Economic policy uncertainty, financial development, and financial constraints: Evidence from China

Huanyu Ma and Dapeng Hao

International Review of Economics & Finance, 2022, vol. 79, issue C, 368-386

Abstract: Financial frictions are important transmission mechanism of the adverse effect of policy uncertainty on economic output. We use Chinese listed firms’ data to verify the mechanism directly by empirically examining whether economic policy uncertainty (EPU) exacerbates corporate financial constraints and whether financial development can mitigate the impact of policy uncertainty on financial constraints. We find that economic policy uncertainty causes a significant increase in the firm financial constraints level. We further find that financial development mitigates the adverse impact of EPU on financial constraints. Financial development also relieves the increase in cost of capital and the significant decrease in cash flow caused by rising EPU through which EPU affects financial constraints. Further analysis shows that the moderating effect is much stronger when the firm is credit constrained, (e.g., small firms and non-state-owned enterprises).

Keywords: Economic policy uncertainty; Financial constraints; Financial development; Cost of capital; Cash flow (search for similar items in EconPapers)
JEL-codes: E44 E60 G18 G31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:79:y:2022:i:c:p:368-386

DOI: 10.1016/j.iref.2022.02.027

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