How does economic policy uncertainty affect corporate diversification?

Abstract

Economic policy uncertainty (EPU) is positively associated with corporate diversification in China between 2001 and 2007. EPU's positive impact on diversification is significant only for large and medium cap firms. High EPU is associated with higher diversification; the effect of EPU on diversification by state-owned enterprises (SOEs) is greater than for non-SOEs. Diversification of firms with a high number of equity analysts and equity reports increases during high EPU. Diversification actively mitigates economic policy-related risks, enhancing firm performance. Our results are robust to different measures of EPU and corporate diversification and remain significantly unchanged when dealing with endogeneity.