Policy uncertainty and substitution between external financing and internal funds: International evidence

Abstract

This study examines the impact of policy uncertainty on the substitution between external financing and internal funds using an international data set for 22 countries during the period 1998–2019. I find that the sensitivity of external financing (measured by the sum of equity and debt issuances) to internal funds is less negative during periods of high policy uncertainty. This implies that policy uncertainty dampens the substitution effect between external financing and internal funds. My results also show that both equity and debt issuances are less negatively associated with internal funds in times of heightened policy uncertainty.