Economic Policy Uncertainty, Financial Constraints and Firm Leverage
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| Title | Economic Policy Uncertainty, Financial Constraints and Firm Leverage
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| Author | Tan Xiaofen, Wang Yaqi and Li Songnan |
| Organization | School of Finance, Central University of Finance and Economics |
| Email | xiaofent@163.com；yakisunny@126.com；soniali97@163.com |
| Key Words | Economic Policy Uncertainty; Firm Performance; Financial Constraints; Firm Leverage |
| Abstract | Based on firm-level data in Chinese Industrial Enterprise Database from 1998 to 2013, this paper investigates the effect of economic policy uncertainty(EPU) on firm leverage. We find that the rising EPU will lower a firm’s leverage ratio significantly in general, and for firms with better performance, the negative effect of EPU on its leverage is more significant. Further study shows that the enlarged gap of leverage between firms with good performance and bad performance when EPU increases is concerned with financial constraints, and support this conclusion from the fact that the leverage of a firm with good performance in an industry heavily dependent on external finance or a region with tough financial environment will be lower when EPU increases. The more severe financial constraints high-performance firms suffer from are related to the ownership discrimination. Compared with state-owned enterprises(SOEs), the financing cost of private firms rises sharply when EPU rises, while the leverage of SOEs decrease less. These findings verify our conclusion that the different responses of firm leverage to EPU with performance are associated with their heterogeneous financial constraints again. |
| Serial Number | WP1367 |
| Time | 2019-04-30 |
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