What Affects Innovation More: Policy or Policy Uncertainty?

Bhattacharya, Utpal; Hsu, Po–Hsuan; Tian, Xuan; Xu, Yan

doi:10.1017/s0022109017000540

Cited by 452 publications

(188 citation statements)

References 114 publications

(135 reference statements)

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“…Prior work suggests that political elections and economic policy uncertainty are highly correlated (Julio and Yook, ; Bhattacharya et al ., ; Jens, ). The only nationwide political election covered in our sample period is the 18th National Congress of the Communist Party of China of 2012, when the China Communist Party selected a new general secretary.…”

Section: Resultsmentioning

confidence: 99%

When to go abroad: economic policy uncertainty and Chinese firms’ overseas investment

Zhang

et al. 2019

Accounting & Finance

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We study how economic policy uncertainty (EPU) influences firms' overseas investments for Chinese listed companies. We find a significant negative relationship between EPU and firms' overseas investments after controlling for firm characteristics and macroeconomic variables. Chinese firms seem to reduce their overseas investments on fixed income securities when facing domestic policy uncertainty. The negative relationship is pronounced for financially constrained firms, firms relying on government subsidies and with low overseas revenues, and SOEs. Firms operating in high marketisation regions can mitigate the negative effect of EPU on firms' overseas investments. Our results remain significant when considering endogeneity problems.

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Section: Resultsmentioning

confidence: 99%

When to go abroad: economic policy uncertainty and Chinese firms’ overseas investment

Zhang

et al. 2019

Accounting & Finance

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“…Bhattacharya et al . () find that political uncertainty adversely affects innovative investment in the same way as regular investment. Another recent working paper, Ni (), revisits this documented negative relationship in a different setting and finds that uncertainty can encourage innovation if firms have an understanding of future policy changes.…”

Section: Political Uncertainty and Corporate Policiesmentioning

confidence: 95%

“…Using industry‐level information of US patents to measure the different dimensions of innovation activities (i.e., quantity, quality, originality, riskiness, and exploratory versus exploitative patents), Bhattacharya et al . () document significant decreases in the quantity, quality, and originality of a country's innovation activities a year after elections for a sample of 43 countries between 1976 and 2010. However, they fail to find evidence supporting the impact of policy on most dimensions of innovation activities.…”

Section: Political Uncertainty and Corporate Policiesmentioning

confidence: 99%

“…For example, Bhattacharya et al . () compare the relative importance of policy and policy uncertainty for technological innovation activities. Using industry‐level information of US patents to measure the different dimensions of innovation activities (i.e., quantity, quality, originality, riskiness, and exploratory versus exploitative patents), Bhattacharya et al .…”

Section: Political Uncertainty and Corporate Policiesmentioning

confidence: 99%

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Political Uncertainty and Finance: A Survey

Dai

Zhang

2019

Asia-Pac J of Fin Stud

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An emerging stream of literature investigates the impact of political uncertainty on financial markets. In this survey, we review this line of literature from four perspectives, namely, asset prices, corporate policies, financial intermediaries, and economy and households, suggesting that political uncertainty generally increases market friction and as a result changes corporate behavior and adversely affects the economy. At the end of the survey, we discuss a few future directions worth being explored in view of the relationship between political uncertainty and finance. most likely to occur if the old policy has led to unexpected low realized profitability. Therefore, policy change can increase firms' expected profitability, thereby pushing stock prices up, that is, the cash flow effect. However, due to the new policy's higher uncertainty, policy change can also increase discount rates, thereby pushing stock prices down, that is, the discount rate effect. The authors show analytically that, on average, the discount rate effect will outweigh the cash flow effect and stock prices will fall at the announcement of a government policy change. The reason is that positive announcement returns tend to be small as policy changes that have the potential to push stock prices up are mostly expected by investors. Moreover, as new policies introduce more uncertainty and raise the volatility of the stochastic discount factor, government policy changes will increase stock return volatilities and correlations.Closely related to P astor and Veronesi (2012, 2013) analyze the risk premium induced by political uncertainty. P astor and Veronesi (2013) extend the general equilibrium model developed by P astor and Veronesi (2012) in two key aspects. First, unlike P astor and Veronesi (2012) who assume political cost is unknown to investors, P astor and Veronesi (2013) allow investors to learn about the political costs of the new policies through the stream of political news. Second, P astor and Veronesi (2012) assume that all government policies are identical a priori, whereas P astor and Veronesi (2013) allow the government to choose from a set of heterogeneous policies. The impacts of both, the learning about political costs and policy heterogeneity, are larger in weak economic conditions when a policy change is more likely to happen.Accordingly, in P astor and Veronesi's (2013) analytic model, stock returns are driven by capital shocks, impact shocks, and political shocks, and correspondingly the equity risk premium can be decomposed into three components based on the three types of shocks. As the optimal choice for the government is to change its policy when the old policy is perceived as sufficiently unfavorable, the authors show analytically that the composition of the risk premium varies depending on the economic state. In weak economic conditions when the probability of a policy change is high, the equity risk premium is largely driven by the political risk premium. However, in strong economic conditions when a policy change ...

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“…Dixit and Pindyck (1994) explained that EPU uplifting the value of the postponing opportunity of so many projects of the investment will be postponed, portraying a negative correlation between investment and uncertainty. Bhattacharya, Hsu, and Tian, Xu (2015) and studies of Gulen and Ion (2015); Julio and Yook (2012) investigate the significant inverse relationship between policy uncertainty and intangible investment. Economic activity especially in developing countries is affected by governments in terms of firm's performance, shares, values and choices of firms (Firth, Gong Stephen, & Shan, 2013).…”

Section: Literature Reviewmentioning

confidence: 99%

The impact of economic policy uncertainty on the innovation in China: Empirical evidence from autoregressive distributed lag bounds tests

Saleem

Jiandong

Khan

2018

Cogent Economics & Finance

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This study is the first attempt to scrutinize the causal relationship between economic policy uncertainty (EPU) and innovation in the case of China, using the autoregressive distributed lag (ARDL) approach to co-integration approach of innovation accounting for causality analysis. The empirical findings show that EPU can negatively affect innovation. EPU indicates a significantly negative impact on innovation as well as on the gross domestic product (GDP) growth rate. The combined results based on ARDL, innovation accounting approach (IAA) (variance decompositions and impulse response functions), and fully modified ordinary least square (FMOLS) raise an important point that calls for attention. The point is relating to the causality running from EPU to innovation. The future of China is uncertain, so when the economic uncertainty is higher, it lowers the value of future activities of the economy of China.

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What Affects Innovation More: Policy or Policy Uncertainty?

Cited by 452 publications

References 114 publications

When to go abroad: economic policy uncertainty and Chinese firms’ overseas investment

When to go abroad: economic policy uncertainty and Chinese firms’ overseas investment

Political Uncertainty and Finance: A Survey

The impact of economic policy uncertainty on the innovation in China: Empirical evidence from autoregressive distributed lag bounds tests

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