Does economic policy uncertainty affect investment sensitivity to peer stock prices

Abstract This paper investigates how economic policy uncertainty (EPU) affects the response of a firm’s investment to its peers’ stock prices. Using the news-based index developed by Baker et al. (2016), we find robust interaction effects of EPU and peers’ stock prices on firm investment for US listed firms over the period 1985–2018, indicating that firms’ investment decisions are heavily influenced by their peers’ stock prices during elevated EPU periods. This relationship holds for both short- and long-term EPUs and is more pronounced for the latter compared to the former and among firms that either operate in highly competitive environments or are more financially constrained. Furthermore, peers’ stock prices appear to be more informative to followers than leaders. Taken together, our findings extend the literature on how firm-level investment varies with EPU and peer valuation.