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NTU Management Review Vol. 35 No. 1 Apr. 2025

and prospects, firms may undertake precautionary business activities against unfavorable
shocks. Such measures include delaying mergers and acquisitions (Bonaime et al., 2018),
reducing investment expenditures (Baker et al., 2016; Gulen and Ion, 2016), implementing
mass layoffs or curtailing employment growth (Ilut and Schneider, 2014), and increasing

cash reserves (Duong et al., 2020).
Another stream of literature examines the impacts of EPU on corporate financial
reporting and information disclosures. Given that EPU induces a state of information

confusion concerning firms’ prospects, the information asymmetry between the inside and
outside of a firm, as well as among investors will be heightened (Nagar et al., 2019; El
Ghoul et al., 2021; Jiang et al., 2022). Thus, EPU ultimately increases stock price volatility
(Pástor and Veronesi, 2012; Baker et al., 2016) and the costs of equity capital, potentially
causing a slump in stock prices (Lang and Maffett, 2011; Pástor and Veronesi, 2012).

Based on the informative motive’s inference, firms will supply additional information
relevant to firm values or core earnings to alleviate the problem of information asymmetry
and assist investors in accurately evaluating firm values (Healy and Palepu, 2001; Curtis,

McVay, and Whipple, 2014).
We integrate these two streams of literature, and our investigation commences
with the precautionary business activities in response to EPU. These activities are more
varied and likely to occur concurrently. For instance, firms that engage in organizational
restructuring may respond to EPU by subsequently undertaking mass layoffs (Chalos

and Chen, 2002), selling assets (Atanassov and Kim, 2009), and reducing investment
expenditures (Chen, Mehrotra, Sivakumar, and Yu, 2001). Therefore, it is reasonable to
infer that EPU can trigger a series of substantial precautionary business activities to do

with firms.
Second, Donelson, Jennings, and McInnis (2011) suggest that substantial business
activities are the primary reasons for firms’ recognition of special items (SPIs). SPIs mostly
arise from special and uncommon events or activities, leading to their infrequent and
transitory occurrence in the long run (McVay, 2006). Thus, SPIs diminish the usefulness of

GAAP earnings to evaluate firm values due to the considerable disparity between them and
core earnings (Srivastava, 2014). Meanwhile, in accordance with the informative motive
previously discussed, firms would voluntarily disclose supplementary information relevant

to firm values or core earnings, including non-GAAP earnings. Moreover, prior empirical

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