Impact of Policy Uncertainty on Corporate Investment:Theory and Empirical Study

The outbreak of global financial crisis and the European sovereign debt crisis since 2008 make the global real economic growth fall sharply and the international economic situation worsen suddenly,affected by this,the economic growth suffered the rapid decline and the difficulties faced by the manufacturing sector was particularly serious in China.The central government continued to adjust macroeconomic policies to cope with the severe impact of the financial crisis and make trade-offs between various economic indicators,leading to many adverse effects on economic activities in the microeconomic entities.Hence,the in-depth study of the effects of policy uncertainty on the microeconomic entities economic activities in current volatile economic situation has important practical significance in promoting the healthy development of the real economy.Based on the theoretical model of investment decision under conditions of policy uncertainty,this paper examined the impact of policy uncertainty on corporate investment with Chinese manufacturing listed companies panel data from the second quarter of 2004 to the third quarter of 2013,showing that policy uncertainty has a significant negative effect on the corporate investment in the whole sample interval.Policy uncertainty makes firms hard to form reasonable expectations and wait and see sentiment strengthened,the firms postpone investment plans or reduce the investment spending so as to avoid investing in volatile situation which led to the expected return of investment decline.In China,the magnitude of policy uncertainty is closely related to the stages of business cycle,therefore,in this paper,the whole sample period is divided into two different stages of the business cycle,policy uncertainty is small in macroeconomic rise period from the second quarter of 2004 to the second quarter of 2008,while policy uncertainty is large in macroeconomic downturn period from the third quarter of 2008 to the third quarter of 2013.The magnitude of policy uncertainty has a different effect on the relationship between policy uncertainty and investment,in economic rise period,policy uncertainty could mean a better investment opportunity for firms and they can accept risky investments within the scope of minor damage,policy uncertainty has a significant positive effect on corporate investment.While in a recession period,most firms hold the pessimism sentiment about the future economic trends,they will reduce investments before the policy uncertainty disappeared,then policy uncertainty has a significant negative impact on corporate investments.The fixed assets are the main investments in most China ' s manufacturing firms and the secondary market transactions are not active,the adjustment cost of firms with a high level of fixed assets is relatively high,the irreversibility of manufacturing corporate investments is evident.With introducing the interaction of policy uncertainty variable and investment irreversibility variable in the basic firm investment model,this paper shows that investment irreversibility does exacerbate the negative effects of policy uncertainty on the manufacturing corporate investments.Facing the shocks of policy uncertainty,manufacturing firms with more irreversible investment are more likely to postpone investments to avoid risk,the negative relationship between policy uncertainty and investments is attributed to the delayed effects caused by real options to a large extent.On the basis of above research,this paper argues that government departments should try to maintain macroeconomic policy stability and continuity,which make finns form coherent economic policy expectation and arrange the investment plans reasonably.The government should have close attention to the impact of policy uncertainty on manufacturing investment during the recession,and then accurately grasp the economic situation and enhance the transparency of macroeconomic policy.Meanwhile,the firms should establish internal management mechanism and improve the abilities of market competitiveness and resist external shocks so as to minimize the adverse impact of uncertainty on investment and the real economy.

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