How does economic policy uncertainty affect corporate risk-taking? Evidence from China

Using the firm-level data from China over the time period 2007-2018, we investigate how EPU affect the corporate risk-taking. Our empirical results show that EPU can significantly reduce the corporate risk-taking. However, such significant evidence mainly exists on the non-state-owned firms. Moreover, financing constraints level in the enterprise is an essential factor adjusting the effect of EPU on corporate risk-taking, and we find that firms with financing constraints become risk aversion in facing with EPU shocks. The conclusion of this study provides theoretical basis and practical reference for enterprises to make better decisions on high-risk and high-return investment projects.

Automated summary

Using firm-level data from China between 2007 and 2018, this study investigates the impact of Economic Policy Uncertainty (EPU) on corporate risk-taking. The empirical results show that EPU significantly reduces corporate risk-taking, particularly for non-state-owned firms. Moreover, financing constraints play a key role in adjusting the effect of EPU, with constrained firms showing risk aversion in the face of EPU shocks. The conclusions of this study provide a theoretical foundation and practical guidance for enterprises making decisions on high-risk, high-return investment projects.