Effects of Policy Uncertainty on Firm-Level Productivity
Abstract
Does policy uncertainty affect productivity? Policy uncertainty creates delays on decision-making as firms await new information about prices, costs, and other market conditions before committing resources. Such delays can have real consequences on firms’ productivity and corporate decisions. We find that economic policy uncertainty has a negative impact on firm-level productivity. We further show that the negative impact is alleviated by firms’ high cash holdings or prior committed irreversible investments. These findings are robust to various specifications.
This paper was previously circulated under the title of ”Capital Reallocation and Firm-Level Productivity Under Political Uncertainty” and was presented at the FMA 2020, SFA 2020, SWFA 2021, WFBC 2021, GFC 2021, and 2023 VSBF conferences, and received the ”Top Paper Award” at the GFC 2021 conference. In order to sharpen the focus of the paper, we adopted this new title for the Quarterly Journal of Finance.
