Economic and Policy Uncertainties and Firm Value: The Case of Consumer Durable Goods

TL;DR

This study investigates how economic and policy uncertainties influence the value of U.S. durable goods firms, revealing that certain economic shocks decrease firm value while others increase it, with uncertainty indicators serving as significant predictors.

Contribution

It employs advanced panel quantile regressions and MIDAS models to analyze the impact of economic uncertainties on firm value, providing new insights into their predictive power.

Findings

Firm value reacts negatively to economic policy uncertainty and recession risk.

Positive shocks to operating income and quick ratio increase firm value.

Uncertainty indicators are significant predictors of firm value changes.

Abstract

The objective of this study is to analyze the response of firm value, represented by the Tobin's Q (Q) for a group of twelve U.S. durable goods producers to uncertainties in the US Economy. The results, based on an estimated panel quantile regressions (PQR) and panel vector autoregressive MIDAS model (PVM), show that Q for these firms reacts negatively to the positive shocks to the current ratio, and debt-to-asset ratio and positively to operating income after depreciation and the quick ratio in most quantiles. The Q of the firms under study reacts negatively to the economic policy uncertainty, risk of recession, and inflationary expectation, but positively to consumer confidence in most quantiles of its distribution. Finally, Granger causality tests confirm that the uncertainty indicators considered in the study are significant predictors of changes in the value of these companies as reflected by Q.