EPU diversity, corporate investments, and corporate governance

We examine a critical aspect of economic policy uncertainty (EPU) that has been largely overlooked – the diversity of uncertainty (or EPU diversity). Firms experience greater diversity of uncertainty when faced with multiple areas of uncertainty simultaneously, whereas a concentration of uncertainty in few areas results in lower EPU diversity. Dealing with multiple distinct areas of uncertainty is inherently more complex and riskier. Supporting this notion, our extensive analysis based on nearly 300,000 observations reveals that firms exercise greater caution and significantly reduce corporate investments and R&D intensity when confronting multiple sources of EPU. Notably, the impact of EPU diversity on corporate investments persists even after accounting for the overall level of EPU, indicating its separate and distinct significance. Importantly, we find that the negative effect of EPU diversity on corporate investments is significantly alleviated in firms with a greater presence of independent and female directors, implying that the reduction in investments that can be attributed to EPU diversity is at least partially motivated by agency conflicts.