The Impact of Economic Policy Uncertainty on Profitability: Evidence from the Energy Companies in Vietnam

2.1 Economic policy uncertainty

EPU has emerged as a critical factor influencing economic activity, investment decisions, and market volatility. Baker et al. [1] developed an index to measure EPU based on newspaper coverage frequency, tax code provisions set to expire, and disagreement among economic forecasters. Their research indicates that heightened EPU reduces corporate investment and employment as firms delay decisions due to uncertain regulatory and policy environments. Similarly, Bloom [6] demonstrated that policy uncertainty exacerbates business cycles by discouraging hiring and capital expenditures, leading to sluggish economic recovery after financial crises. Empirical studies confirm that increased uncertainty disrupts financial markets and dampens economic growth, particularly during political transitions or unexpected policy changes [15].

Moreover, EPU has significantly affected international trade and monetary policy effectiveness. Handley and Limao [16] argued that uncertainty regarding trade policies can reduce firms’ incentives to enter foreign markets, thereby suppressing trade flows and global economic integration. In the monetary domain, Fernández-Villaverde et al. [17] highlighted how uncertainty constrains central banks’ ability to stabilize inflation and economic output, as unpredictable fiscal policies may counteract monetary interventions. Recent studies extend the impact of EPU to asset pricing and firm-level risks, with empirical evidence suggesting that firms with greater exposure to policy uncertainty face higher costs of capital and reduced earnings predictability [4, 13]. As economic policies evolve in response to geopolitical events and technological disruptions, understanding the implications of EPU remains crucial for policymakers, investors, and businesses.

2.2 Economic policy uncertainty and profitability

Agency theory provides an interpretative lens through which the impact of EPU on firm performance can be understood. EPU affects corporate profitability by influencing managerial decision-making and risk-taking behavior. Under high EPU, managers may adopt conservative financial strategies, such as delaying investments or reducing expenditures, to protect their interests and job security, which can lead to lower profitability [1, 11, 15, 18]. This risk-averse approach may create conflicts between shareholders seeking long-term growth and managers prioritizing short-term stability [1]. Additionally, EPU exacerbates agency costs by increasing information asymmetry, making it harder for investors to assess a firm’s financial health [4]. Managers may also manage earnings or inefficient resource allocation to mitigate perceived risks, reducing firm value and profitability [13]. Therefore, high EPU reinforces agency problems, leading to suboptimal financial decisions that hinder long-term corporate performance and shareholder returns.

EPU has significant implications for corporate profitability, influencing firm-level decision-making and financial performance. Prior studies suggest that heightened EPU increases firms’ operating costs and reduces their willingness to invest, leading to lower profitability [15, 19]. Firms facing uncertainty tend to delay capital expenditures, hiring, and expansion plans, negatively affecting their revenue generation and cost structures [7]. Moreover, EPU disrupts demand conditions as consumers and businesses adopt a wait-and-see approach, reducing consumption and investment activities. This uncertainty-driven reduction in market confidence further limits firms' ability to maintain stable earnings growth, exacerbating profitability concerns [1].

The negative impact of EPU on profitability is particularly pronounced in industries that are heavily regulated or reliant on government policies, such as finance, healthcare, and energy [13]. These industries experience greater earnings volatility when unpredictable policy changes affect pricing strategies, cost structures, and overall financial planning. Empirical research supports that firms with higher exposure to policy risk tend to face increased financing costs as uncertainty raises equity risk premiums and borrowing costs [20]. In contrast, some firms, particularly those in defensive sectors such as utilities and consumer staples, may be less sensitive to EPU fluctuations due to their relatively stable demand [21]. However, even these firms may experience reduced profitability if prolonged uncertainty leads to lower consumer spending and investment activity.

Despite the predominantly negative effects of EPU on profitability, some firms can benefit from uncertainty by leveraging flexible business strategies or operating in countercyclical industries. For instance, firms with strong market power and adaptive pricing strategies may mitigate the adverse effects of policy uncertainty by passing costs onto consumers [21]. Additionally, companies in the financial sector specializing in risk management services or policy-related consulting can experience profitability growth during periods of heightened uncertainty. Nonetheless, the overall trend in the literature suggests that EPU is a key determinant of firm profitability, influencing both short-term earnings performance and long-term financial stability. Understanding the relationship between EPU and profitability remains essential for investors, managers, and policymakers as governments navigate economic and geopolitical challenges.

EPU has a profound impact on the profitability of energy companies due to the industry's heavy reliance on government policies, regulations, and geopolitical stability. Energy firms often operate in highly regulated environments where policy changes regarding taxation, subsidies, environmental regulations, and trade restrictions can significantly alter cost structures and revenue streams [13]. For instance, uncertainty surrounding carbon emission policies or renewable energy incentives can delay investment decisions, leading to lower capital expenditure efficiency and reduced long-term profitability [20]. Additionally, fluctuations in government energy policies affect oil and gas price stability, making it more challenging for firms to forecast earnings and manage operational risks. Increased EPU also raises the cost of capital for energy firms, as investors demand higher risk premiums, leading to constrained access to financing and reduced expansion opportunities [15]. Furthermore, geopolitical tensions and uncertain trade policies exacerbate market volatility, impacting supply chains and global demand for energy resources. As a result, energy companies facing high levels of EPU often experience increased earnings volatility, reduced investment confidence, and long-term declines in profitability, underscoring the critical role of stable economic policies in ensuring financial sustainability in the sector. Therefore, the hypothesis is shown:

Hypothesis: EPU has a negative impact on profitability.

4.1 Descriptive

Although the baseline sample covers 68 energy firms over the period 2016-2023, the empirical analysis employs an unbalanced panel due to intermittent data availability across firms and years. The summary statistics provide an overview of the dataset's variables. ROA has a mean of 0.041 with a standard deviation of 0.040, indicating moderate variability, ranging from -0.033 to 0.128, with a median of 0.035. ROE exhibits a higher mean of 0.096 and greater variability (SD = 0.072), with values from -0.026 to 0.247 and a median of 0.092. Firm size is relatively stable, averaging 17.648 with a small standard deviation of 1.541, ranging between 15.301 and 21.014. Growth shows significant dispersion (SD = 0.278) around its mean of 0.051, with extreme values from -0.371 to 0.750 and a lower median of 0.026, suggesting a skewed distribution. Liquidity has a mean of 1.551 but varies considerably (SD = 1.118), with a wide range from 0.510 to 4.837 and a median of 1.171. Leverage has a mean of 0.560, a standard deviation of 0.199, and values ranging from 0.179 to 0.884, with a median of 0.576, indicating moderate leverage levels. Finally, Beta, a measure of market risk, has a mean of 0.637, with moderate variability (SD = 0.468), ranging from -0.182 to 1.497, and a median of 0.638, suggesting most firms have a risk level close to the market average (the details in Table 2).

Table 2. Summary statistics

4.2 Regression

The regression analysis results using the FEM, REM, and SGMM models show almost no difference in the regression outcomes. The model is minimally affected by endogeneity. In the SGMM, AR(1) has a p-value less than 0.05, and AR(2) has a p-value greater than 0.05; the p-value of the Hansen test is greater than 0.05, so the SGMM is suitable. Therefore, the regression results are highly robust (see Tables 3 and 4).

Table 3. The result of the regression with ROA

Note: The number of observations varies across specifications due to missing values in selected firm-level variables; Standard errors in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1

Table 4. The result of the regression with ROE

Note: The number of observations varies across specifications due to missing values in selected firm-level variables; Standard errors in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1

EPU adversely affects corporate profitability by heightening operational risks, deterring investment decisions, and raising financing costs. Firms experiencing high EPU tend to postpone capital expenditures and workforce expansion due to regulatory unpredictability, resulting in lower revenue and narrower profit margins [15]. Furthermore, policy uncertainty disrupts market confidence, leading to fluctuations in demand and reductions in consumer spending, which further strain corporate earnings [1]. Industries heavily regulated by the government, such as energy and finance, are particularly susceptible to these challenges, as frequent regulatory changes and geopolitical instability exacerbate earnings volatility and financial constraints [13]. Additionally, firms facing significant policy uncertainty experience elevated risk premiums and borrowing costs, restricting their ability to invest in innovation and expansion [20].

From a theoretical perspective, heightened EPU exacerbates agency conflicts between managers and shareholders. Under uncertain policy conditions, managers may prioritize short-term risk aversion over long-term value creation, opting for conservative financial strategies that limit investment and innovation. This misalignment of interests leads to suboptimal decision-making, where firms forgo profitable opportunities due to managerial concerns over personal job security and risk exposure. Moreover, EPU amplifies agency costs by increasing information asymmetry, making it more difficult for investors to assess a firm’s financial health and strategic direction. Consequently, prolonged uncertainty weakens financial performance by destabilizing business operations, discouraging strategic investments, and raising capital costs, highlighting the need for effective corporate governance and risk management strategies to mitigate EPU’s adverse effects.

The impact of EPU on ROE is similar to its impact on ROA, resulting in consistent returns on assets and equity (see Table 4).

The size of a business has a positive impact on profits, indicating that a larger scale is associated with higher profits. Therefore, businesses with scale advantages tend to achieve higher profits [15]. This may be because large businesses have easier access to capital than smaller businesses. In addition, large cash flow also brings business advantages with better investment capabilities in both the short and long term [1]. This will help increase the sustainability of investment projects.

Research indicates that revenue growth positively impacts profitability. This shows that boosting revenue through sales activities is effective. Marketing or sales costs are effective. Higher revenue also allows companies to invest in innovation, technology, and market expansion, leading to sustainable competitive advantage and long-term profitability [1]. Furthermore, companies with growing revenue tend to attract better financing options at lower costs, as lenders and investors view them as financially stable and less risky [20]. In addition, steady revenue growth signals strong demand for the company's products or services, improving investor confidence and stock performance [13].

The negative impact of leverage on profitability suggests that financial leverage is not yet effective for businesses. The cost of capital or tax shield is not being used effectively by businesses. Companies with excessive debt burdens face higher interest costs, which reduce net profits and limit reinvestment opportunities [15]. Furthermore, highly leveraged companies struggle to meet debt obligations during economic downturns or policy instability, leading to financial difficulties and the risk of insolvency [1]. High leverage also restricts management decision-making, as companies must prioritize debt repayment over growth initiatives, reducing the ability to invest in innovation and expansion [20].

A high beta (risk) negatively impacts profitability by High beta coefficients (risk) negatively impact returns, indicating that the worse a business performs compared to the industry, the more its returns are dragged down. Companies with high beta coefficients are more sensitive to market volatility, leading to unpredictable revenue streams and greater financial uncertainty [15]. This increased risk makes investors wary of long-term investments, as cash flow uncertainty makes it difficult for companies to plan for expansion and growth [1]. During economic downturns or periods of policy uncertainty, these companies experience greater returns declines than companies with low beta coefficients, as market volatility exacerbates financial stress [13].

6.1 Theoretical implication

This study has made an important theoretical contribution by highlighting the impact of EPU on the performance of energy enterprises in Vietnam. Agency theory provides an interpretative lens through which to examine the impact of EPU on firm performance in the context of economic policy fluctuations. The findings align with agency theory, suggesting that firms facing high uncertainty may adopt conservative financial strategies to mitigate risks. Additionally, the study supports the trade-off theory, emphasizing that excessive leverage reduces profitability due to increased financial distress costs. The positive impact of firm size and revenue growth aligns with resource-based theory, underscoring the advantages of economies of scale. These insights contribute to understanding how macroeconomic factors influence firm performance and strategic financial management.

6.2 Practical implications

The practical implications of this study emphasize the need for businesses to adopt effective risk management strategies to mitigate the negative impact of EPU on profitability. Firms should maintain a balanced capital structure to avoid excessive leverage and financial distress while leveraging economies of scale and revenue growth for stability. Investors and policymakers must also consider EPU’s influence on corporate performance when making financial and regulatory decisions. Businesses in highly regulated industries should develop adaptive strategies to navigate uncertainty, ensuring resilience and sustainable profitability. Proactive financial planning and strategic investment are crucial for long-term success. In addition, several risk mitigation policies have been developed in detail. Scenario planning and stress testing based on alternative EPU trajectories can help managers evaluate the resilience of profitability (ROA, ROE) under adverse policy environments. Adopting strategic flexibility such as phased investment, modular project design, and diversification across energy segments can reduce irreversible investment risks associated with heightened uncertainty.