Navigating corporate investment efficiency during uncertainty: Role of firm lifecycle and information asymmetry

The study investigates the impact of economic policy uncertainty (EPU) on corporate investment efficiency, using a panel of Indian nonfinancial firms from 2004-05 to 2022-23. We find that Economic Policy uncertainty significantly increases investment inefficiency. Addressing endogeneity with two-step system GMM and two-stage least squares instrumental variable estimations, we confirm the robustness of our baseline results. Further analysis reveals that the adverse effect of EPU is concentrated among mature firms and is more pronounced for firms operating in weaker information environments. We also find that firms in industries with greater ex ante dependence on external finance exhibit significantly higher investment inefficiency during periods of elevated policy uncertainty. These findings highlight the role of firm characteristics, financing frictions, and information environments in shaping the investment consequences of EPU.