Does economic and policy uncertainty impact corporate policies? Evidence from India
Indian Growth and Development Review
ISSN: 1753-8254
Article publication date: 5 February 2024
Issue publication date: 29 March 2024
Abstract
Purpose
This study aims to examine the role of economic political uncertainty (EPU) on various corporate policies, namely, cash reserves, investment, capital structure and operating activities of Indian listed firms.
Design/methodology/approach
To assess the influence of policy-related uncertainties, the author uses the India-specific EPU news-based index constructed by Baker et al. (2016) as a proxy for policy uncertainties. This study uses data from listed Indian firms spanning the period 2003 to 2019. The author uses panel regression models with firm-fixed effects to analyze the impact of EPU on corporate policies, including cash reserves, leverage and CAPEX, while considering key control variables.
Findings
In response to heightened EPU, firms tend to increase their cash reserves, curtail their investment activities and favour secured financing options. Notably, this study aligns with the “real options” framework, demonstrating that firms with substantial investment irreversibility significantly reduce their capital expenditures during periods of elevated EPU. Additionally, the results reveal that rising EPU corresponds to heightened borrowing costs and increased operating expenses for firms.
Originality/value
In contrast to prior research that predominantly investigated the impact of EPU on the decisions of listed firms in developed markets, this study delves into the role of EPU on corporate policies among listed firms in India. This focus is particularly relevant, given the significant policy changes that have transpired in the Indian business landscape in recent years.
Keywords
Acknowledgements
No specific grant was received for this research from funding agencies in the public, commercial, or not-for-profit sectors.
The author extend his sincere thanks to Editors Prabal Chowdhury, Kaniska Dam, and the anonymous reviewers for their invaluable contributions. Special appreciation goes to his thesis committee members, Dr Aravind Sampath, Dr S.S.S Kumar, and Dr Ashok Thomas, for their guidance. Author also acknowledge the support of Athira, Reshma, Jithesh, Rahul, Sreejith and Siva. Any remaining errors are solely mine.
Since submission of this article, the following author has updated their affiliation: Vishnu K. Ramesh is currently working as an Assistant Professor in the Finance and Accounting Area, at Amrita School of Business, Amrita Vishwa Vidyapeetham, Bengaluru, India.
Citation
Ramesh, V.K. (2024), "Does economic and policy uncertainty impact corporate policies? Evidence from India", Indian Growth and Development Review, Vol. 17 No. 1, pp. 43-62. https://doi.org/10.1108/IGDR-09-2022-0107
Publisher
:Emerald Publishing Limited
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