Abstract
Financial innovation vis-à-vis economic policy uncertainty (EPU) without due regards being given to debt financing. This paper fills this gap and unveils the dynamic role of national culture in defining debt financing via EPU. We use a sample of 3831 non-financial firms of Asian economies and employ the System Generalized Method of Moments to estimate the regression coefficients. Our findings reveal an inverse relationship between the EPU and debt financing, which suggests that debt finance mitigation strategies are successfully executed in the region. The potential reasons for this include the policies by businesses to reduce business activities and avoid the unfavorable rising financing cost through EPU. On the supply side, the rising EPU induces the banks to accelerate their interest rate due to increased default risk. Similarly, we observe that high uncertainty avoidance (UND) has a negative and significant link with debt financing due to an unpleasant behavior of corporate managers towards debt when they have an alternate source of financing instruments instead of accepting long-term obligations. However, we find that the UND and EPU interaction has a significantly positive impact on debt financing due to the rigid behavior of managers, which forces them to consider cultural traits and converts their risk-averse attitude into risk-friendly behavior. This implies that corporate managers should reflect the sensitivity of the national culture while considering debt financing.
Highlights
Recent literature on economic policy uncertainty (EPU) and sustainable economic growth has mostly addressed issues related to financial stability without due regards being given to debt financing instruments
This study examines the influence of economic policy uncertainty on debt financing in the presence of national-level culture by using data of non-financial firms from six Asian economies (Pakistan, India, Singapore, China, South Korea, and Japan) from the period of 2007 to 2016
The overall findings validated the first hypothesis that the economic policy uncertainty negatively drives the corporate debt financing in our sample because uncertainty creates an anonymous situation for the industries to equip capital structure with debt
Summary
Recent literature on economic policy uncertainty (EPU) and sustainable economic growth has mostly addressed issues related to financial stability without due regards being given to debt financing instruments. The issue of EPU on sustainable economic growth under debt financing practices vis-à-vis a socioeconomic structure based on cultural values is ignored. This paper fills this gap in the literature and unveils interesting dynamic characteristics of national culture, which play a defining role in debt financing under. Phan et al [1] investigated the impact of EPU on financial stability, demonstrating a significantly negative impact. This motivated the idea to redefine EPU as an assortment of economic risk, which converts an evolution into an ambiguous position, e.g., monetary, and fiscal policy uncertainty, tax regime uncertainty, and other regulatory institution uncertainty
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