Firm's perception of economic policy uncertainty and corporate innovation efficiency

Current Economic Policy Uncertainty (EPU) indicators are highly correlated with macroeconomic growth. To better reveal the EPU perceived by each firm, a firm-level EPU index is constructed using a text mining method. Using data of Chinese A-share listed companies from 2011 to 2020, this study examines the impact of a firm's perception of EPU on corporate innovation efficiency, computed using Stochastic Frontier Analysis (SFA) with a time-varying decay model. The empirical results show that corporate innovation efficiency decreases with a firm's perception of EPU. Additionally, the impact of traditional EPU indicators on innova-tion efficiency becomes statistically insignificant after the macroeconomic variable is added, demonstrating the importance of introducing firm-specific perceptions of EPU. Moreover, this negative impact is attenuated for firms with higher board independence and lower board ownership, while State-Owned Enterprises (SOEs) are less impacted. Furthermore, the impact of a firm's perception of EPU on corporate innovation effi-ciency is more pronounced for high-tech firms and those without political connections. We propose the fol-lowing policy implications: First, it is vital for governments to provide stable economic circumstances to maintain corporate innovation efficiency. Second, mixed ownership reform is crucial in China; the risk-taking of non-state-owned firms will be greatly improved; thus, the innovation efficiency of non-state-owned firms will improve. & COPY; 2023 The Author(s). Published by Elsevier Espana, S.L.U. on behalf of Journal of Innovation & Knowledge. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)

Automated summary

This study constructs a firm-level Economic Policy Uncertainty (EPU) index using a text mining method and finds that a firm's perception of EPU decreases corporate innovation efficiency. The study also suggests that traditional EPU indicators become statistically insignificant after considering macroeconomic variables, highlighting the importance of incorporating firm-specific perceptions of EPU.