Economic Policy Uncertainty And Investment Sensitivity To Stock Price: International Evidence

Abstract

This study examines how economic policy uncertainty affects the sensitivity of firm investment to the stock price for a sample of 22 countries during the period from 1990 to 2021. The empirical results indicate that the level of sensitivity of firm investment to the stock price is positively correlated with economic policy uncertainty. In addition, this relationship remains robust after adding various control variables for firm characteristics, macroeconomic factors, and country-level variables. Further investigation shows that investment irreversibility, financial constraints, external finance dependence, market competition, information asymmetry, financial distress, and operational risk are transmission channels contributing to the effect of economic policy uncertainty on the sensitivity of firm investment to the stock price. This study contributes to previous research by initially investigating the association between economic policy uncertainty and investment sensitivity to stock price using an international sample.