The impact of country level investor protection on economic policy uncertainty and corporate investment link

Abstract

We examine the relationship between economic policy uncertainty (EPU) and corporate investment in a global setting based on the real options theory and the agency theory. Using a sample of 44,610 firms from 28 countries, we find that the negative relationship between EPU and investment is more pronounced in the countries with stronger investor protection. In the countries with stronger investor protection, the negative impact of EPU on firms' capital investment is significantly stronger for the firms with more irreversible investment. Further evidence shows that the reduction of investment is mainly from overinvestment firms in the countries with stronger investor protection. Our evidence suggests country level investor protection can act as effective governance mechanisms that mitigate agency problems when firms are facing uncertainty.