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

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.

Does the financial flexibility prevent stock price crash risk during COVID-19 crisis? Evidence from the Vietnamese stock market

“…Thus, this result is consistent with agency theory and empirical evidence from previous studies. Furthermore, this supports previous studies which state that reducing “unexpected” cash flow shortfalls can reduce bad news hoarding and thus reduce future crash risk [ [19] , [20] , [21] ]. Our research also provides an important implication for Vietnamese listed firms that do not prioritize pursuing a financial flexibility strategy, indicating that more attention should be paid to pursuing a financial flexibility strategy.…”

“…Given its significant impact on value creation, financial flexibility plays a crucial role in explaining why changes in a company's financial flexibility should be factored into stock market pricing. In addition, “unexpected” cash flow shortfalls may increase bad news hoarding and thus increase future crash risk [ [19] , [20] , [21] ].…”

Corporate Investment and Economic Policy Uncertainty (EPU) Index Evidence from India

“…There are an increasing number of studies which analyze the relationship between Economic Policy Uncertainty and investment decisions (Bloom et al, 2007;Colombo, 2013;Bernal et al, 2016;Drobetz et al, 2018;Kong et al, 2022;Jing, 2023). According to (Rajan and Zingales, 1995;Dalbor and Jiang, 2013) capital expenditures are favourably associated with size, growth potential, free cash flow, and company earnings, whereas recession has a negative influence on capital expenditures.…”

The moderating effect of financial constraints on the relationship between stock price crash risk and managerial ability

“…They discover that the negative interplay between ESG and stock market plunges is attenuated for companies with stringent financing constraints. Deng et al (2023) assert that severe financial obstacles are the main channel through which patent infringement lawsuits exacerbate the incidence of stock plunges.…”

“…Nevertheless, limited studies have examined the influence of managerial ability, as one of the key managerial characteristics, on crash risks. Also, there is a dearth of papers examining financial constraints and crash risk linkage (Bae et al , 2021; Dang et al , 2022; Deng et al , 2023) and none of them have explored how financing constraints can affect the managerial aptitude and crash risk interplay.…”