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

Abstract

Inefficient investment by the private sector, especially in manufacturing, has been a major cause of worry for policymakers across the globe because of its adverse impact on productivity and potential economic growth. This article 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. The negative impact of EPU on investment inefficiency is stronger for overinvesting firms and firms with better quality of financial reporting. 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.

JEL Codes: E22, E20, E60

Keywords

Economic policy uncertainty product market competition financial reporting quality investment inefficiency

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