Economic Policy Uncertainty and Stock Price Crash Risk

Abstract We examine the impact of economic policy uncertainty (EPU) on firm-specific crash risk. Based on a large sample of Chinese listed firms over the period from 2000 to 2017, we provide empirical evidence that firms are more likely to experience stock price crashes when EPU increases. Cross-sectionally analysis further reveals that the impact of EPU on stock price crash risk is stronger for firms whose returns are more sensitive to EPU. More specifically, young stocks, small stocks, high volatility stocks, and growth stocks, which have high valuation uncertainty per se, are more sensitive to EPU and are more affected by EPU in terms of crash risk. We further show that EPU is significantly and positively associated with aggregated stock price crash risk at the market level.