Policy uncertainty sensitivity and market value: Evidence from China

Economic policy uncertainty under political opaqueness imposes great impact in the capital market. We construct ex ante firm exposure to China Economic Policy Uncertainty (CEPU) index from Baker et al. (2016). This measure of policy uncertainty exposure is significantly and negatively predictive to firm's market value and Tobin's Q, suggesting that high level of policy exposure causes significant value destruction in the capital market. The effect is more pronounced when the political opaqueness is higher. The analysis of influence channels shows that the negative effects are stronger for firms operating in less liberated market, with more policy-dependent business, unfavorable competitive status and poor corporate governance.