Economic Policy Uncertainty and Capital Structure Choice: Evidence from China

Abstract

This paper studies how economic policy uncertainty affects corporate capital structure for Chinese listed firms from 2003 to 2013. We show that when the degree of economic policy uncertainty increases, firms tend to lower their leverage ratios. However, firms that are from regions with lower degree of marketization, are state-owned or have prior bank-firm relationship mitigate the negative effect of policy uncertainty. Moreover, we provide consistent evidence that this negative effect sources from the deterioration of external financing environment. We also find that firms adjust their financing structure by using more trade credit when the economic policy uncertainty increases. Our results are robust to sample selection criteria, data frequency, model specifications and endogenetiy.