Economic policy uncertainty and cost of debt financing: International evidence |
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| Institution: | 1. Manning School of Business, University of Massachusetts Lowell, 72 University Avenue, Lowell, MA 01854, United States of America;2. Robert C. Vackar College of Business & Entrepreneurship, University of Texas Rio Grande Valley, 1201 W University Dr, Edinburg, TX 78539, United States of America;3. School of Industrial Management, Ho Chi Minh University of Technology, Vietnam National University – Ho Chi Minh City, 268 Ly Thuong Kiet Street, District 10, Ho Chi Minh City, Viet Nam;4. School of Business, University of Connecticut, 2100 Hillside Road, Storrs, CT 06269, United States of America |
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| Abstract: | Prior research shows that economic policy uncertainty affects a wide range of corporate financial decisions; however, there is little research on the relationship between economic policy uncertainty and cost of debt financing across countries. In this paper, we argue that economic policy uncertainty affects cost of debt financing through two mechanisms including information asymmetry and default risk. With a sample of 163,243 firm-years across 17 countries from 2003 to 2016, we find that economic policy uncertainty positively affects cost of debt financing and this effect is stronger during the global financial crisis from 2008 to 2009. Moreover, our research findings show that large firms’ debt financing cost is less affected by economic policy uncertainty. |
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| Keywords: | Economic policy uncertainty Cost of debt Debt financing G32 G34 |
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