Economic Policy Uncertainty and Firm-Level Investment

This paper examines the effect of economic policy uncertainty and its components on firm-level investment. It is found that economic policy uncertainty in interaction with firm-level uncertainty depresses firms’ investment decisions. When firms are in doubt about costs of doing business due to possible changes in regulation, cost of health care and taxes, they become more guarded with investment plans. The effect of economic policy uncertainty on firm-level investment is greater for firms with higher firm-level uncertainty and during a recession. News-based policy shock has a significantly negative long-term effect on firms’ investment. Federal expenditure forecast interquartile range shock has a significant negative effect in the short- and long-run. Policy uncertainty does not seem to influence the investment decisions of the very largest firms (about 20% of listed firms).