The effect of firm-level perception of uncertainty on innovation: Evidence from China’s listed firms

Abstract

The debate on how firms respond and react in the face of uncertainty is still unsettled. This study examines the effect of firm-level perception of economic policy uncertainty (EPU) on innovation decisions. Using the text-based measure of firm-level perception of EPU for China’s listed firms, we find an inverted U-shaped relationship between firm-level perception of EPU and corporate innovation . Further analysis shows that the positive effect of firm-level perception of EPU on corporate innovation is weaker in firms with higher financial constraint and investment irreversibility, while stronger in firms located in more competitive industries . Our results are robust to using alternative measures of primary variables and to endogeneity concerns.