Threshold Effects of Economic Policy Uncertainty on Corporate Investment

Abstract

Existing literature vigorously underlines the negative impact of economic policy uncertainty (EPU) on corporate investment. However, earlier empirical studies mostly examined this relationship using linear econometric models. Current study aims to revisit this relationship employing a non-linear Threshold Auto Regressive (TAR) model of Hansen (1999). The study incorporates data from 25 countries ranging 2008 to 2021 comprising 10020 firm-level observations. The study's findings emphasize the nonlinear relationship between the EPU and corporate investment. The results also find out two EPU thresholds in the regression relationship. Beyond the thresholds firms’ investments behaviors significantly change. The robustness checks also confirm that our results remain consistent even upon utilizing two step system GMM model. The findings hold important implications for policymakers and businesses, emphasizing the need of robust economic policies for corporate investment.