Economic policy uncertainty and corporate investment: Evidence from China

• This paper studies how economic policy uncertainty influences corporate investment.
• Economic policy uncertainty and corporate investment are inversely related.
• Firms with higher return on invested capital mitigate the effect of policy uncertainty.
• Firms that use more internal finance alleviate the effect of policy uncertainty.
• Firms that are not state-owned reduce the negative effect of policy uncertainty.

This paper studies how economic policy uncertainty influences corporate investment for Chinese listed companies. We show that when the degree of economic policy uncertainty is higher, firms stand to lower their investment and vice versa. However, firms that have higher return on invested capital, use more internal finance and are not state-owned mitigate the negative effect of policy uncertainty on corporate investment. Moreover, firms in regions with higher degree of marketization are more sensitive to the economic policy uncertainty. The evidence illustrates that keeping the transparency and stability of the implementation of economic policies can improve corporate investment efficiency.