Economic policy uncertainty and its mediating effect on leverage on the adjustment speed of corporate investment– evidence from China

Abstract

ABSTRACT Using the data of 677 listed manufacturing companies in China from 2008 to 2020, we construct an empirical model to study the adjustment speed of investment level and leverage change under economic policy uncertainty (EPU). Our empirical results show that: (1) EPU hinders the adjustment speed of firm investment level. (2) EPU is negatively associated with leverage and hinders the adjustment speed of leverage level. (3) Corporate leverage has a negative mediation effect on the adjustment speed of firm investment level. The response of firms and markets to economic policies always lags behind. In particular, the EPU effect is significant in long term, up to 3 years, and the negative mediating effect is lasted for 10 quarters. A robust check has been done to verify the results. It is suggested that policymakers should help to improve the information efficiency, smooth the market reaction and take the dominant position of market regulation, to avoid the large-scale shock from EPU.