Economic Policy Uncertainty: Does It Truly Matter?—Evidence from Corporate Fraudulent Behaviors in Chinese Capital Market

A macro policy environment affects managers’ decision-making behaviors. When there is greater uncertainty in economic policy, will they engage in extreme violations? This paper explores the economic consequences of policy uncertainty at the firm level from the perspective of corporate fraud. We focus on the fraudulent behaviors of listed companies in the Chinese capital market and conduct our empirical research through the multiple mediation model. The results show that economic policy uncertainty not only has a direct effect on corporate fraud but it also has a mediating effect that can be explained by four mediating variables. Increased economic policy uncertainty will increase the likelihood of company fraud, and this direct effect will vary due to corporate heterogeneity. Companies with a lower risk tolerance and productive capacity will be more affected and have more significant violation motives. From the results of the mediating effect test, we determine that increased economic policy uncertainty increases mergers and acquisitions, decreases cash holdings, increases stock price volatility, and decreases institutional investors’ shareholdings, which will increase the possibility of corporate fraud.