Policy uncertainty exposure and market value: Evidence from China

Economic policy uncertainty under political opaqueness imposes great impact in the capital market. We construct ex ante firm exposure to China Economic Policy Uncertainty (CEPU) index from Baker et al. (2016). This measure of policy uncertainty exposure is significantly and negatively predictive to firm's market value and Tobin's Q, suggesting that high level of policy exposure causes significant value destruction in the capital market. The effect is more pronounced when the political opaqueness is higher. The analysis of influence channels shows that the negative effects are stronger for firms operating in less liberated market, with more policy-dependent business, unfavorable competitive status and poor corporate governance. •China's Economic policy uncertainty (CEPU) basically has negative loading on stock return.•Firm’s exposure to economic policy uncertainty would reduce its market value.•The pattern of the value deterioration is time-varying and is more pronounced when the economic policy uncertainty is higher.•The negative effect is stronger for policy-dependent, less competitive and poor governed firms.