Firm's perception of economic policy uncertainty and corporate innovation efficiency

Abstract

Current Economic Policy Uncertainty (EPU) indicators are highly correlated with macroeconomic growth. To better reveal the EPU perceived by each firm, a firm-level EPU index is constructed using a text mining method. Using data of Chinese A-share listed companies from 2011 to 2020, this study examines the impact of a firm's perception of EPU on corporate innovation efficiency, computed using Stochastic Frontier Analysis (SFA) with a time-varying decay model. The empirical results show that corporate innovation efficiency decreases with a firm's perception of EPU. Additionally, the impact of traditional EPU indicators on innovation efficiency becomes statistically insignificant after the macroeconomic variable is added, demonstrating the importance of introducing firm-specific perceptions of EPU. Moreover, this negative impact is attenuated for firms with higher board independence and lower board ownership, while State-Owned Enterprises (SOEs) are less impacted. Furthermore, the impact of a firm's perception of EPU on corporate innovation efficiency is more pronounced for high-tech firms and those without political connections. We propose the following policy implications: First, it is vital for governments to provide stable economic circumstances to maintain corporate innovation efficiency. Second, mixed ownership reform is crucial in China; the risk-taking of non-state-owned firms will be greatly improved; thus, the innovation efficiency of non-state-owned firms will improve.