Economic Policy Uncertainty and Corporate Investment Behavior: Evidence from China?s Five-Year Plan Cycles

Using China?s five-year plan (FYP), this study examines how state ownership affects corporate investment behavior during economic policy shifts. We find that non-state-controlled firms (NSCF) experience a larger increase in underinvestment under policy uncertainty and a larger increase in overinvestment after the policy uncertainty is resolved. However, the increase in overinvestment at state-controlled firms (SCF) is significantly more pronounced in the final years of an FYP. This differential change in investment behavior between SCF and NSCF is found primarily at firms that are politically unconnected, in policy-supported industries and low-marketization regions. Further analysis shows that SCF are associated with a higher increase in sales growth after an FYP. Our findings suggest that state ownership is helpful in obtaining policy benefits to improve investment behavior for SCF during policy shifts, but it also encourages these firms to engage in unprofitable but politically prioritized investment projects when such benefits substantially diminish.