Economic policy uncertainty and stock price crash risk

Abstract

We use the China’s economic policy uncertainty (EPU) index constructed by Baker et al. (2016)to explore the relationship between EPU and stock price crash risk. We find that the increasing of EPU will significantly increase stock price crash risk. After analyzing the mechanism of the relationship between them, we find that economic policy affects stock price crash risk mainly by influencing information asymmetry. More specifically, small enterprises, non-state-owned enterprises, and enterprises in regions with developed economies and high levels of marketization are more sensitive to EPU and are more affected by EPU in terms of stock price crash risk. We also put forward policy implications from both the government and business perspectives.