Effects of policy and economic uncertainty on investment activities and corporate financial reporting: a study of developing countries in Asia-Pacific

Abstract

Purpose

This study investigates the impact of government and economic policy uncertainty (EPU) on companies' business operations, especially risk-taking tendencies and corporate financial reporting quality (FRQ).

Design/methodology/approach

The study employs the generalised least squares regression model. The final sample comprised 27,376 company-year observations from eight countries in the Asia-Pacific region.

Findings

EPU has a negative and significant effect on investment activity and FRQ. Higher EPU leads to a decline in investment and FRQ.

Research limitations/implications

There are several limitations in this study. First, the authors used abnormal investments to measure investments, without considering the degree of irreversibility investment objectives. Second, although control variables are included at the company and country levels, they may only partially control for companies' mitigation effects. Third, the sample is limited to developing countries with unique characteristics in Asia-Pacific; therefore, the findings cannot be generalised.

Practical implications

The findings can help investors, analysts and regulators evaluate EPU's impact on companies' business activities by offering an overview regarding the decline in investment efficiency and FRQ. The results can also be used as input for regulators in formulating policies that encourage companies to regulate investment levels without harming other stakeholders and maintain FRQ during periods of uncertainty.

Originality/value

This research provides intriguing insights into EPU's effects on companies' investment activity and FRQ in developing countries, which are sensitive to changes in macroeconomic conditions.

Citation

Kurniawan, F., Amanati, H.T., Nugroho, A.H.L. and Pusparini, N.O. (2023), "Effects of policy and economic uncertainty on investment activities and corporate financial reporting: a study of developing countries in Asia-Pacific", Asian Review of Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/ARA-12-2022-0290