & Phan, H.V. (2020) The influence of economic policy uncertainty on corporate trade credit and firm value. Journal of Corporate Finance, 64, 101671.
- Julio, B. & Yook, Y. (2012) Political uncertainty and corporate investment cycles. The Journal of Finance, 67(1), 45–83.
- Kang, W., Lee, K. & Ratti, R.A. (2014) Economic policy uncertainty and firm-level investment. Journal of Macroeconomics, 39, 42–53.
- Kim, H. & Kung, H. (2017) The asset redeployability channel: how uncertainty affects corporate investment. The Review of Financial Studies, 30(1), 245–280.
- Kim, J.B., Li, Y. & Zhang, L. (2011) CFOs versus CEOs: equity incentives and crashes. Journal of Financial Economics, 101(3), 713–730.
- Kim, J.B., Tseng, K., Wang, J.J. & Xi, Y. (2020) Policy uncertainty, bad news disclosure, and stock price crash risk. Available from: https://ssrn.com/abstract=3745260.
- Kim, J.B., Wang, Z. & Zhang, L. (2016) CEO overconfidence and stock price crash risk. Contemporary Accounting Research, 33(4), 1720–1749.
- Klein, A. & Marquardt, C.A. (2006) Fundamentals of accounting losses. The Accounting Review, 81(1), 179–206.
- Li, Y., Ma, F., Zhang, Y. & Xiao, Z. (2019) Economic policy uncertainty and the Chinese stock market volatility: new evidence. Applied Economics, 51(49), 5398–5410.
- Li, X., Wang, S.S. & Wang, X. (2017) Trust and stock price crash risk: evidence from China. Journal of Banking & Finance, 76, 74–91.
- Liu, L. & Zhang, T. (2015) Economic policy uncertainty and stock market volatility. Finance Research Letters, 15, 99–105.
- Lucas, R.E., Jr. (1976) Economic policy evaluation: a critique. Carnegie-Rocheseter Conference Series on Public Policy, 1, 19–46.
- Luo, Y. & Zhang, C. (2020) Economic policy uncertainty and stock price crash risk. Research in International Business and Finance, 51, 101112.
- Malmendier, U. & Tate, G. (2005) CEO overconfidence and corporate investment. The Journal of Finance, 60(6), 2661–2700.
- Pástor, Ľ. & Veronesi, P. (2012) Uncertainty about government policy and stock prices. The Journal of Finance, 67(4), 1219–1264.
- Peng, Y., Han, X. & Li, J. (2018) Economic policy uncertainty and corporate financialization. China Industrial Economics, 1, 137–155 (in Chinese).
- Richardson, S. (2006) Overinvestment of free cash flow. Review of Accounting Studies, 11(2–3), 159–189.
- Stein, J.C. (1997) Internal capital markets and the competition for corporate resources. The Journal of Finance, 52(1), 111–133.
-
Stulz, R.M. (1996) Rethinking risk management. Journal of Applied Corporate Finance, 9(3), 8–25.
10.1111/j.1745-6622.1996.tb00295.x Google Scholar
- Su, X., Zhou, S., Xue, R. & Tian, J. (2020) Does economic policy uncertainty raise corporate precautionary cash holdings? Evidence from China. Accounting & Finance, 60(5), 4567–4592.
- Taylor, S.E. & Gollwitzer, P.M. (1995) Effects of mindset on positive illusions. Journal of Personality and Social Psychology, 69(2), 213–226.
- Theurillat, T., Corpataux, J. & Crevoisier, O. (2010) Property sector financialization: the case of Swiss pension funds (1992–2005). European Planning Studies, 18(2), 189–212.
- Thomas, S. (2002) Firm diversification and asymmetric information: evidence from analysts' forecasts and earnings announcements. Journal of Financial Economics, 64(3), 373–396.
- Xu, Y., Xuan, Y. & Zheng, G. (2021) Internet searching and stock price crash risk: evidence from a quasi-natural experiment. Journal of Financial Economics, 141(1), 255–275.
- Xu, Z. (2020) Economic policy uncertainty, cost of capital, and corporate innovation. Journal of Banking & Finance, 111, 105698.
- Ye, X., Cao, Z. & Xiang, H. (2020) How does corporate financial asset allocation affect the risk of stock price collapse?—an inspection of mechanism from the perspective of term structure heterogeneity. Chinese Review of Financial Studies, 4, 67–83 +125.
- Zeng, C. & Yang, X. (2012) Diversification, leverage and overinvestment. Journal of Audit & Economics, 6, 83–91 (in Chinese).
