Economic Policy Uncertainty and Firm Exit Decisions: Theoretical and Empirical Analysis

Zhang Hui; Jiang Minxing; Peng Biyu

doi:doi:10.16538/j.cnki.jfe.2018.04.009

Summary

Under the special political system in China, changes in economic policies are relatively frequent, and Chinese firms are faced with high economic policy uncertainty. Also, how economic policy uncertainty affects the decision-making of micro-firms has been the research focus of many scholars. This paper mainly examines the effect of economic policy uncertainty on firm exit decisions, and focuses on the problems that how economic policy uncertainty affects firm exit decisions, what is the transmission mechanism of this influence and whether heterogeneity exists between different economic subjects. It not only makes up for the deficiency of existing theoretical research, and enriches the content and scenes of related research, but also provides important reference for Chinese governments to adjust economic policies and corporate managers to make strategic decisions. In particular, under a framework of a representative firm’s optimal exit decision, this paper builds a theoretical model to discuss the mechanisms hiding behind it, and further empirically tests the model based on micro data of industrial firms in China newly established between 1998 and 2011. Our results indicate that economic policy uncertainty reduces firm exit by increasing expected market returns, i.e. in the condition of high economic policy uncertainty, firms form a good expectation for future market and tend to delay exit decisions. Further analysis suggests that the " delayed phenomenon” of firm exit decisions has heterogeneity among different firms, industries and regions and economic policy uncertainty has mainly delayed market exit of firms, industries and regions with superior development prospects. Among different firms, this phenomenon is more significant in small firms, multi-sectoral firms, export firms, government-subsidized firms and innovative firms. Among different industries, this phenomenon is more significant in capital-intensive and technology-intensive industries and industries with high productivity. Among different regions, this phenomenon is more significant in regions with high marketization and economic growth. Therefore, as governments change their economic policies, they not only guide firms to formulate rational strategic decisions, but also encourage sustainable development of superior resources and markets. The conclusions of this paper provide important enlightenment for Chinese policy makers and corporate managers. On the one hand, in the period of frequent replacement of economic policies, governments should not only pay attention to the role of their positive behavior in macroeconomy, but also focus on the micro-firms’ response. At the same time, governments should send a positive signal to the market, so as to raise firms’ expectations for the future market and prevent firms from making irrational exit decisions when they lose confidence for the market. On the other hand, during the period of economic policy uncertainty, corporate managers can enhance their option value and survivability in the future market by strengthening their capabilities, adjusting their business models, adjusting their orientation to industrial policies and using the superior environment in the regions.