The impact of economic policy uncertainty on earnings value relevance

Abstract

Earnings value relevance, defined by the predictive and explanatory power of corporate earnings information for market value, reflects accounting earnings decision utility and the capital market's information efficiency. Economic policy uncertainty (EPU) reduces information quality, impairs the information environment, and disrupts interpretation of information, diminishing earnings value relevance. Using a dataset comprising Chinese A-share listed companies from 2006 to 2019, we empirically examine the impact of EPU on earnings value relevance. Our finding indicates that EPU reduces earnings value relevance, and the effect is more pronounced in firms with lower governance effectiveness and higher firm complexity. Channel analysis demonstrates that decreasing information quality, undermining the information environment, and impeding investor decision-making are the main three mechanisms. In light of these findings, the government should strive to enhance stability in economic policies and improve information efficiency, fostering a positive interaction between firms and the capital market.