Level Of Policy Uncertainty Research Articles

Economic policy uncertainty and stock market in G7 Countries: A panel threshold effect perspective.

Based on the literature, it is commonly understood that stock prices (SP) are influenced by economic policy uncertainty (PU), with a rise in PU typically having a negative impact on SP. However, the relationship between PU and SP may not always be linear due to the varying risk preferences of individuals. Risk preference theory posits that individuals respond differently to different levels of risk. Therefore, this study aims to investigate whether PU determines SP asymmetrically (i.e., in a non-linear manner) by considering risk preferences and addressing a gap in the literature. To answer this question, the study employs a panel threshold approach to examine the effect of PU on SP in the Group of Seven (G7) countries, namely Canada, France, Germany, Italy, Japan, UK, and the US. In contrast to previous research, this study finds evidence of an asymmetric effect of PU on SP in the G7 countries. Specifically, the panel threshold results reveal that the impact of increased PU on SP is positive up to a certain level (Threshold1), beyond which it becomes negative (Threshold2). These findings are in line with information asymmetry hypothesis, prospect theory, behavioural finance hypothesis, and market liquidity hypothesis and shed light on the asymmetric behaviour of SP in response to varying levels of PU. The implications of these findings are significant for understanding how to manage risks effectively in the financial markets.

Economic policy uncertainty and incentive to smooth earnings

We examine how economic policy-induced uncertainty influences managers' discretionary accounting choices to achieve a smoother earnings stream. We find that managers offset the partial risk of policy uncertainty on reported earnings by using discretionary accruals. We mainly observe that firms report more negative discretionary accruals when managers are less certain about their prospects. We further show that managers' engagement in income-decreasing earnings management is more significant when firms’ current period pre-managed earnings are higher. To complete the story, we also find that the propensity of reversal of discretionary accruals is positively associated with levels of policy uncertainty. Our results imply that managers opportunistically use discretionary accruals around an uncertain exogenous environment to smooth earnings.

Global policy uncertainty and cross-border acquisitions

Policy uncertainty has been documented to have a significant impact on corporate investment decisions. This paper investigates the effect of policy uncertainty on cross-border acquisitions. We find a significant monotonic relationship between the size of the acquired equity stake in a target firm and the level of policy uncertainty in the target’s country of origin. More specifically, the acquirer is less inclined to purchase a sizeable ownership stake in the target firm, if the target is domiciled in unstable macroeconomic environment. Moreover, we find that acquirers are less willing to pay in cash if the target faces high policy uncertainty. The above results do not seem to depend on the quality of the country’s institutional environment and are robust to alternative econometric specifications. Our study discusses policy implications and should be of interest to academics as well as finance practitioners.

How to understand, evaluate and influence efficient progress in South Africa’s land reform process: A typology from historical lessons from selected sub-Saharan African countries

Background: With reports of widespread failures in South Africa’s land reform programmes, the levels of policy uncertainty in the political rhetoric that influences land reform have been increasing. Since 1994 policy targets to transfer land to black farmers have not been met. Of the 2005 target to transfer about 25 million ha of commercial farmland to black farmers by 2014, less than 5 million ha. have been transferred for commercial use. Some studies report failure rates in resettlement projects of up to 90%. To account for the failures, revisions of policies and amendments to legislations have been proposed within a political environment that is becoming increasingly intolerant to slow progress in land transfers and to resettlement failures.Aim: Against this environment, this paper presents a typology for understanding and evaluating important elements of the land reform project in order to influence progress in the process.Setting: The study adopts a historical review of land reform processes in post-colonial Kenya and Zimbabwe in order to identify potential challenges and key lessons for South Africa.Methods: Hence, using institutional and historical analytical lenses in exploring different narratives, the paper reviews reported failures and successes in land reform policy cases from the selected countries. From an institutional framework, prevalent social institutions and key lessons from Kenya, Zimbabwe and South Africa, a typology for evaluating important elements of the land reform process in South Africa is developed and discussed. Additionally, a review of global data collected on average sizes of farms in different regions of the world is provided as evidence to support propositions of what would constitute efficient farmland size ranges for small to medium commercial farms in South Africa.Results and conclusion: A proposition is made on how to use the typology to guide policy and research interventions to reduce failures and promote successful cases in different areas of the land reform process in South Africa, and possibly other similar contexts.

Policy Uncertainty, Corporate Risk-Taking and CEO Incentives

We show evidence that CEO risk-taking incentives represent a key mechanism through which policy uncertainty impacts the real economy. We document that high levels of policy uncertainty are associated with significantly lower future stock return volatility. This relation is stronger (more negative) for firms where the CEO has higher compensation delta or less transferable skills, and is weaker when the CEO has higher compensation vega. Furthermore, when policy uncertainty is high, firms are more likely to use financial hedging instruments and engage in more diversifying mergers, and CEOs sell more own-firm shares and exercise fewer options.

Belgian economic policy uncertainty index: Improvement through text mining

Recently, the literature has measured economic policy uncertainty using news references, resulting in the frequently-mentioned ‘Economic Policy Uncertainty index’ (EPU). In the original setup, a news article is assumed to address policy uncertainty if it contains certain predefined keywords. We argue that the original setup is prone to measurement error, and propose an alternative methodology using text mining techniques. We compare the original method to modality annotation and support vector machines (SVM) classification in order to create an EPU index for Belgium. Validation on an out-of-sample test set speaks in favour of using an SVM classification model for constructing a news-based policy uncertainty indicator. The indicators are then used to forecast 10 macroeconomic and financial variables. The original method of measuring EPU does not have predictive power for any of these 10 variables. The SVM indicator has a higher predictive power and, notably, changes in the level of policy uncertainty during tumultuous periods of high uncertainty and risk can predict changes in the sovereign bond yield and spread, the credit default swap spread, and consumer confidence.

INCERTEZA POLÍTICA: ANÁLISE DO IMPACTO DA INCERTEZA POLÍTICA NO PRÊMIO DE RISCO

No contexto da crise financeira originada no mercado imobiliário norte-americano no final de 2007, a incerteza em relação às políticas que seriam adotadas chamou atenção da área acadêmica e provocou uma série de questionamentos a respeito de seus efeitos no mercado de capitais. Este artigo analisa o impacto da incerteza política no mercado de capitais em nove países. Foram submetidos a um estudo empírico dados mensais de Estados Unidos, Canadá, Reino Unido, Alemanha, Espanha, Itália, França, Índia e China de janeiro de 2003 a dezembro de 2013. Os resultados das regressões indicam que a incerteza política aumenta a volatilidade dos retornos e que o mercado exige um prêmio de risco pela incerteza política, sendo a associação entre essas variáveis maior em situações econômicas adversas. Os resultados demonstram ainda que houve um aumento no nível de incerteza política dos países analisados após a referida crise financeira. Percebe-se, conforme esperado, que a incerteza política impacta os mercados de capitais dos países analisados.

How Policy Uncertainty Affects Organizational Responses to Flexible Environmental Regulations

Despite their growing popularity, flexible environmental regulations are increasingly characterized by high levels of policy uncertainty. This uncertainty poses numerous challenges for managers, policy makers, and researchers, for we still have a poor understanding of how organizations respond to flexible regulations under such uncertainty. This article presents findings from a phenomenographic study of how organizations respond to the introduction of flexible environmental regulations. Our findings first revealed that organizations exhibited significant variation in the focus of their response, which led organizations to conduct the same activities in markedly different ways. Second, our study is able to clarify the effect that policy uncertainty has on these responses, with our findings demonstrating that policy uncertainty forces regulated organizations to direct their responses on short-term investments and dealing with that very uncertainty, thereby constraining the development of green capabilities....

Greenfield or Acquisition Entry? The Roles of Policy Uncertainty and MNE Legitimacy in Host Countries

Political constraints shortages in host countries facilitate policy changes and, hence, imply policy uncertainty for multinational enterprises (MNEs). I examine how such uncertainty influences MNEs' choice between wholly owned greenfield and full acquisition entry by combining real options and MNE legitimacy theory. I argue that acquisitions require MNEs to buy the needed external assets immediately upon entry while greenfields allow them to buy these assets sequentially, causing greenfields to temporarily have a real options advantage over acquisitions if policy uncertainty resolves unfavorably after the initiation of an entry. I expect the value of this advantage and, hence, the likelihood of greenfield entry, to increase with the level of policy uncertainty. I also expect this increase to be smaller for subsidiaries with greater expected legitimacy, since greater subsidiary legitimacy reduces the chance of adverse shifts in policy preferences and, therefore, the threat posed by a given political constraints shortage. I find support for most of these expectations in a sample of 172 foreign entries by Dutch MNEs, measuring policy uncertainty by Henisz's reverse‐coded POLCON index and a subsidiary's expected legitimacy by its planned autonomy level, its parent's host country experience, its industry's expected performance, and its parent country's religious closeness. I conclude that the POLCON index is an incomplete indicator of the policy threats faced by MNEs because it does not account for subsidiaries' legitimacy.