Economic policy uncertainty,corporate investment decisions and stock price crash risk: Evidence from China |
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Authors: | Zhongbo Jing Shiyu Lu Yang Zhao Jun Zhou |
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Institution: | 1. School of Management Science and Engineering, Central University of Finance and Economics, Beijing, China;2. Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, China |
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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. |
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Keywords: | economic policy uncertainty financial asset holdings overinvestment stock price crash risk |
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