The Impact of Energy-Related Uncertainty on Corporate Investment Decisions in China

Abstract

This study investigates the impact of the Energy-related Uncertainty Index (EUI) on corporate investment among Chinese non-financial listed companies, focusing on two aspects: the effect of EUI fluctuations on investment behavior, and its differential impact on energy versus non-energy sectors. Utilizing a dataset of 2487 firms from 2007 to 2022, encompassing 22,346 firm-year observations, our analysis reveals that a 1% increase in the EUI leads to a 0.045% decrease in overall corporate investment. Notably, this effect is more pronounced in energy-related firms, where a 1% increase in EUI leads to a 0.057% reduction in investment. In comparison, non-energy-related firms exhibit a milder response, with a 1% increase in EUI resulting in a 0.026% decrease in investment. Given the average annual change in EUI over the sample period [2007–2022] of 27.710%, a 0.045% decrease in investment implies a substantial 1.246% per annum change in investment. This highlights the economically significant impact of EUI fluctuations on corporate investment decisions, particularly during periods of heightened uncertainty. These findings, validated through alternative EUI measures and investment metrics, provide crucial insights for understanding investment behavior under energy uncertainty. Conclusively, our study contributes to the literature by highlighting how energy uncertainty uniquely impacts corporate investment, taking into account the specific financial and operational conditions within different sectors. The findings highlight the importance of incorporating energy policy considerations into corporate strategic planning, particularly for energy-intensive industries within transitional economies like China.