The paper “The Transmission Mechanism Analysis of the Impact of Economic Policy Uncertainty on Corporate Investment”, written by Professor Xiaofen TAN, associate dean of the School of Finance, and Wenmei ZHANG , was published in the 12th issue of “The Journal of World Economy” in 2017.

Abstract: This paper analyzes the transmission mechanisms through which economic policy uncertainty influences corporate investment theoretically and empirically. We show that economic policy uncertainty affects corporate investment through both real options and financial friction channels. The transmission role of policy uncertainty comes through its shock to the value of capital liquidity. Our empirical evidence suggests that both channels exist, while in general real options channel dominates. At firm level, the dominant channel depends on firm's financial positions. The policy implication of this paper is that on the one hand, government should keep economic policies consistent and transparent to decrease economic policy uncertainty; on the other hand, government should devote to reducing real friction and financial friction of capital liquidity to mitigate the negative influence on corporate investment.

Keywords: economic policy uncertainty, corporate investment, transmission mechanism, real option, financial friction