Policy Uncertainty Makes Firms Less Efficient at Turning Inputs Into Output

When governments send mixed signals about taxes, spending, or regulation, companies become less efficient at turning inputs into output. That is the central finding of a study in the Journal of Accounting and Public Policy co-authored by Augustine Tarkom, Assistant Professor of Finance at McCoy College of Business, Texas State University. His co-authors are Renee M. Oyotode-Adebile of the University of Wisconsin-Parkside and Nacasius U. Ujah of South Dakota State University.

The study

The researchers use an index of economic policy uncertainty, a widely followed measure that rises when the future course of government policy becomes harder to predict. They match it to a panel of non-financial, non-utility firms from 1992 through 2022, three decades that include the dot-com bust, the 2008 financial crisis, and the pandemic.

The outcome of interest is operational efficiency: how much output a firm produces from the inputs it uses. This is a different question from whether firms invest less in uncertain times, which earlier research has covered. The authors ask whether firms also get less out of what they already have.

What the researchers found

The relationship is negative and statistically significant. A one standard deviation rise in policy uncertainty reduces operational efficiency by about 2.6 percentage points. In plain terms, when the policy outlook becomes as murky as it does in a typical bad year, the average firm slips noticeably in how well it converts resources into output.

The effect is not uniform. It varies with firm characteristics. One surprise is that financially constrained firms, which might be expected to suffer most, showed unexpected resilience.

The results survive a long list of checks. They hold after controlling for firm-specific traits and macroeconomic conditions, under alternative model specifications, and when other forms of uncertainty are included in a head-to-head comparison. A copula-based correction, a statistical technique that addresses the concern that uncertainty and efficiency might drive each other, does not change the conclusion.

What it means for managers and policymakers

For managers, the lesson is that uncertainty is not only a reason to delay investment. It also drags on day-to-day operations. One plausible reason is that planning, hiring, and procurement all become harder when the rules may change. Firms that build flexibility into operations may weather these periods better. Boards and investors judging results in a high-uncertainty year may also want to separate the drag from policy from the drag from management.

For policymakers, the authors argue that predictability itself has economic value. Reducing uncertainty produces net gains across the corporate sector, which supports policies that favor clear, stable rules over frequent changes. The estimate of 2.6 percentage points gives a rough sense of what is at stake.

This summary is based on the paper’s abstract. The full article reports the data, methods, and detailed results.

What it means for managers

• Uncertainty hurts operations, not just investment. When the policy outlook is murky, firms get less output from the resources they already have.
• The effect is material. One standard deviation more uncertainty is worth roughly 2.6 percentage points of operational efficiency.
• Predictability has value. The authors argue that reducing policy uncertainty yields net economic gains, which supports stable, well-signaled rules over frequent changes.

Oyotode-Adebile, R., Tarkom, A., & Ujah, N. U. (2026). Firm efficiency in turbulent times: Unraveling policy uncertainty. Journal of Accounting and Public Policy, 56, 107408. 10.1016/j.jaccpubpol.2026.107408