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Economic policy uncertainty, hold-up risk and vertical integration: Evidence from China

Zhen Yu, Yuankun Li and Ziyi Ouyang

Pacific-Basin Finance Journal, 2021, vol. 68, issue C

Abstract: Firm behavior in the presence of policy uncertainty has been a focal point of research in recent years. We examine a sample of Chinese mergers from 2005 to 2018 and find that economic policy uncertainty has a significantly positive impact on firms' propensity to engage in vertical mergers relative to other types of mergers. We apply the incomplete contract theory to explain this effect, using relationship concentration to represent relationship specificity, we find the effect is stronger for firms with a high relationship concentration and in regions with poor judicial quality. We find that this effect is more pronounced for risk-averse firms. The results remain robust in several robustness checks. The results are consistent with incomplete contract theory and demonstrate that policy uncertainty increases hold-up risk between upstream and downstream traders, causing firms to choose vertical integration to alleviate the increased transaction costs caused by policy uncertainty.

Keywords: Economic policy uncertainty; Incomplete contract theory; Vertical integration (search for similar items in EconPapers)
JEL-codes: E61 G34 G38 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:68:y:2021:i:c:s0927538x21001323

DOI: 10.1016/j.pacfin.2021.101625

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