High Economic Policy Uncertainty Research Articles

Can corporate digital transformation alleviate financial distress?

This paper examines the impact of digital transformation on financial distress in A-share listed companies from 2012 to 2021. We find that enterprises digital transformation can significantly alleviate financial distress, and higher economic policy uncertainty will promote the role of enterprises' digital transformation to alleviate financial distress. The mechanism test shows that the digital transformation can alleviate the financial distress mainly by reducing the operational risk and easing the financing constraints. The conclusion is helpful to understand the driving effect of digital transformation on high-quality development of enterprises and evaluate the implementation effect of enterprises' digital transformation.

Institutional Investor Networks and ESG Performance: Evidence from China

ABSTRACT This paper examines whether and how the network centrality of institutional investors affects firms’ sustainability development. Using data from the Chinese market, we find that central institutional investors in the social network significantly increase firms’ overall ESG performance. For the environmental, social, and governance pillars of ESG, we find that environmental performance is more likely to be driven by central institutional investors. We further show that central institutional investors act as active monitors and resource providers, enhancing firms’ ESG performance by improving corporate internal control quality, promoting the corporate information environment, alleviating financing constraints, and increasing green innovation capability. Furthermore, the relationship between centrality and ESG performance is considerably more pronounced for firms with political connections or under a high degree of industry competition but more diminished in periods of high economic policy uncertainty.

The impacts of economic policy uncertainty, energy consumption, sustainable innovation, and quality of governance on green growth in emerging economies

This study investigates the impacts of economic policy uncertainty (EPU), energy consumption (EC), sustainable technological innovation (STI), and quality of governance on green growth (GG). Besides, it examines the moderating effect of STI and governance quality on the association between EPU and GG. It applies a Pooled Mean Group Autoregressive Distributed Lag estimator for 25 emerging economies for periods 1991–2019. For the robustness test, we utilize the asymptotic distribution of the Cross-section Augmented Distributed Lag to control for cross-sectional dependence concerns. We drive two indicators for GG by applying the principal component approach and directional distance function. The findings imply that STI and quality of governance have significant positive impacts on GG. However, EPU and EC adversely impact GG in emerging economies. Besides, quality of governance and STI positively moderate EPU's influence on GG, implying that countries with better quality of governance and promote STI mitigate the detrimental effects of high EPU on GG. Moreover, we run the causality analysis to investigate the causal relationship between target variables and GG. Policy suggestions are proposed based on the results.

Is economic policy uncertainty an excuse for corporate fraud?

This study examines the dynamic relationship between economic policy uncertainty (EPU) and corporate fraud by using a sub-sample time-varying rolling window test. Corporate fraud is classified as fraud incidents (the number of corporate frauds) and fraud magnitude (the severity of corporate frauds). Based on this, we propose an EPU-Fraud Triangle model to evidence that EPU affects corporate fraud by acting on Pressure, Opportunity, and Rationalization. The empirical results show that corporations are more likely to engage in fraud during high EPU periods. Moreover, corporate fraud has positive impacts on EPU. As a result, this study suggests corporations consider fraud consequences and policy trends when making decisions. Additionally, government policymakers should analyze the causes of corporate fraud to develop appropriate policies. In addition, to minimize information asymmetries, investors should pay attention to corporate fraud and remain knowledgeable of national policy trends. Furthermore, the study can contribute to the smooth functioning of macroeconomics and reduce the probability of financial risks.

The influence of peers' MD&A tone on corporate cash holdings

This paper explores whether Management Discussion and Analysis (MD&A) can provide incremental information to peers using the data of Chinese A-share listed firms. It is found that positive peers' MD&A tone encourages firms to hold more cash, particularly in industries with fewer institutional investors' site visits. Moreover, this association is moderated by predation risk and the decision-making environment. Specifically, this effect is more pronounced for firms that are market followers or financially constrained, and it is also stronger for firms operating under higher economic policy uncertainty or solely in the domestic market. Overall, our findings enrich the information channels of peer effects in cash policy.

Bank affiliation and mutual funds’ trading strategy distinctiveness

This study investigates the effect of commercial bank affiliation on mutual fund trading strategy distinctiveness. We find that bank affiliation has a significantly positive relationship with mutual funds’ unique investment strategies, and this phenomenon exhibits better performance, supporting the benefits of bank affiliation. This association is most pronounced around macroeconomic releases, during high economic policy uncertainty periods, and among funds located within a close distance from their parent bank headquarters. Further analysis indicates that the more talented affiliated fund managers tend to pursue the distinctive strategy. Therefore, our evidence reveals that the underlying mechanisms are that affiliated funds own information advantages or hire more skilled fund managers due to the unique position of commercial banks in the economy. Finally, our results suggest that affiliated funds with a higher Strategy Distinctiveness Index attract stronger net inflows and are less exposed to risks. Our findings remain unchanged after several robustness tests.

Do Chinese firms speculate during high economic policy uncertainty? Evidence from wealth management products

It has been well-documented that policy-related uncertainty has significant economic consequences. Studies show that US firms tend to delay investments and be conservative during periods of high economic policy uncertainty (EPU), but findings regarding Chinese firms suggest that they seem to act speculatively. This study examines the impact of policy uncertainty on firms' bank wealth management product (WMP) purchasing and helps better understand firm behaviour during high EPU. Using Chinese listed firms' bank WMPs purchasing data, we find that high EPU is associated with a higher probability of bank WMPs being purchased. Moreover, a 100% increase in EPU is associated with an 11.14% increase in average bank WMP holdings in the sample. We provide evidence that Chinese firms are not speculative, but prudent, and use bank WMP holdings to hedge the risk of policy uncertainty. Additionally, we show that financial constraints are the channels through which EPU affects bank WMP holdings.

Green innovation and the cost of equity: evidence from China

PurposeThis paper aims to examine the association between green innovation and the cost of equity in China. This study relies on the investors’ base perspective and shareholders’ perceived risk perspective to investigate the relation between green innovation and the cost of equity in China.Design/methodology/approachThe paper uses firm-fixed effect regression for a sample of Chinese public companies for the period 2008–2018.FindingsThe authors find a negative relationship between green innovation and the cost of equity capital. This negative association is found to be more pronounced for less financially constrained firms, during periods of high economic policy uncertainty, and for firms with a strong internal control environment. Finally, the paper shows that the negative association became more pronounced after the passage of the Environmental Protection Law of China in 2012. The results remain robust to possible endogeneity concerns.Originality/valueThis study contributes to the green innovation literature by documenting that shareholders favorably view firms implementing green innovation policies. The study also has policy implications for Chinese regulators in improving the green credit policy.

Policy uncertainty and bank’s funding costs: The effects of the financial crisis, Covid-19 pandemic, and market discipline

This paper examines the impacts of economic policy uncertainty (EPU) on bank funding costs using the 2001–2021 data of US banks. We document consistent evidence of a negative relationship between EPU and bank funding costs, implying lower bank funding costs during a time of high EPU, consistent with the hypothesis that economic agents tend to reallocate their assets into safer investments, such as bank deposits during high uncertainty. Large banks are likely to benefit most during high EPU when experiencing lower costs of funds compared with other banks, suggesting the “too-big-to-fail” perception of depositors. Cross-sectional analysis indicates that depositors require safer banks to pay lower rates, indicating the existence of market discipline. The cost-decreasing effects of policy uncertainty are less pronounced during the global financial crisis than the Covid-19 crisis.

Stock liquidity during COVID-19 crisis: A cross-country analysis of developed and emerging economies, and economic policy uncertainty

We investigate the impact of the COVID-19 on firms' stock liquidity across six developed and emerging economies. Unlike prior literature, we further compare the effects of the pandemic between developed and emerging economies, high and low economic policy uncertainty (EPU), and large and small firms. Our results document the significant negative impact of infection cases and deaths on firms' stock liquidity across the sample countries, and the similar effect of their interaction term. We find that the impact is more pronounced in the developed economies, high EPU and small firms, compared to emerging economies, low EPU and large firms, respectively.

Does digital transformation speed up dynamic capital structure adjustment? Evidence from China

This paper examines whether and how digital transformation impacts capital structure adjustment speed. We find that digital transformation speeds up capital structure adjustment. Furthermore, digital transformation can improve the probability of leverage upward (downward) adjustment by issuing debts and dividends (issuing equities and repaying debts). Channel tests show that reducing information asymmetry, mitigating agency problems, and alleviating financial constraints are possible mechanisms. Cross-sectional tests show that the findings are more pronounced for firms in highly competitive industries, located in provinces with high level of market development, and in years of high economic policy uncertainty.

ASSOCIATION BETWEEN STATE OWNERSHIP PARTICIPATION AND RENT-SEEKING BEHAVIOR OF PRIVATE FIRMS IN CHINA

The rent-seeking behavior of firms in economic society destroys the fair market order and hinders the sustainable development of the economy. In the context of the mixed-ownership reform, this study examines whether and how state ownership participation affects the rent-seeking behavior of private firms using Chinese-listed private firms from 2010 to 2019. The findings suggest that state ownership participation significantly eliminates the rent-seeking behavior of private firms. However, the eliminating effect of state ownership participation on private firms’ rent-seeking behavior is weakened by high economic policy uncertainty and government intervention where private firms operate. The findings of this study enrich the characteristics and influencing factors of rent-seeking behavior of private firms, expand the literature on Chinese mixed-ownership participation, provide empirical evidence that is inconsistent with Western theoretical predictions, construct a new theory based on practices with Chinese characteristics and further reveal the characteristics of Chinese accounting practices.

Economic policy uncertainty, corporate investment decisions and stock price crash risk: Evidence from China

AbstractWe examine the relationship between economic policy uncertainty (EPU) and stock price crash risk via the corporate investment in Chinese listed firms. Results show that higher EPU is associated with lower crash risk. Firms increase financial asset holdings and reduce overinvestment when EPU rises, leading to lower future crash risk. State‐owned enterprises (SOEs) and firms with lower management incentives tend to reduce overinvestment, whereas non‐SOEs tend to increase financial asset holdings. Thus, firms tend to be cautious in their investments when EPU is high, which reduces crash risk. Our study provides new insights into the validity of the Lucas critique in China.

Girls will be girls? The gendered effect of economic policy uncertainty on corporate investment

ABSTRACT We examine the effect of CEO gender on the relationship between economic policy uncertainty (EPU) and corporate investment. Using the newspaper-based EPU index developed by Baker, Bloom, and Davis (2016), we perform an empirical investigation on firm-level data of more than 38,000 firms from eight European countries for 2010–2019. We find evidence that higher EPU is associated with higher corporate investment. However, we show that this beneficial effect of economic policy uncertainty is lower when the firm CEO is a woman. We explain this finding by the higher risk aversion of women relative to men. Our work contributes to the debate on the impact of EPU on firm corporate decisions by bringing upfront the influence of CEO gender.

Economic policy uncertainty nexus with the value relevance of advertising: Evidence from an emerging market

AbstractThis paper aims to document the effect of economic policy uncertainty on the value of advertising expenditures within the context of an emerging market. The paper shows that the value of advertising expenditures is an increasing function of economic policy uncertainty. The impact of advertising on firm performance is more pronounced during the periods characterized by higher economic policy uncertainty. We argue that, during uncertain times, the financial information loses its relevance. Therefore, during these periods, non‐financial traits, such as brand image, customer equity, relationship capital, and familiarity that characterizes firms with high advertising become more important. The findings hold in various sub‐samples and across various proxies of advertising activity. The findings also hold under alternate estimation procedures (pooled OLS regression, panel data with fixed effects and instrument variable regression). More importantly, this paper also shows that, relative to other agency reducing mechanisms (such as analyst coverage, asset utilization ratio, expense ratio and dividend payments), advertising is more valuable during periods with high economic policy uncertainty.

Trade Credit and Firm Efficiency: Evidence from Chinese Manufacturing Firms

ABSTRACT Our work focuses on the impact of trade credit financing on firm efficiency exploiting a sample of Chinese manufacturing listed firms for the period 2004 to 2018. We find that trade credit significantly improves firm efficiency. This positive association is stronger in firms located in regions with higher levels of social trust, during periods with higher economic policy uncertainty and in times of economic downturn. We reveal three economic mechanisms underlying our baseline findings: alleviating financial constraints, mitigating agency conflicts, and reducing transaction costs.

Is Bitcoin an emerging market? A market efficiency perspective

Abstract Despite recent studies focused on comparing the dynamics of market efficiency between Bitcoin and other traditional assets, there is a lack of knowledge about whether Bitcoin and emerging markets efficiency behave similarly. This paper aims to compare the market efficiency dynamics between Bitcoin and the emerging stock markets. In particular, this study indicates whether the dynamics of Bitcoin market efficiency mimic those of emerging stock markets. Thus, the paper's contribution emerges from the combination of Bitcoin and emerging markets in the field of dynamics of market efficiency. The dynamics of market efficiency are measured using the Hurst exponent in the rolling window. The study uses daily data for the MSCI Emerging Markets Index and the Bitcoin market over the period 2011–2022. Our results show that there is at most a moderate correlation between the dynamics of Bitcoin and emerging stock markets’ efficiency over the entire study period. The strongest correlations occur mainly in periods of high economic policy uncertainty in the largest Bitcoin mining countries. Therefore, the association between Bitcoin market efficiency and emerging stock markets’ efficiency may strengthen with an increase in economic policy uncertainty. These findings may be useful for investors and portfolio managers in constructing better investment strategies.

Economic Policy Uncertainty and ESG Performance: Evidence from China

Using the data of listed companies in Chinese A-share market from 2011 to 2020, this paper investigates the effect of the economic policy uncertainty (EPU) on corporate environmental, social, and governance (ESG). The results show that during periods of high economic policy uncertainty, firms increase their overall ESG performance, corporate environmental performance, social performance and governance performance. Heterogeneous analyses show that the positive effect of EPU on ESG performance is more pronounced for state-owned enterprises, for firms with better corporate governance, for firms with more institutional investors, and for firms with less financing constraints. This study contributes to the literature on the determinants of ESG and provides implications for both practitioners and academics.

The relationship between cash flow uncertainty and extreme risk: International evidence

This study investigates the relationship between cash flow uncertainty and stock price crash risk. Using a large sample of firms from 22 countries, we find that a higher cash flow uncertainty leads to a higher crash risk for firms. The empirical results also indicate that cash flow uncertainty increases crash risk in most regions, industries, and other subsamples. Furthermore, this positive relationship between cash flow uncertainty and crash risk is more pronounced for firms in highly competitive industries, and those in countries with higher economic policy uncertainty. We use simultaneous equation and two-stage least squares regression methods to address endogenous concerns. Overall, our findings have useful policy implications for investors, firms, and regulators.

Does economic policy uncertainty impact firms' capital structure policy? Evidence from Western European economies.

This study specifically investigates the impact of economic policy uncertainty (EPU) on travel and leisure (TL) companies' debt holdings policy. To the best of our knowledge, there is a momentous gap in exclusively conducting the impact of EPU on the debt holdings policy behavior of Western European firms operating in the TL sector and its sub-sectors, namely the airlines, gambling, hotels, recreational services, restaurants and bars, and travel and tourism. In this sector, external financing is strongly needed to finance enormous investments and replace, expand, and modernize tangible and intangible assets. To fill the gap, the present study selects 92 publicly listed TL companies operating in Western Europe's top tourist destinations, namely, the UK, Germany, France, Spain, and Italy, and performs both the static and dynamic panel data estimation approaches during the 2005-2019 period. The results reveal that the EPU negatively impacts TL firms' debt holdings, implying that firms tend to decline in debt levels by rising EPU. Consequently, the results highlight that the level of EPU matters, and firms' debt ratios are relatively lower in countries having a higher EPU and vice versa. Besides, the results underscore that the EPU negatively impacts firms' debt holdings in each sub-sector; however, the negative effect is most prominent on the debt ratios of the firms, particularly those operating in gambling, hotels, travel, and tourism, and also recreational services sub-sectors. The results are robust and have important suggestions for regulatory bodies, policymakers, and firms' managers.