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Economic Policy Uncertainty and Corporate Investment Behavior: Evidence from China’s Five-Year Plan Cycles

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  • Guanghua Xie
  • Jianlin Chen
  • Ying Hao
  • Jing Lu

Abstract

Using China’s five-year plan (FYP), this study examines how state ownership affects corporate investment behavior during economic policy shifts. We find that non-state-controlled firms (NSCF) experience a larger increase in underinvestment under policy uncertainty and a larger increase in overinvestment after the policy uncertainty is resolved. However, the increase in overinvestment at state-controlled firms (SCF) is significantly more pronounced in the final years of an FYP. This differential change in investment behavior between SCF and NSCF is found primarily at firms that are politically unconnected, in policy-supported industries and low-marketization regions. Further analysis shows that SCF are associated with a higher increase in sales growth after an FYP. Our findings suggest that state ownership is helpful in obtaining policy benefits to improve investment behavior for SCF during policy shifts, but it also encourages these firms to engage in unprofitable but politically prioritized investment projects when such benefits substantially diminish.

Suggested Citation

  • Guanghua Xie & Jianlin Chen & Ying Hao & Jing Lu, 2021. "Economic Policy Uncertainty and Corporate Investment Behavior: Evidence from China’s Five-Year Plan Cycles," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(10), pages 2977-2994, August.
    • Handle: RePEc:mes:emfitr:v:57:y:2021:i:10:p:2977-2994
    DOI: 10.1080/1540496X.2019.1673160
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    Cited by:

    1. Xuan Yang & Shihao Mao & Luxuan Sun & Chao Feng & Yinshuang Xia, 2022. "The Effect of Economic Policy Uncertainty on Green Technology Innovation: Evidence from China’s Enterprises," Sustainability, MDPI, vol. 14(18), pages 1-17, September.
    2. Hyung-Jong Na & Hyeon Kang & Hyang-Eun Lee, 2021. "Does Tax Incentives Affect Future Firm Value for Corporate Sustainability?," Sustainability, MDPI, vol. 13(22), pages 1-17, November.
    3. Huifu Nong, 2024. "Connectedness and risk transmission of China’s stock and currency markets with global commodities," Economic Change and Restructuring, Springer, vol. 57(1), pages 1-24, February.
    4. Alam, Ahmed W. & Houston, Reza & Farjana, Ashupta, 2023. "Geopolitical risk and corporate investment: How do politically connected firms respond?," Finance Research Letters, Elsevier, vol. 53(C).
    5. Yu Zhang & Xiaotong Wang & Wei Guo & Xinlei Guo & Qisheng Wang & Xin Tan, 2024. "Does ESG Performance Affect the Enterprise Value of China’s Heavily Polluting Listed Companies?," Sustainability, MDPI, vol. 16(7), pages 1-21, March.
    6. Cuiling Ou & Kegao Yan, 2024. "The Nonlinear Effect of Economic Policy Uncertainty on Corporate Social Responsibility," Sustainability, MDPI, vol. 16(12), pages 1-19, June.

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