Policy Uncertainty and Peer Effects: Evidence from Corporate Investment in China

This study investigates whether economic policy uncertainty magnifies peer effects in corporate investment decisions, and whether this could lead to industry-wide investment inefficiency, using data for Chinese manufacturing firms over the period 1999-2013. First, we show that peer firms have significant causal effects on Chinese manufacturing firms' investment policies. Second, we provide evidence to show that economic policy uncertainty magnifies peer effects in corporate investment decisions, and we identify the channels of such effects. Finally, we show that this effect is more pronounced in the under-investment sample, suggesting that economic policy uncertainty could exacerbate industry-wide under-investment problems through peer effects.