Navigating the Storm: Firm-Level Economic Policy Uncertainty and Its Network Propagation in China

This paper constructs a firm-level economic policy uncertainty (FEPU) index by applying the LDA-2MNIR model to the MD&A sections of Chinese listed firms’ annual reports from 1999 to 2024. Unlike aggregate news-based measures, FEPU captures firm-specific uncertainty embedded in corporate disclosures, tracks major policy and macroeconomic shocks, and varies across industries. Baseline validation tests show that FEPU predicts future investment, R&D expenditure, and stock returns, and provides incremental information beyond return-based exposure measures. We further find that FEPU propagates through board interlock networks, particularly through direct and influential connections, with stronger effects among state-owned enterprises and large firms. These findings provide a scalable firm-level EPU measure and identify board interlocks as a channel of policy-related information transmission.