Economic Policy Uncertainty and Corporate Investment - Cash Sensitivity

Abstract

This paper explores the relationship between economic policy uncertainty (EPU) and corporate investment cash sensitivity. We find that economic policy uncertainty has a significant impact on the investment-cash flow sensitivity of firms. Moreover, these results were still robust after a series of robustness tests and endogeneity treatments. More importantly, this paper finds that EPU impacts firms' investment-cash flow sensitivity mainly by affecting financing constraints (information disclosure, operational risk). Finally, compared with large-scale enterprises, EPU has a more significant impact on the investment-cash flow sensitivity of small-scale enterprises. Compared with enterprises with a high state-owned share ratio, EPU significantly impacts enterprises with a low state-owned share ratio. Moreover, we also find that institutional investors have no significant mitigating effect on the sensitivity of investment cash flow of enterprises impacted by economic policy uncertainties. The data we used was from the Wind data system, and the fixed effect panel was used, and the measurement method was LSDV.