This study investigates whether economic policy uncertainty (EPU) magnifies peer effects in corporate investment decisions, and through which mechanisms EPU influences the peer effects, using data for Chinese manufacturing firms over the period 1999–2013. We first show that peer firms have significant causal effects on Chinese manufacturing firms’ investment policies. We then find that this peer effect is magnified by EPU. In addition, we show that this magnifying effect is more pronounced in the underinvestment sample, suggesting that EPU could exacerbate underinvestment problems by magnifying peer effects. We also find evidence that EPU magnifies the peer effects though the information cascade channel, but not through the asymmetric capacity of information acquisition and career concerns channels.

JEL classification: G31, E22, D81, G32

Keywords: Corporate Investment Policy, Peer Effects, Economic Policy Uncertainty, Underinvestment, Information Cascade