Economic Policy Uncertainty and Firm Cost Stickiness: An Empirical Test of Chinese A-listed Firms

We try to explore the influencing factors of firm cost stickiness in a novel view. Based on the sample of Chinese A-listed firms with period of 1999-2016, this paper investigates the relationship between economic policy uncertainty and cost stickiness from the perspective of uncertainty at the macro-level. We find that the high level of economic policy uncertainty significantly reduces firm cost stickiness. In order to have a better understanding of the above results, we elaborate the logic from the aspects of adjustment cost, risk hedging and real option in detail.Moreover, we test whether there exist differences between economic policy uncertainty and cost stickiness according to firms’ different life cycles and financial slack. The results present that when firms are in stage of decline, the lower cost stickiness induced by economic policy uncertainty is more obvious. Besides, the negative effect of economic policy uncertainty on cost stickiness is more pronounced in the sub-sample with less financial slack. These conclusions are still valid after a series of robustness tests, including changing measurements of key variables, adding other potential influencing factors and so on.This paper makes the following contributions to the existing literature. First, we extend the consequences of economic policy uncertainty at the firm level. We provide evidence that economic policy uncertainty does have an impact on firm cost behavior beyond other decision-making, such as investment, cash holdings and innovation. Second, we enrich the influencing factors of firm cost stickiness from the perspective of the external view, which is explained with the integration of three related theories. Last but not least, we conduct our research in the background of China, which is featured with strong government interference and unique transformation characteristics. In conclusion, our paper explains the mechanism between macroeconomic policy uncertainty and firm cost behavior, providing theoretical basis and practical reference for firms to better implement and promote cost management decisions.