Economic Policy Uncertainty and Investment Inefficiency – Role of Product Market Competition and Financial Reporting Quality

Journal: Journal of Emerging Market Finance

Abstract: This paper studies the impact of Economic Policy Uncertainty (EPU) on investment inefficiency among Indian manufacturing firms. Higher EPU is found to reduce investment inefficiency among Indian firms, but the impact is stronger for firms facing greater product market competition especially when the quality of financial reporting is poor. Greater product market competition and better quality of financial reporting are both mechanisms that reduce investment inefficiency in the face of higher EPU with some degree of substitutability. Policies aimed at improving financial reporting quality in industries with lower product market competition can significantly improve investment efficiency with resulting benefits.