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Firms’ Sustainability: Does Economic Policy Uncertainty Affect Internal Control?

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  • Fang-Nan Liao

    (School of Economics and Business Administration, Chongqing University, Chongqing 400044, China
    School of Management, Xiamen University, Xiamen 361005, China)

  • Xiao-Li Ji

    (School of Economics and Business Administration, Chongqing University, Chongqing 400044, China)

  • Zhi-Ping Wang

    (School of Economics and Business Administration, Chongqing University, Chongqing 400044, China)

Abstract

This paper studies whether economic policy uncertainty (EPU) influences internal control (IC). Exploiting EPU as an exogenous shock and using unique internal control index data at the firm level from China, we can make causal inferences about the EPU effect on IC, and provide new insight into firms’ sustainability. Our results show that firms tend to cope with higher EPU by improving IC, indicating their efforts to ensure sustainability development. We also find that this trend is intensified for firms localized in regions with a lower marketization degree, state-owned firms, or firms with fewer analysts following. Further analyses show that EPU significantly reduces the internal control auditing fees, hence backing up the association between EPU and IC. Unlike the previous literature, this paper shows the important role of internal control for firms in coping with EPU, which is of crucial significance to how firms seek to adhere to sustainable development and how economic policy works best.

Suggested Citation

  • Fang-Nan Liao & Xiao-Li Ji & Zhi-Ping Wang, 2019. "Firms’ Sustainability: Does Economic Policy Uncertainty Affect Internal Control?," Sustainability, MDPI, vol. 11(3), pages 1-26, February.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:3:p:794-:d:203159
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    2. Imlak Shaikh, 2019. "On the Relationship between Economic Policy Uncertainty and the Implied Volatility Index," Sustainability, MDPI, vol. 11(6), pages 1-11, March.
    3. Guo, Jitao & Zhang, Bianxiu & Guo, Yingchi & Li, Feng, 2022. "Expectation or risk aversion when outward foreign direct investment firms invest in the belt and road: Evidence from China," Research in International Business and Finance, Elsevier, vol. 62(C).

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