The impact of economic policy uncertainty on corporate diversification: evidence from Latin american emerging economies

Abstract

Recently a fast-growing strand of literature has focused on economic policy uncertainty (EPU) that has prominent impacts on the firms' decisions. Diversification is one of the important strategies to cope with an unpredictable environment. This study investigates the impact of EPU on corporate diversification. By using 4,253 firm -year observations from 3 Latin American emerging countries through the period of 2010-2016, the results show an inverse U-shaped relationship between EPU and diversification. The findings demonstrate that after reaching a certain level of EPU, further increases in EPU trigger firms to behave prudently and diversify less. This study contributes to the literature by exploring the possible nonlinear nature of EPU-diversification nexus on emerging countries.