The Effect of Economic Policy Uncertainty on Corporate Investment: Evidence from Companies Listed on the Tehran Stock Exchange

Corporate investment in corporate financial theory is influenced by various factors, that are important in evaluating, identifying and determining the optimal level of investment of companies. Given the fact that firms often face a great deal of uncertainty about the timing, content, and potential effects of economic policy decisions, it is important to examine the implications of economic policy uncertainties. This article examines the effect of economic policy uncertainty on corporate investment in companies listed on the Tehran stock exchange during the period 2007-2020.

The studied model was estimated once with the entry of each of the variables of uncertainty resulting from inflation, interest rate, exchange rate, economic growth, monetary and fiscal policy. The uncertainty of each variable is calculated using by Hodrick-Prescott filtering. Then, the effect of economic policy uncertainty on corporate investment was investigated using GMM by introducing the composite index of economic policy uncertainty resulting from the analysis of the main components of the mentioned variables.

The results showed that the effect of the combined index of economic policy uncertainty as well as all uncertainty variables on corporate investment is negative and significant. In addition, the results showed that monetary policy uncertainty had a greater impact on corporate investment than fiscal policy uncertainty.

Economic uncertainty, by disrupting the price system, directing liquidity to financial assets and reduces the inflow of liquidity into production, reduces corporate investment. In addition, the role of monetary policy stability is more prominent due to the major dependence of firms on banking resources.