Do Controlling Ownership Structure Moderate the Link between Economic Policy Uncertainty and Firm Value?

Abstract

In this study, we investigate the relationship between economic policy uncertainty (EPU) and firm value of Chinese listed companies. Our research is based on China’s EPU index developed by previous researchers and financial data on 1749 Chinese listed companies from 2011 to 2020. The empirical results reveal that economic policy uncertainty negatively influences firm value, and that corporate governance affects the degree of the effect. To be more specific, we investigate the moderating effect of corporate governance in terms of ownership structure and use 3 variables, the largest shareholder’s holding, board size, and independent directors’ proportion, to measure ownership structure. The results show that the increase in the largest ownership and the expansion of board size can help companies go through the negative effect of EPU on firm value, while the increase in the proportion of independent directors can intensify the effect. The evidence illustrates that Chinese policymakers should pay attention to the possible impact of initiating a new economic policy on firm value. More importantly, our empirical results also give directors of Chinese listed companies advice about how they should adjust their ownership structure to mitigate the effect of the volatility caused by economic policy.