Government economic policy uncertainty and corporate debt contracting

Dung T. T. Tran and Hieu V. Phan

International Review of Finance, 2022, vol. 22, issue 1, 169-199

Abstract: We examine the relation between government economic policy uncertainty and debt contracting of U.S. public firms. We find that policy uncertainty is associated with more stringent debt terms, such as shorter debt maturity, higher cost of debt, and more restrictive debt covenants, and these relations are concentrated in financially constrained firms. Further analysis indicates that the negative real effects of policy uncertainty documented in the literature are more pronounced for financially constrained firms. Overall, our evidence suggests that policy uncertainty dampens external financing and exacerbates firms' financial constraints, leading to their investment delays.

Date: 2022
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