Policy Uncertainty and Peer Effects: Evidence from Corporate Investment in China

45 Pages Posted: 9 Jan 2016 Last revised: 20 Jul 2021

See all articles by Hyun Joong Im

Hyun Joong Im

The University of Seoul

Jia Liu

University of Salford

Young Joon Park

Peking University - HSBC School of Business

Date Written: July 3, 2021

Abstract

This study investigates whether economic policy uncertainty (EPU) magnifies peer effects in corporate investment in China and the economic mechanisms through which EPU may act upon this property. We examine this relationship by analysing a large sample of publicly listed companies in China for the period of 2009–2019, adopting the peer-firm-average idiosyncratic stock return to capture exogenous variations in peer firms’ investment activities. We demonstrate that peer effects are stronger when EPU is increasing in intensity. We also find that high EPU magnifies peer effects by decreasing the accuracy of firms’ signals regarding their investment opportunities, asymmetrically impacting their capacity to acquire information and exacerbating managers’ career concerns. We further show that increased EPU magnifies peer effects only for underinvesting firms, causing underinvestment to persist and retarding recovery from an economic downturn. Our investigation provides original evidence of how EPU influences corporate investment decisions through peer effects, contributing to the continuing debate on the role of EPU and corporate investment efficiency by establishing that the adoption of consistent and transparent economic policies optimize returns on a company’s investments, especially during an economic downturn.

Keywords: Corporate Investment Policy, Peer Effects, Economic Policy Uncertainty, Underinvestment, Information Cascade

JEL Classification: G31, E22, D81, G32

Suggested Citation

Im, Hyun Joong and liu, jia and Park, Young Joon, Policy Uncertainty and Peer Effects: Evidence from Corporate Investment in China (July 3, 2021). International Review of Financial Analysis, 2021, Volume 77, Article 101834, Available at SSRN: https://ssrn.com/abstract=2713102 or http://dx.doi.org/10.2139/ssrn.2713102

Hyun Joong Im (Contact Author)

The University of Seoul ( email )

163 Seoulsiripdae-ro
Dongdaemun-gu
Seoul, 02504
Korea, Republic of (South Korea)
+82-2-6490-2268 (Phone)
+82-2-6490-2219 (Fax)

Jia Liu

University of Salford ( email )

University of Salford
M5 4WT Salford, Lancashire M5 4WT
United Kingdom

Young Joon Park

Peking University - HSBC School of Business ( email )

University Town
Shenzhen, 518055
China

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