Economic policy uncertainty and overinvestment: evidence from Korea

Jiang, Wenwen; Kim, Hwa‐Sung

doi:10.1108/jdqs-05-2021-0010

Cited by 3 publications

(3 citation statements)

References 37 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…In reality, firms may invest in negative-NPV projects for several reasons. First, the well-known risk-shifting problem can cause inefficient investments in inefficient projects (Jensen and Meckling, 1976;Eisdorfer, 2008;Jiang and Kim, 2021). Second, overconfident managers can also invest in negative-NPV Journal of Derivatives and Quantitative Studies: 선물연구 projects if they overestimate the projects' future profits or their own ability (Malmendier and Tate, 2005).…”

Section: Suggestive Empirical Evidencementioning

confidence: 99%

Informational role of investment and liquidation values

Doh,

Wang

2024

JDQS

View full text Add to dashboard Cite

We develop a credit-risk model to study the informational role of investment in an economy susceptible to large liquidity shocks. Firms' investment decisions carry information about their asset quality, thereby mitigating informational frictions when firms enter bankruptcy. An increase in aggregate investment can reduce the informational value of investment, depressing firms' recovery values. Therefore, policies boosting investment can decrease debt and firm values by reducing the informational value of investment. The presence of debt overhang may enhance firm value by making firms' investment decisions more informative. We present suggestive empirical evidence consistent with model predictions on the relation between firms' investments and recovery rates.

show abstract

Section: Suggestive Empirical Evidencementioning

confidence: 99%

Informational role of investment and liquidation values

Doh,

Wang

2024

JDQS

View full text Add to dashboard Cite

show abstract

“…1. Prior literature including Baker et al (2016Baker et al ( , 2020, Gulen and Ion (2016), Mueller et al (2017), Sharif et al (2020), Jiang and Kim (2021), Kim (2021) and Yang and Yang (2021) utilizes EPU as the measure of policy-or economic-related uncertainty.…”

Section: Notesmentioning

confidence: 99%

Mean–variance relationship and uncertainty

Kim

2021

JDQS

View full text Add to dashboard Cite

This study investigates the impact of uncertainty on the mean-variance relationship. We find that the stock market's expected excess return is positively related to the market's conditional variances and implied variance during low uncertainty periods but unrelated or negatively related to conditional variances and implied variance during high uncertainty periods. Our empirical evidence is consistent with investors' attitudes toward uncertainty and risk, firms' fundamentals and leverage effects varying with uncertainty. Additionally, we discover that the negative relationship between returns and contemporaneous innovations of conditional variance and the positive relationship between returns and contemporaneous innovations of implied variance are significant during low uncertainty periods. Furthermore, our results are robust to changing the base assets to mimic the uncertainty factor and removing the effect of investor sentiment.

show abstract

“…Most studies agree that elevated EPU disrupts firms’ investment decisions by reducing management risk-taking and pressuring for more conservative decisions (Panousi and Papanikolaou, 2012; Tran, 2019). For example, during periods of high uncertainty, firms tend to engage in fewer merger and acquisition activities (Bonaime et al , 2018), hold more cash (Phan et al , 2019), lower their leverage ratio (Zhang et al , 2015) and reduce corporate investment (Jiang and Kim, 2021; Gulen and Ion, 2016) as well as R&D investment (Guan et al , 2021; Xu, 2020; Wang et al , 2017). Although these studies have focused on how EPU affects the investment and financing of large businesses, to the best of our knowledge, there is a lack of insight regarding the effect of the macro environment on small-to-medium enterprises (SMEs) behavior.…”

Section: Introductionmentioning

confidence: 99%

Economic policy uncertainty and SMEs’ investment efficiency in France: does competitive pressure matter?

Hamza,

Barka,

Verdie

et al. 2023

EBR

View full text Add to dashboard Cite

Purpose This paper aims to investigate empirically the impact of economic policy uncertainty (EPU) on small-to-medium enterprises’ (SMEs) investment efficiency and whether product market competition influences this association. Design/methodology/approach The study was conducted on French SMEs listed on the “CAC Mid & Small” Index over 2008–2021. This paper proposes a quantitative approach to test the relationship between the EPU and SME investment efficiency. Findings These findings show that EPU significantly alleviates SMEs’ investment inefficiency, reflected in the reduction of overinvestment and underinvestment. As EPU increases, firms with more exposure to such uncertainty invest more efficiently, and their overinvestment tendency becomes lower, while reducing the risk of underinvestment. These results are still significant after a series of robustness checks. Further analysis shows that EPU mitigates investment inefficiency to a greater extent for firms operating in highly competitive industries, and better information environments. Research limitations/implications This study was limited to the French EPU index and could be extended to a European or even international scale. Moreover, using alternative uncertainty indexes across various European countries can be more advantageous in further studies. Although results suggest that EPU affects investment efficiency, future studies could further explore the mechanisms through which EPU affects SMEs’ investment efficiency and, in particular, across different industries. Understanding these variations due to the specific industry-EPU sensitivity can provide valuable insights. Finally, it would be interesting to examine the risk management strategies adopted by SMEs in the face of EPU, combined with other growing risks, such as climate risk. Practical implications In the face of high EPU, SME managers must improve risk management, adopt appropriate investment strategies, consider using predictive analytics or economic forecasting tools and embrace technology and innovation that enhance agility and responsiveness to policy uncertainty. Besides, political decision-makers should adapt their regulatory policies (tax, labor, housing, etc.) to preserve the efficiency of SME investment. Originality/value Although the debates on how policy uncertainty affects the investment and financing of large businesses have received a great concern of academia, to the best of the authors’ knowledge, this is the first study that focuses on the effect of EPU on investment distortions for SMEs.

show abstract

Economic policy uncertainty and overinvestment: evidence from Korea

Cited by 3 publications

References 37 publications

Informational role of investment and liquidation values

Informational role of investment and liquidation values

Mean–variance relationship and uncertainty

Economic policy uncertainty and SMEs’ investment efficiency in France: does competitive pressure matter?

Contact Info

Product

Resources

About