Economic Policy Uncertainty and Peer Effects in Corporate Investment Policy: Evidence from China
This study investigates whether economic policy uncertainty magnifies peer effects in corporate investment decisions, and whether this could lead to industry wide investment inefficiency, using data for Chinese manufacturing firms over the period 1999 2013. First, we show that peer firms have significant causal effects on Chinese manufacturing firms' investment policies. Second, we show that economic policy uncertainty magnifies peer effects in corporate investment decisions through the information cascade channel. Finally, we show that this effect is more pronounced in the under investment sample, suggesting that economic policy uncertainty could exacerbate industry wide under investment problems through peer effects.