Optimal loan contracting under policy uncertainty: Theory and international evidence

Di Gong, Tao Jiang, Zhao Li and Weixing Wu

Journal of International Financial Markets, Institutions and Money, 2022, vol. 77, issue C

Abstract: This paper provides comprehensive theoretical and empirical analyses on bank lending under macro-policy uncertainty. Our theory differentiates uncertainty from risk and endogenizes banks’ loan contracting under uncertainty. We show that banks demand a higher loan rate and grant a smaller loan size when uncertainty increases. To test our theoretical predictions, we construct a cross-country sample of syndicated loan contracts in 18 major economies over 2000–2015 and proxy the policy uncertainty with the Economic Policy Uncertainty (EPU) index for the same objects and period time. Evidence confirms our theory. Fixed effects estimation and an instrumental variable estimation with the inverse distance weighted EPU as an instrument further corroborate with our results.

Keywords: Policy uncertainty; Uncertainty aversion; Loan contracting; Uncertainty premium (search for similar items in EconPapers)
JEL-codes: G01 G11 G21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:77:y:2022:i:c:s1042443121002055

DOI: 10.1016/j.intfin.2021.101502

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