Economic policy uncertainty and corporate risk-taking: Loss aversion or opportunity expectations

Rising economic policy uncertainty (EPU) makes it more difficult for companies to obtain financing, and they may not be able to support high-risk and high-yield investment projects due to insufficient funds. Accordingly, this research utilized data of Chinese listed companies from 2003 to 2019, revealing that an increase in EPU will facilitate corporate risk-taking. The mechanism test conveyed that a rise in EPU increases the level of corporate risk-taking through the development of financialization. Product market competition will strengthen the opportunity expectation effect of EPU, and financial market friction will restrict EPU's opportunity expectation effect. Notably, financialization is integral in this mechanism. Our findings are robust to alternative variable measures and endogeneity tests.

Automated summary

The research found that an increase in economic policy uncertainty will facilitate corporate risk-taking through financialization. Product market competition strengthens this effect, while financial market friction restricts it.