Firms' uncertainty perceptions and financial misallocation: Evidence from China

Recently, the impact of economic policy uncertainty on economic outcomes has received considerable attention. This research examines the link between firms' perceptions of uncertainty and financial misallocation, with a focus on the differential effects across different types of firms. We find that a heightened sense of uncertainty significantly reduces financial misallocation. This relationship remains robust to rigorous validity checks. Interestingly, we find that private firms, those operating in highly competitive arenas and those with minimal financing barriers are more attuned to economic uncertainty. Hence, for these firms, the moderating effect of uncertainty perception on financial misallocation is particularly pronounced.