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Policy uncertainty and the capital shortfall of global financial firms

Roman Matousek, Ekaterini Panopoulou and Andromachi Papachristopoulou

Journal of Corporate Finance, 2020, vol. 62, issue C

Abstract: This paper examines how economic policy uncertainty affects financial firms' capital shortages in the event of a new crisis. By employing a global economic policy uncertainty index, we show that an increase in policy uncertainty leads to future capital shortfall increases in the event of a severe market decline. This effect of policy uncertainty is of a similar magnitude for all firms across all regions and sectors, albeit with a few exceptions. As expected, well-capitalized financial firms are less affected. Our findings have important implications for policymakers and politicians, since if their response during a severe market decline is not timely and decisive, the delay will come at a cost. Further, in terms of the implications for firms' managers, we show that during periods of elevated policy uncertainty and a severe market downturn, firms will face additional, unexpected capital requirements.

Keywords: Policy uncertainty; Systemic risk; Financial stability; Capital shortfall (search for similar items in EconPapers)
JEL-codes: E66 G15 G18 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jcorpfin.2020.101558

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