Purpose: This study investigates the impact of economic policy uncertainty (EPU) on firm-specific valuation errors (FSE) and examines whether corporate governance mitigates this effect.Research design, data, and methodology: FSE is measured using the method by Rhodes-Kropf et al.(2005), while economic uncertainty is proxied by the EPU index and the news-based EPU (NEPU) index. Firms are further classified by their ESG Integrated and Governance Scores to test the moderating role of governance quality.Results: First, Firms are more likely to be undervalued when economic uncertainty is high, suggesting that investors adopt conservative valuations during uncertain periods. Second, the undervaluation effect is stronger in firms already identified as undervalued, particularly when measured with the NEPU index, which better captures real-time market sentiment. Additionally, earnings management (absDA) does not significantly affect valuation errors in these firms, implying that further mispricing may be limited when firms are already conservatively priced. Third, strong corporate governance reduces the negative impact of uncertainty on valuation errors, whereas firms with weaker governance experience greater undervaluation during uncertainty.Implications: Our results suggest that, under heightened uncertainty, investors tend to place greater weight on macro-level signals rather than firm-specific information. Robust corporate governance structures appear to mitigate valuation distortions by enhancing investor confidence.
Hwang et al. (Sun,) studied this question.