Economic Policy Uncertainty and Corporate Innovation-Empirical Evidence from Chinese Pharmaceutical Listed Companies

In the context of economic policy uncertainty tends to be normalized, and corporate innovation behavior can cope with the cost shocks caused by economic policy uncertainty. This paper empirically investigates the relationship between economic policy uncertainty and firms' innovation based on relevant data of Chinese A-share pharmaceutical listed companies from 2015-2022 and examines the mechanism effects of financialization, executive compensation, and government subsidies. The results of the study find that economic policy uncertainty significantly increases firms' innovation intensity. Firms with dual-job management, overseas backgrounds, and non-state ownership types increase firms' innovative behavior in the face of economic policy uncertainty.Further analysis shows that economic policy uncertainty increases firms' innovation intensity through three mechanisms: increased financialization of firms, access to government subsidies, and incentives for management. Increasing firms' innovation intensity can cope with risky shocks from economic policy uncertainty, but not with negative shocks that increase costs. Financialized transformation helps firms cope with business risks and late costs associated with economic policy uncertainty.Based on these results, this study provides empirical evidence for the theoretical inference that firms cope with shocks from economic policy uncertainty and thus increase their innovative behavior.