The effect of firm-level perception of uncertainty on innovation: Evidence from China’s listed firms

The debate on how firms respond and react in the face of uncertainty is still unsettled. This study examines the effect of firm-level perception of economic policy uncertainty (EPU) on innovation decisions. Using the text-based measure of firm-level perception of EPU for China’s listed firms, we find an inverted U-shaped relationship between firm-level perception of EPU and corporate innovation. Further analysis shows that the positive effect of firm-level perception of EPU on corporate innovation is weaker in firms with higher financial constraint and investment irreversibility, while stronger in firms located in more competitive industries. Our results are robust to using alternative measures of primary variables and to endogeneity concerns. • Economic policy uncertainty (EPU) perceived by individual firms is heterogeneous. • There is an inverted U-shape relationship between firm-level perception of EPU and corporate innovation. • The non-linear relationship between firm-level perception of EPU and corporate innovation is contingent on financial constraint, investment irreversibility, and industry competition.