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Economic policy uncertainty, corporate investment decisions and stock price crash risk: Evidence from China

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  • Zhongbo Jing
  • Shiyu Lu
  • Yang Zhao
  • Jun Zhou
Abstract
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.

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  • Zhongbo Jing & Shiyu Lu & Yang Zhao & Jun Zhou, 2023. "Economic policy uncertainty, corporate investment decisions and stock price crash risk: Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 1477-1502, April.
    • Handle: RePEc:bla:acctfi:v:63:y:2023:i:s1:p:1477-1502
    DOI: 10.1111/acfi.13077
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    3. Hu, Debao & Lu, Jingming & Zhao, Sibo, 2024. "Does trade policy uncertainty increase commercial banks’ risk-taking? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 532-551.
    4. Zhang, Cong & Farooq, Umar & Jamali, Dima & Alam, Mohammad Mahtab, 2024. "The role of ESG performance in the nexus between economic policy uncertainty and corporate investment," Research in International Business and Finance, Elsevier, vol. 70(PB).

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